It was bold and controversial at the time, and remains so today.
Critics were quick to pounce when the federal Liberals presented their big and expensive tax-and-transfer package of the 2015 election campaign as an experimental remedy to income inequality and the populism it often spawns, They said the tax elements of the package — especially raising personal income taxes on the rich — would drive away the best and the brightest, along with all their money.
New research shows that the worst-case scenario has not come to pass.
In fact, the Parliamentary Budget Officer and his staff have dissected the tax hike on the rich and found that, although there were some growing pains at first, the country’s wealthy did not up and leave Canada as feared.
At first, they piled as much income into the 2015 tax year as they could, taking advantage of the lower tax rate. But then they went to work as usual, supplying essentially the same amount of labour as before. In general, they did not flee as feared.
Now, they’re shouldering a larger portion of the country’s tax burden than they were before. Preliminary figures from the Department of Finance show that individuals making more than $200,000 a year paid 25.1 per cent of the country’s income taxes in 2017. It’s less than the 25.9 per cent in 2015 when the rich were busy with their “tax planning” to avoid the new higher rate. But it’s a not-insignificant amount more than the 24.2 per cent they carried in 2014, the last full year under the Stephen Harper government. Plus, there’s a chance that the aftermath of the tax-planning adventure is still in the system, possibly pointing to a larger tax burden for the rich in the next few years.
What’s more, the PBO has found that the middle class was surprisingly receptive to the Liberals’ moves to lower taxes on the middle-income bracket. Those people increased the amount of work they contributed to the Canadian economy more than the PBO had earlier expected.
So far, so good. But it would be a stretch to say that avoiding the worst-case fallout from rejigging the tax system is a victory over income inequality or the anxiety so many families feel about their financial future.
Justin Trudeau’s fiscal platform from 2015 had four key elements:
- Combine the various family and child benefits into one bundle and enrich the package to create the Canada Child Benefit.
- Raise the top personal income tax rate on earnings over $200,000, essentially hiking the taxes on the highest income earners in Canada.
- Cut the tax rate on income between $45,282 and $90,563 so that the middle class would pay less.
- Run deficits in the short term, aiming for a balanced budget by 2019.
We all know how the deficit promise turned out, of course. The deficits are still there, and there’s no end in sight. The Canada Child Benefit and the tax changes certainly add to their persistence — as the PBO also confirmed in his report last Thursday.
The other elements took square aim at improving the financial stability of the poor, encouraging economic growth led by the middle class, and pushing the rich to pick up more of the tab.
The Canada Child Benefit has indeed taken a bite out of poverty among children in Canada. In February, Statistics Canada credited the monthly cheques for helping lift 133,000 children above the poverty line in 2017. While it’s also true that child poverty rates had been declining gradually since 2012, the advent of the new benefit accelerated that trend.
So, with child poverty in decline, the middle class embracing their new tax cut, and the rich staying put while paying more taxes, is income disparity about to disappear?
The long-term trend in Canada shows that the gap between rich and poor has been fairly steady — some would say stubborn — over the past 20 years. In 2017, that meant the top 10 per cent of income earners made more money than the bottom 40 per cent, according to Statistics Canada.
And while inequality is not as stark a divide as in the United States, Canada is below the income inequality average for industrialized countries in the Organization for Economic Co-operation and Development.
Whether the goal is to alleviate the fears for the future of those 40 per cent, or to stamp out the destructive envy of the very rich, or simply to foster enough growth in the economy to ensure everyone has a decent chance, there is still some serious work to be done.
Heather Scoffield is an economics columnist based in Ottawa. Follow her on Twitter: @hscoffield