Canada Fact Check continues its election coverage with a look at the likely tax planks in the NDP and Liberal platforms.
Mulcair and Trudeau on Harper Tax Cuts
First, both Liberal leader Justin Trudeau and NDP leader Tom Mulcair have announced that if they form a government, they will cancel the Conservative “Family Tax Cut”, an income-splitting measure that primarily benefits higher-income earners. Both parties would also cancel the increase in the Tax free Savings Account (TFSA) to $10,000 which also largely benefits higher-income earners.
The Family Tax Cut, announced in the fall by Prime Minister Stephen Harper, would allow couples with children under 18 to transfer income for tax purposes up to a maximum tax savings of $2,000.
An analysis of the initiative by Parliamentary Budget Officer (PBO) Jean-Denis Fréchette found that the benefits of the measure will primarily go to “medium-through high-income households”. In fact, the PBO says families in the bottom 20 per cent of income would receive next to nothing from the tax cut.
Mulcair and Trudeau on Personal Taxes
In his most significant tax proposal, Trudeau has promised that a Liberal government will raise personal income taxes on individual income over $200,000 a year while at the same time reducing rates for middle income earners.
The current top tax bracket starts on income over $138,586 with a rate of 29 per cent. Trudeau proposes to add a new tax bracket starting at $200,000, with a rate of 33 per cent. Liberals suggest this will raise about $3 billion, which they propose to re-allocate into a reduction of the middle tax-bracket rate from 22 per cent to 20.5 per cent, affecting income in the range from $44,701 to $89,401.
NDP leader Mulcair has not endorsed an increase in the top personal income bracket to date, but has promised to close the tax loophole currently enjoyed by senior executives who exercise stock options. Mulcair says the new revenue (approximately $750 million/yr.) would be re-directed to low-income families through an enhanced Working Income Tax Benefit and an enhanced National Child Benefit Supplement.
Mulcair and Trudeau on Corporate Taxes
Mulcair has been clear that his platform will include an increase in the General Corporate Tax rate and that this is his top tax priority. However, he has been less clear as to exactly how much and how quickly the rate will be increased.
On June 16th, Mulcair gave an interview with CBC Radio’s Anna Maria Tremonti suggesting that an NDP government would raise corporate income tax rates so as to get them “closer to the G7 average.”
The CIT average for the G7 countries is 29.9 per cent – considerably higher than anything being considered by Mulcair.
That said, what really matters is the combined federal-provincial corporate rate. The federal tax rate currently levied on corporate profits is 15 per cent but provincial corporate tax rates are in the 11-12% range. For example, Ontario’s General Corporate rate is 11.5% and corporate profits generated in Ontario (other than manufacturing and small business) are taxed at a combined federal-provincial rate of 26.5%.
It follows. then, that a good bet on where Mulcair may eventually end up on his corporate tax platform plank is to propose an increase in the CIT of 2 or 3 percent to be phased in over 2 or 3 years. That would leave the combined rate in Ontario, for example, at 29.5%. This places a potential Mulcair corporate tax increase firmly in the middle of the G7 range and still considerably lower than the combined rates of U.S. states such as Michigan and New York.
Mulcair also promised to help the manufacturing sector by extending the Accelerated Capital Cost Allowance. It allows businesses to rapidly write off investments in equipment against taxable income, by an extra two years.
Prime Minister Harper has proposed a similar measure. The accelerated capital cost allowance was set to expire this year and the cost of extending it by two years would cost approximately $1.2 billion.
Perhaps reflecting the Liberal Party’s stronger ties to big business, Trudeau has been silent on the need to raise corporate taxes.
Corporate Tax Cuts Under Recent Liberal and Conservative Governments
Despite Trudeau’s silence on the issue, an increase in the 15% federal Corporate Income Tax (CIT) rate is entirely justified.
The federal CIT rate was 40 per cent in 1970 (about 50% when the provincial rate is added) and 28 per cent as recently as 2000.
Changes to the CIT by Liberal governments led by Jean Chrétien and Paul Martin saw it further cut to 21 per cent in the early years of the new century.
The Conservatives won their first minority government in 2006, and further reduced the CIT rate. It was at 19.5 per cent when Harper won a second minority in 2008, and then down to 16.5 in the lead-up to the 2011 election. After winning a majority government in 2011, Harper cut the CIT rate still further to 15 per cent.
Fiscal Implications of Tax Proposals
A look at the federal budget suggests that each percentage point increase in the CIT rate could generate an additional $1.6 to $1.7 billion annually. If so, a three-point CIT rate hike might raise as much as $4.5 billion per annum when fully phased in– and still keep Canada at or below the G7 average.
However, both the New Democrats and Conservatives are also committed to reducing the small-business corporate income tax rate by two points, to nine per cent. The cost of such a small business reduction would be approximately $1 billion annually.
The Corporate Tax base
It should be noted that the Corporate Tax rate is only part of the story – and arguably not the most important part. Recent years have also witnessed a significant erosion of the Corporate Tax base – in other words, the calculation of the company profits that the Corporate Tax is levied against.
Canada is not alone in having its Corporate Tax base steadily eroded due to tax treaties (e.g. the tax treaty with the Barbados), exemptions, and profit shifting by companies such as the large banks. All G20 members – including Canada – had committed to fighting against precisely this when they endorsed the OECD’s “action plan” against “base erosion and profit shifting” (BEPS).
But despite Canada’s formal commitment to the OECD’s BEPS Action Plan, the Harper government has been reluctant to follow through on implementing rules that might affect Canadian corporations. This is most notably visible in the government’s continuance of the generous participation exemption for dividends from foreign affiliates and its refusal to take a serious look at our treaties with tax havens such as Barbados and Bermuda.
However, this should come as no surprise. The Harper government is ideologically pre-disposed to turning a blind eye to “fairness” issues such as the erosion of the Canadian Corporate Tax base. And more generally, Trudeau’s Liberals seem to share many of the government’s wrong-headed economic assumptions on corporate taxation.
That likely leaves only Tom Mulcair’s New Democrats to address the issue of ongoing Corporate Tax base erosion – a party that has made a good start on the corporate tax file with its promise to increase the corporate rate.
Let’s hope to hear more from Mr. Mulcair during the election on this vital policy issue.