There’s a better way to cut taxes on Canada's middle class
The federal Liberals delivered their much anticipated Throne Speech last week outlining the main priorities for the coming Parliament. The government emphasized its first and “immediate priority” is to “deliver a tax cut for the middle class,” with legislative changes being announced in the coming days.
We applaud the government for this commitment. However, there are two major problems with the proposed tax reform.
First, it is not bold enough. One problem is that it does not go far enough in terms of reforming the existing personal income tax system, which consists of four rates (15, 22, 26, and 29 per cent) that apply to different income brackets (see table below). Simply put, reducing the second rate from 22 per cent to 20.5 per cent is too minor a change, given how uncompetitive Canada’s system is.
A second, and even bigger problem, is that the Liberals plan to “pay” for this tax cut by creating a new, top income tax rate of 33 per cent on those earning over $200,000. For many of the same reasons that cutting the 22 per cent rate will be good for the economy, increasing the top marginal tax rate would be harmful. Doing so will also reduce the competitiveness of Canada’s personal tax system.
Thankfully, there is a better reform option that would provide much more tax relief for middle income families while improving, rather than harming, Canada’s economic competitiveness. The better way forward is to simply eliminate the two middle personal income tax brackets, leaving one tax bracket (15 per cent) for the overwhelming majority of Canadians and a single high-income bracket of 29 per cent, affecting approximately two per cent of taxpayers. This would put more money in the pockets of middle income earners, but without the harmful economic effects of a new top rate.
To help finance this tax change, the government could eliminate or reduce ineffective tax expenditures—one of the stated priorities of the Liberal government. This is the type of fundamental tax reform that Canada needs to truly spark economic activity.
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