Trudeau government should learn from Chrétien-era tax relief
As the Trudeau government prepares to table its 2020 budget, it should reflect on another federal budget from 25 years ago when the Chrétien government took decisive action to balance the budget (after nearly three decades of deficits) and laid the foundation for broad-based tax relief and more than a decade of economic prosperity in Canada.
Indeed, thanks to its historic 1995 budget, the Chrétien government eliminated the federal deficit in 1997/98 and was then able to improve Canada’s competitiveness through meaningful tax relief, which included lower taxes on personal income and capital gains.
In 2000, the federal government introduced its first major reduction to personal income taxes by adjusting the income tax brackets at which different tax rates apply to account for the effects of inflation. Put simply, the government eliminated a problem in the tax system whereby inflationary income gains were taxed.
In 2001, the government reduced personal income tax rates, dropping the bottom-income tax rate from 17 per cent to 16 per cent and the two middle-income tax rates from 25 per cent to 22 per cent and 29 per cent to 26 per cent. The government also added a new tax bracket at $100,000 and maintained the top rate of 29 per cent. However, even those with earnings over $100,000 received tax relief as two surtaxes—taxes levied in addition to the standard income tax—were eliminated, including a surtax that affected only high-income earners.
Clearly, the Chrétien government understood that lowering personal income tax rates for all Canadian workers would create stronger incentives for entrepreneurship, investment, risk-taking and work effort, and subsequently improve the country’s economic performance.
As then-finance minister Paul Martin noted, personal income tax relief is critical for strong economic growth and job creation because “personal income tax changes have increased incentives for Canadians to learn, work, save and invest.”
The federal government also substantially reduced taxes on capital gains. Capital gains occur when an individual or company sells an asset for more than they paid for it. Entrepreneurs and investors, particularly those focused on startups and early-stage companies, are sensitive to capital gains taxes, so reductions in the tax made Canada a more attractive and competitive place for investment.
Following these tax changes Canadians enjoyed more than a decade of strong economic growth, job creation, business investment and rising incomes. Real economic growth averaged 3.3 per cent from 1997/98 to 2007/08.
Today, the federal government’s policies look much different.
First, the Trudeau government has no plans to balance the budget. The federal deficit is expected to reach $28.1 billion next year, which makes responsible and meaningful tax relief impossible. As Paul Martin explained, when a government cuts taxes while in deficit, there isn’t really a “tax cut” but rather a deferral of the tax payment to the future in the form of borrowing.
And instead of lowering tax levels to help attract talent and entrepreneurship, the Trudeau government has actually increased taxes for most Canadian families.
This government has also introduced a new higher top income tax rate and eliminated several tax credits. As a result of these changes, many professionals, entrepreneurs, businessowners and skilled workers—people critical to investment, job creation and economic growth—face higher personal income taxes (and capital gains taxes) and thus have lower incentives to work and invest in Canada.
Tellingly, economic growth is expected to be a tepid 1.6 per cent in 2020, a far cry from the annual average of 3.3 per cent enjoyed for a decade following the balanced budget in 1997/98, and subsequent tax relief.
If the Trudeau government wants to strengthen the Canadian economy, it should look to the successes from the past. The Chrétien 1995 budget supported a strong economy by prioritizing budget balance and creating the foundation for meaningful tax relief.