Ford government should kill ‘temporary’ tax hikes

Famed Nobel Prize-winning economist Milton Friedman said there’s “nothing as permanent as a temporary government program.” This maxim certainly applies to tax policy in Ontario, where a series of “temporary” personal income tax increases introduced early this decade remain in effect.

For starters, there’s overwhelming evidence that high marginal personal income tax rates have a negative effect on economic performance. In fact, a recent Fraser Institute study of the Trudeau government’s federal income tax hike suggests such policies are so harmful to the economy they actually, on net, provide very little additional government revenue. As such, Ontario’s sky-high personal income tax rates are essentially all pain for little or no gain.

And remember, raising more money in an effort to reduce Ontario’s deficit was the rationale for the personal income tax increases that began under then-premier Dalton McGuinty in 2012 (McGuinty’s new top tax bracket was called the temporary “deficit-fighting high income tax bracket.”) The idea was that with Ontario facing a huge budget deficit, an income tax hike for people with higher incomes would produce extra revenue to help fill the hole.

But again, what does the evidence tell us. The aforementioned study (authored by Prof. Ergete Ferede of MacEwan University) found that the recent creation of a new top federal income tax bracket of 33 per cent (up from 29 per cent) had a significant impact on the economic behaviour of those affected by the tax, which reduced the size of the income tax base. In fact, the four-percentage point increase in the tax rate was associated with a two per cent reduction in total taxable income.

In other words, although the rate increased, the tax base the new rate applied to shrank considerably. Consequently, the total effect of the tax hike on overall revenue is disappointing to say the least.

And while the study projects a small short-term increase in federal revenue (the first nine years), in the long-run Ottawa will actually wind up collecting less money than if it had not increased the tax rate at all. The higher tax will hurt the economy and, over time, won’t even produce additional tax revenue. That seems quite self-defeating.

Policymakers in Ontario should learn from this evidence. Clearly, the McGuinty and Wynne governments were misguided in trying to fight Ontario’s deficit through personal income tax increases. Like the Trudeau government’s tax hike on top earners, these provincial tax hikes hurt the economy and changed economic behaviour in ways that undermine their ability to generate new revenue.

The Ford government should recognize that its predecessors erred on tax policy and reverse the McGuinty and Wynne income tax increases. “Temporary” tax hikes to fight the deficit were a mistake. It would be an equally serious mistake for the Ford government to leave the tax increases in place.