New government's vowed tax bracket shift will cost more than additionally thought, PBO says
OTTAWA—The Liberals’ tax-bracket changes will drain on average about $100 million more per year from the public treasury than the government expects, says a new analysis by the federal budget watchdog.
But the parliamentary budget office said the discrepancy between its numbers and those of the federal Finance Department largely came down to different assumptions.
The main difference between the two projections is the fact that the Finance Department’s calculations do not take into account the fiscal impact of the Liberal vow to cancel income splitting for families with kids, said Mostafa Askari, the assistant parliamentary budget officer.
While seemingly counterintuitive, Askari says that repealing the income-splitting measure would actually lower government revenues under the Liberals’ new, tax-bracket framework.
The tax-bracket changes will reduce government revenues by $8.9 billion over six years if Ottawa ditches income splitting, the budget office said. If it keeps income splitting, the budget office estimated that six-year figure would be $8.3 billion.
Last month, the government said the lost revenue would amount to just over $8.2 billion over six years. Askari said those Finance Department numbers were calculated with the impacts of income splitting still in place.
“Overall, the difference is pretty small,” Askari said. “It’s really related to assumptions.”
Since winning the election, the Liberals fulfilled their campaign promise to cut federal income taxes for middle-income earners by raising the rate on the highest-earning Canadians.
The Liberals had initially projected their tax-bracket adjustments—which include the creation of a new, upper bracket—to be revenue-neutral.
But Finance Minister Bill Morneau acknowledged last month that the revenue cost of the changes would be $1.4 billion in 2016-17, a shortfall that’s projected to rise each year until it hits $1.7 billion in 2020-21.
On Thursday, the budget office estimated the tax-bracket changes—after the impact of cancelling income splitting is factored in—will have a net drain on the public books of $1.6 billion in 2016-17. That number will creep up each year until it reaches $1.9 billion in 2020-21.
The budget office and government calculations also had slightly different assumptions about how people at different income levels might respond to the tax changes.
For example, people whose incomes land in the highest bracket may take steps to lower their tax payments.
The government’s new measures, already introduced for 2016, have lowered the income-tax rate to 20.5 per cent, from 22 per cent, on people earning between $45,282 and $90,563 per year.
To help pay for that change, Ottawa added a 33 per cent tax rate on income earned by those who make more than $200,000 per year—the top one per cent.
Previously, the highest tax rate in the country was the 29 per cent bracket, which applied to incomes between $140,388 and $200,000.
The budget office crunched the numbers after New Democrat finance critic Guy Caron asked it to examine the fiscal impact of the Liberal tax changes.
Caron also requested that the office explore the potential revenue loss if the government were to lower the tax rate to 14 per cent for the first bracket, down from its current level of 15 per cent. That bracket covers those who earn up to $45,282 of taxable income—about 17.9 million people.
The budget office estimates such a change would have a net reduction on government revenues of $3.7 billion in 2016-17, a figure that would grow annually until it hits $4.4 billion in 2020-21.
The Liberal measures have also come under criticism for providing more benefit to richer Canadians.
Those making more than $90,563 are taxed at three different rates: one rate on the first segment of income up to $45,282, the second, newly reduced rate on the next segment of income, up to $90,563; and a third rate beyond that, up to $200,000.
Therefore, people earning $90,563 and higher will receive the largest possible benefit of $679. But once their earnings reach the $217,000 mark, the new, highest tax rate completely erases that benefit.