Tax Cut, Schmax Cut

I was listening to a breakdown of Liberal election promises (pre-election) and the reporter doing the breaking down said they included a tax cut for middle-income families and it got me to thinking about the value of tax cuts versus the cost of tax cuts.

Luckily for me, someone much better qualified than I am was thinking about the very same thing. So I’d like to take a moment today to really drill down into what you get from a tax cut — and what we, as a society, lose — with the help of David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives (CCPA).

Macdonald used Stats Canada modelling software to figure out how much the competing cuts would save Canadians in taxes. Here’s what he had to say.



On the subject of the Liberal plan (which I guess may now come into force), Macdonald writes:

Specifically, the Liberals want to increase the basic personal exemption to $15,000 (from $13,091) in 2023. But there’s a twist: for those making over $210,371, the basic personal exemption will stay at $13,091.

The other twist is that the Liberals asked the PBO to cost the impact of increasing the basic personal exemption⁠—which is the amount that appears in the Liberals’ platform⁠—but not the spousal and eligible dependent versions. These additional versions, which the Liberals are also committing to, would increase the cost of this measure from the $5.5 billion to $6.0 billion in 2023, or $490 million more than what is cited in the platform (The PBO calculated the basic cost at $5.6 billion in 2023-24 as they are using fiscal years)…

Even at the higher end of the income scale, the average family benefit will be $500, or less, a year.  That’s not a cheque in the mail; it’s $42 a month, less than what’s taken off at source by most employers, and unlikely to make a huge difference to most families.

To recap: In 2023, the Liberal promise would leave a $6.0 billion hole in the federal budget and allow the average family to keep $500 a year — or $42 a month.



Here’s Macdonald’s take on the Tories’ “Universal Tax Cut” promise:

The basic premise of this plan is to reduce the rate in the lowest federal income tax bracket from 15% to 13.75% gradually over a three year period.  The non-refundable tax credit rate would be reduced to match.  The plan would be fully implemented in 2023.

Does the name “Universal” mean that everyone everyone would get this benefit? No. In order to be eligible, Canadians would have to be paying taxes to benefit, as with any change to the tax brackets like this. Further, the full benefit of this tax cut goes to people with incomes in the top deciles of the bracket.  So an individual would need to make over $52,000 per year in 2023 to reap the full benefit of this cut.  That benefit is hypothetically $490 per person, but the average benefit, even for the top filers, is more likely to work out to $370.  It’s really only the top three deciles of tax-filers that can even expect even that average of $370 a year. The bottom third of taxpayers, on average, get essentially nothing as they don’t pay any income tax and can’t benefit.  The middle third of taxpayers see some benefit, but less than the maximum as they don’t make over $52,000.

To recap: the Tory promise would have given the highest earners in the lowest tax bracket, on average, a $370 benefit ($31 a month) and would cost (according to the Parliamentary Budget Office) $6 billion by 2023. (Andrew Scheer said the “average family” would save “over $850” on their taxes, which seems overly optimistic if Macdonald’s calculations are correct, but even if it’s true, it would still be only $71 a month.)



Macdonald then makes the (to me) obvious point:

As with any tax cut, there are three options as to how to pay for it: tax increases elsewhere, program cuts or increases in the deficit.  As policy changes go, this plan’s $6 billion annual price tag by 2023 is expensive and would require significant changes in program funding, taxation or deficit growth in order to pay for it.

I don’t think I’m exaggerating to suggest that “program cuts” are the method of choice for paying for tax cuts — or maybe just “program starvation,” where you don’t ax a given program, just trim its budget.

But existing programs aren’t the only thing we lose when we decide to sacrifice $6 billion on a tax cut. As Macdonald says:

It’s true that sometimes small amounts of money can have real consequences, particularly for families with low income. But there is the opportunity cost to consider as well.  How could we have otherwise spent $6 billion a year? This is the sort of annual investment required for a national affordable child care plan. It would easily provide a revolution in wait lists and quality of long-term care in Canada. It would make a huge difference in the construction of green transit projects.

You know what else it would also help with? A universal pharmacare program like the one The Advisory Council on the Implementation of National Pharmacare recommended in its June report.

source: Government of Canada

As Global News reported:

All Canadians would have access to a list of drugs from a national formulary. Drugs on the essential medicines list would carry a co-payment of $2, while other drugs would cost $5. No person or household would pay more than $100 per year.

People on social assistance, the federal Guaranteed Income Supplement or federal disability benefits would be exempted from the co-payment.

As for the costs involved:

This program will cost an additional $3.5 billion in 2022 with the limited formulary, according to the report. The full program, implemented by 2027, will cost $15.3 billion per year.

But escalating drug costs mean that Canada needs to negotiate drug prices as a national entity, [Council Chair Dr. Eric] Hoskins said. Last year, Canada spent around $34 billion on prescription medication, according to Hoskins, and by 2027, that could rise to $55 billion under the current model.

“The price is too high not to do anything,” he said.

What would you prefer: an extra $500 a year in your pocket or the comfort of knowing you — and your family, and your neighbor and their family — could afford their medications?

In other words, would you rather do something nice for yourself or chip in and do something nice for us all?