Canadians are about two weeks away from finding out which of Prime Minister Justin Trudeau's election promises will come to fruition first and when, as Parliament is scheduled to resume on Dec. 3. A tax bill is expected to be introduced shortly thereafter.
It's likely that the government's first priority will be to cut the middle income tax bracket, which affects Canadians with taxable annual income between $44,701 and $89,401, to 20.5 per cent from 22 per cent.
But just how many Canadians will benefit from the middle-income tax cut?
For starters, we can eliminate anyone with an income below $45,000. Using the Canada Revenue Agency's most recent tax filing data and income statistics for the 2012 tax year, we know that 26.7 million tax returns were filed that year out of a population of about 35 million (since most children don't file tax returns.) Of those that did file returns, 17.6 million of them - 66 per cent - had income below $45,000 and won't benefit at all from the tax cut.
The nine million Canadians with income above $45,000 will all benefit from the middle-income tax cut, thanks to Canada's progressive tax system. But what about Canada's top income earners?
To pay for the middle-income tax cut, the Liberals are proposing to introduce a new tax bracket of 33 per cent for individuals earning more than $200,000 annually. The current top federal bracket of 29 per cent affects individuals making taxable income over $138,586. When you take into account the fact that these high-income earners will also benefit from the middle-income tax cut, the new four per cent tax increase will be felt once taxable income exceeds about $217,000.
New Statistics Canada data released earlier this month for the 2013 tax year focused specifically on high-income Canadians. It showed that the cutoff for the top one-per-cent of income earners was just slightly above this number, at $222,000. There were 264,030 tax filers that had this amount of income or more in 2013.
This week, Craig Alexander and Alexandre Laurin from the C.D. Howe Institute published a new report titled "Tax Reform Priorities for Canada: Creating More Income to Go Around3" in which they argue that raising tax on Canada's top income earners "is at odds with the desire for more entrepreneurial activity." The authors state that Canada is in a competition for talent and needs competitive tax rates for high-income earners, "or we run the risk of a brain drain and the risk of being less able to attract foreign talent. Excessively taxing the talent that fuels a more innovative, creative and successful economy is ultimately self-defeating."
The Liberals projected that while this new tax bracket is expected to bring in approximately $3.4 billion by 2016/17, it must be reduced by "a prudence factor" of $600 million to take into account the fact that "(h)igh earners may attempt to use tax planning strategies to avoid higher taxes."
The C.D. Howe authors believe the revenue loss could be much more significant. They estimate that the proposed four percentage point tax increase on incomes above $200,000 could result in those affected taxpayers reporting approximately 4.5 per cent less taxable income, costing the personal income tax base $7.3 billion in 2016 and thus reducing projected tax receipts from the hike by about 70 per cent.
One alternative to raising personal income tax rates would be to shift part of the tax base from personal income taxes to consumption based taxes, like the GST/HST. Another possibility would be to eliminate some of the dozens of personal tax credits which complicate the tax system and for which research has shown play little or no role in incenting the desired behaviour.