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By Jake Fuss and Grady Munro
On Monday, Parliament returns to the House of Commons, and the new Carney government will now attempt to implement the policy agenda it sold to Canadians in this year’s election. The government’s first priority is to follow through on its promise to cut personal income taxes for Canadians—a change that is long-overdue at the federal level. But the proposed cut misses two important considerations that will limit its effectiveness.
Specifically, the Carney government plans to lower the bottom federal personal income tax (PIT) rate (on income up to $57,375 per year) from 15 per cent to 14 per cent. The Liberal election platform suggests this change would reduce taxes for a dual-income family by up to $825 per year.
To be clear, the government should lower the tax burden on Canadians. When you add up all taxes (income taxes, sales taxes, property taxes, etc.) Canadians pay, the average family spends 43.0 per cent of its income on taxes—more than on food, shelter and clothing combined. In other words, taxes are the largest single expense families face.
While the Carney government’s proposed tax cut could help chip away at the staggering tax burden imposed on Canadians, the design of the tax cut (beyond the fact that this tax cut is paid for by borrowed money) limits its ability to improve overall economic growth and prosperity.
First, the proposed tax cut fails to improve economic incentives for many Canadians.
“Marginal” tax rates refer to the rate imposed on the next dollar of income earned. For example, consider an individual who earns $100 in income and owes $15 in total tax. If they are taxed at 20 cents on the next dollar they earn, they experience a 20 per cent marginal tax rate.
A wealth of research shows that marginal PIT rates influence the behaviour of individuals. Indeed, for decisions about whether to work more hours, take a new job that pays more but has a longer commute, become an entrepreneur, or whether to save your money and invest it, marginal PIT rates directly affect the rewards you receive from those decisions.
If the government lowers marginal tax rates, it provides a greater incentive for individuals to choose to engage more in these types of productive activities. As a result, Canadians and the overall economy will be more prosperous.
But by only reducing the PIT rate for the lowest federal tax bracket, the Carney government will lower marginal tax rates for some Canadians but fail to meaningfully reduce tax rates for high-skilled workers in particular. Many Canadians won’t see better incentives to work, save or invest, and the positive effect on the economy from the tax cut will be limited. Put simply, the narrow scope of the government’s proposed tax cut limits its effectiveness at improving incentives and increasing economic growth.
Second, the proposed tax cut does little to improve the competitiveness of Canada’s tax system.
In today’s interconnected world, countries must compete to attract the people (doctors, engineers, entrepreneurs, scientists, etc.) and investment that help improve economic growth and prosperity. While there are many factors that determine how attractive (or unattractive) a country is, lower and more attractive taxes play a big role.
There are many things that make Canada an attractive place to live and work, but our uncompetitively high income tax rates are not one of them. If you compare combined (federal and provincial) marginal PIT rates in every Canada province with those in every U.S. state, Canadians in every province face higher tax rates than Americans in virtually every state, across a variety of incomes.
For example, in 2023 an individual earning $50,000, $150,000 or $300,000 per year (in Canadian dollars) would face a higher marginal PIT rate in every Canadian province than they would in every U.S. state. And Canada is not just uncompetitive with the United States but with other advanced countries worldwide at the top levels of income.
By only reducing a tax rate for the lowest income bracket, the Carney government’s proposed tax cut does little to make Canada a more attractive destination for doctors, entrepreneurs, scientists or other skilled workers. In fact, the rate cut will likely have little to no effect on the decisions of people to move to (or keep living in) Canada. And do little to improve our living standards and prosperity.
As the Carney government works to deliver on its campaign promise to lower personal income taxes on Canadians, it should consider that the current plan does little to meaningfully improve economic incentives and tax competitiveness. Instead, it should consider more ambitious and broad-based tax cuts that affect incentives.
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