With the competition between the Liberals and Conservatives to show “my tax cut is bigger than yours” now in full swing, there’s a whiff of supply-side economics wafting through the announcements.
Both parties have now promised a $6-billion-a-year broad-based income-tax cut aimed squarely at the middle class. Justin Trudeau announced on the weekend that a Liberal government would increase the basic personal exemption – the amount wage earners can claim tax free every year. And a week ago, Andrew Scheer announced a phased-in cut on the first $12,000 to $48,000 a worker earns.
The competing tax cuts have slightly different designs with slightly different outcomes on income distribution, but what they have in common is a confusing backdrop of reasons to justify that tax cuts are the best way for Canadian fiscal policy to go.
It’s as if former Conservative prime minister Stephen Harper is hovering over everyone, repeating his maxim that no tax is a good tax – implying that any time taxes are cut, it’s inherently a good thing.
Supply-side economics would have it that tax cuts bolster economic growth, and tax cuts for the rich and for corporations can increase investment, productivity and participation in the workforce. The idea was popularized in the 1980s, discredited in the early 2000s and revived in some ways by U.S. President Donald Trump.
There’s an enduring belief that high taxes reduce the incentive to work and invest, and that low taxes have the opposite effect.
No one in the federal campaign is proposing an outright tax cut for the rich and, in fact, the parties are united in beating up on high-income Canadians in general. They pillory each other for anything that even resembles favouring the already well-off.
Rather, it’s the persistent and collective undertone of “all taxes are bad” and therefore “all tax cuts will bring prosperity” that evokes memories of the last century.
Most of the partisan tax-cut contest is justified in affordability terms, by both parties. The Conservatives want lower taxes in order to put more money in voters’ pockets so that they can better make ends meet – for real estate, child care or whatever they’re finding too expensive these days. The Liberals want lower taxes for those who need it most, to help cover their basic needs.
The Liberals also invoke a class analysis and suggest the government needs to be more aggressive in redistributing income throughout the economy so that we are a more equal society. To that end, if they were to raise the personal exemption for everyone, they would also wind it down for individuals earning more than $148,000 and eliminate the extra benefit completely for individuals earning more than $210,000. They foresee 38,000 people being lifted out of poverty, and 700,000 low-income people moving off the federal tax roll.
In their background documents, the Liberals suggest the rich will pick up the bill.
“We will pay for this middle-class tax cut through a series of measures that make our tax system fairer for Canadians,” they say, promising details on how they will crack down on the wealthy at a later date.
The Liberals have a third explanation for the tax cut: Corporate profits have outpaced wages. And a fourth justification: By cutting taxes, more money will flow back into the economy and help it grow, benefitting everyone.
The Conservatives have embraced tax cuts with even more zeal and equally diverse justifications. They, too, look to lower taxes for stronger economic growth. They also highlight slow wage growth and the problem of workers making too little money. And they emphasize that their tax cuts would help the middle class and lower-income classes, with much of the rhetorical emphasis put on hard-working families.
The Liberal tax cut would help the very poorest somewhat more than the Conservative tax cut; and the Conservative tax cut would benefit the rich more than the Liberal tax cut. But generally, both tax cuts are quite progressive.
But is that the end goal? Or is it economic growth? Or is it bolstering wages that don’t rise? Or is it alleviating affordability? Or is it redistribution of income and reducing inequality?
It’s worth remembering that links between lower taxation and economic growth are tenuous and the subject of thousands of pages of analysis from the world’s thinkers.
It’s also worth considering that some economists would argue that reducing inequality can best be done by raising taxes, especially at the top end, or by legislating corporate excess.
And perhaps the best fix for wages that don’t rise as fast as profits is to look at the corporations that make and deploy those profits – instead of lowering income taxes and essentially giving companies carte blanche to persist with their current patterns.
Taxes pay for our collective social security, defence and improving the quality of life for all Canadians. When we cut them in the name of something poorly defined, we put all those benefits at risk without considering the price. We need a clear explanation.
Heather Scoffield is a national affairs writer.