The Globe & Mail – Editorial – Saturday, October 22, 2005 Page A26
Mere weeks ago, federal politicians were gamely dodging the very notion of tax cuts. In a remarkable omission, Paul Martin did not even bother to discuss them in his recent vision statement. Ralph Goodale constantly skittered away from any hint of relief. Instead, both the Prime Minister and his Finance Minister outlined grand notions of where they wanted to spend. So it was gratifying this week when Ottawa abruptly announced that taxpayers will get a long overdue break after all.
It is difficult not to attribute this sudden largesse to guilt and guile. The feds have tucked away huge surpluses in this fiscal year. In the first five months, the surplus was $6.8-billion, up from $4.6-billion in the same period last year. Such windfalls are embarrassing when individual Canadians are grappling with higher prices for everything from gasoline to electricity. And no one should ever underestimate Liberal cunning: Personal tax cuts could prove a nifty diversion after the report into the sponsorship scandal is tabled next month.
But if the Liberals are acting for the wrong reasons, it is still the right prescription. Canada's standard of living hinges on capital investment and on taxpayers' willingness to work. But, as the C.D. Howe Institute reported last month, the marginal effective tax rates on capital for medium and large-sized businesses are the second highest among 36 major industrial nations. The marginal tax rates for individuals are equally bad. Effective rates on extra earnings can exceed 60 per cent for those bringing home anywhere from $20,000 to $50,000 a year. As TD Bank chief economist Don Drummond has warned, those unusually high rates constitute "the most pressing tax problem in Canada," squashing the incentive to work, save and invest.
So what should Ottawa do? It could resurrect corporate tax breaks which the NDP derailed in the last budget. Those reductions were designed to lower the rate for larger corporations from 21 to 19 per cent in 2008. The federal government could even move up the implementation date, perhaps shaving one percentage point off next year's rates.
For individuals, Ottawa could raise the ceiling at which each of the four federal tax brackets takes effect. As it stands, the lowest rate of 16 per cent applies only to the first $35,595 of taxable income, and the highest rate of 29 per cent hits any income over $115,739. There is certainly room for action. Revenue from personal income tax was up 9 per cent in the first five months, while wages and salaries inched up only 5 per cent.
But there is a broader issue here. Ottawa has promised to focus on productivity in its upcoming financial statement. So, as many experts have suggested, why not hold Ottawa to that standard? All new spending could be measured for productivity dividends, and then compared with the advantage from lowering taxes. It is a test that would rattle politicians but could eventually spell even more relief for harried Canadians.