Finance Minister Bill Morneau says tax changes to take $1.2 billion more out of coffers

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Finance Minister Bill Morneau says tax changes to take $1.2 billion more out of coffers

Andy Blatchford, The Canadian Press | December 7, 2015 | Last Updated: Dec 7 4:36 PM ET
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Adrian Wyld/The Canadian PressFinance Minister Bill Morneau announced a tax cut for the middle class and a lower TFSA limit on Monday.

OTTAWA — The Liberal government is poised to make good on its promise to cut federal income taxes for middle earners by raising the rate on the richest Canadians — cuts that the government admits won’t be revenue-neutral.

Finance Minister Bill Morneau is conceding for the first time that the changes are going to cost the federal treasury $1.2 billion annually, starting in the 2016-17 fiscal year.

The government has introduced a motion in Parliament lowering the income-tax rate on Canadians earning between $45,282 and $90,563 per year from 20.5 per cent from 22 per cent, to take effect starting Jan. 1.

To offset most of that tax-rate change, the Liberals are also imposing a higher tax rate of 33 per cent on earners in the top one per cent — those who make more than $200,000 per year.

Morneau says the government is being forthright with Canadians about the total cost of the tax changes.

Those changes also include cancelling a Conservative plan to increase limits on tax-free savings accounts from $5,500 to $10,000.

“We are starting today with middle-class tax breaks, a key part of our initiative,” Finance Morneau told the House of Commons on Monday.

“Today is the day where we have said we are going to reduce middle-class taxes by asking those Canadians who are doing very well to pay a little bit more. This is an important first part in our tax program.”

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But some say the tax changes, a central pledge in the campaign platform that helped propel the Liberals to victory in October, are likely to cost public coffers more than the government expected and could provide more benefit to richer Canadians.

For example, a study released Monday by the Canadian Centre for Policy Alternatives found that higher-income earners — those who make more than $124,000 — would benefit most from the middle-class rate cut as long as they did not earn enough to land in the new upper bracket above $200,000.

Those making more than $90,563 are taxed at three different rates: one rate on the first segment of income up to $45,282, the second, newly reduced rate on the next segment of income, up to $90,563; and a third rate beyond that, up to $200,000.

As a result, they will realize a greater total benefit from the middle-bracket cut than will an income earner whose annual salary lands within that bracket, the study says.

Another recent study by the C.D. Howe Institute think tank said the changes would encourage big earners to make more of an effort to avoid taxes, while the rate reduction itself could cost government finances more than expected.

In its platform, the Liberals estimated the tax increase on the top earners would fall a little short of covering the full costs of the tax cut. It projected the reduction to cost close to $3 billion annually over its four-year mandate.

Combined with the sting of the struggling economy, the new Liberal government is facing increasing pressure to meet its election vows to cap annual deficits at $10 billion over the next two years and to balance the federal books in the fourth year of its mandate.

Morneau has said the Liberals are facing a slower economy and a worse-than-expected fiscal environment handed over from the former Conservative government.

“We have inherited a situation that is more challenging than what was foreseen in the budget,” he said.

Last month, Morneau announced a $3-billion deficit forecast for the current fiscal year. In April, the Tories projected a $2.4-billion surplus for 2015-16 — including the $1 billion set aside for contingencies.

The proposed changes to the tax brackets will help boost the economy, the Liberals say.
Last week, however, Morneau backed away from the Liberal vow to keep annual shortfalls under $10 billion in 2016-17 and 2017-18.

He said the government would focus on its pledges to invest in infrastructure, lower the federal debt-to-GDP ratio and balance the books before the next election, but dodged when asked directly about the party’s promise to keep annual shortfalls under the $10-billion ceiling.

 

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Liberal tax changes to cost federal treasury $1.2-billion per year
Bill Curry
OTTAWA — The Globe and Mail
Published Monday, Dec. 07, 2015 4:45PM EST; Last updated Monday, Dec. 07, 2015 5:34PM EST

The Liberal government’s planned tax reforms will cost the federal treasury $1.2-billion per year, according to new information released Monday.

The Liberals had promised during the recent election campaign that a new tax bracket on income above $200,000 would fully cover the cost of its middle class tax cut. Now in government, Finance Minister Bill Morneau says that won’t be the case.

Finance Canada released a costing Monday that shows an additional annual shortfall of $1.2-billion, including new revenue from reverting to the previous annual contribution limits to tax-free savings accounts as of Jan. 1.

“This is going to cost a bit more for the government and we want to explain to Canadians exactly what the shortfall is,” Mr. Morneau said in French at a news conference in Ottawa that was held after markets closed. “We are going to continue to uphold our commitments because we know that with a lower growth rate than planned for in the budget, it’s necessary to make investments.”

The Liberals were elected on a platform that promised to lower the tax rate on income earned between $44,701 and $89,401 to 20.5 per cent, from 22 per cent. The party also promised a new tax rate of 33 per cent on income above $200,000 and estimated that these two measures would roughly offset each other, with the tax hike raising $3-billion a year and fully covering the revenue loss of the tax cut.

The Liberal election platform had said they would run annual deficits of up to $10-billion a year before balancing the books. Mr. Morneau said Monday that the government stands by its plan to return to balance before the next election. However he declined to say whether the Liberals are also standing by their plan to keep annual deficits below $10-billion.

Finance now says the tax cut will reduce federal revenues by about $4.1-billion in 2019-20, while the tax hike will only raise $2.4-billion that year. Corresponding technical tax changes to the tax rules governing small businesses will raise $250-million in additional annual revenue that year, but not enough to bridge the gap.

Returning the TFSA annual contribution limit to $5,500 from $10,000 and reinstating indexation will raise a further $275-million in 2019-20.

The Liberals’ original estimate was based on a calculation provided to the party on request by the Library of Parliament, which said such a tax hike would raise $3.24-billion in 2014 before any behavioural changes are considered. The Liberal campaign then raised that to $3.4-billion for 2016 based on inflation. It then subtracted $600-million to account for tax losses due to behavioural changes.

The question is whether that subtraction was large enough. Economists widely believe that high-income tax earners will take steps to avoid higher taxes through actions like restructuring their business or turning down extra work. Economists do not agree, however, on how much tax revenue would be lost through such actions.

Respected tax expert Kevin Milligan with the University of British Columbia, who was a member of the Liberals’ economic advisory team, stated in September that “with strong administrative efforts and an effective tax expenditure review” the party’s $2.8-billion figure was a “reasonable” estimate.

However those are important caveats. The Liberal platform promised to beef up the Canada Revenue Agency’s tax enforcement powers and to review various tax credits, but the platform provided few details in this area.

University of Western Ontario economist Mike Moffatt, who also provided advice to the Liberals in the run-up to the election, said it is important for the new government to lay out how it plans to avoid large behavioural responses to the new tax bracket.

“I would say their estimate was on the high end of possible ranges [for new revenue], but not unreasonable,” Mr. Moffatt said. “In my mind, there’s so much uncertainty here that I think most economists would say ‘Really, you should probably be choosing a range of outcomes... We really don’t know how high-income people will respond to this or to what degree.”

The Liberals also face questions as to whether their tax break is truly aimed at the middle class. A report released Monday by the left-leaning Canadian Centre for Policy Alternatives argues it would be more accurately described as an “upper-class” tax cut, given that the largest gains will go to families in the top 20 per cent of income who earn over $124,000 a year.

The report praises the creation of a new top tax bracket but recommends other offsetting tax breaks that would be more focused on middle class incomes, such as cutting the rate on the lowest income tax bracket from 15 per cent to 14.5 per cent or increasing the basic personal amount that can be earned before taxes are collected.