By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
Too often, reality doesn’t match political rhetoric. The federal government’s tax relief promises are a case in point.
On the federal election campaign trail in 2015, Justin Trudeau promised to cut income taxes for middle-class Canadian families. And since becoming prime minister, he and his government have repeatedly claimed to have kept this promise.
For instance, the Liberals’ first budget in 2016 proclaimed “the government cut taxes for middle-class Canadians everywhere.” And the prime minister made a similar statement to a global audience at the United Nations General Assembly recently.
In fact, despite the repeated claims to the contrary, the Trudeau government has increased the personal income tax paid by the vast majority of middle-class families.
Cutting income taxes is a laudable goal. After all, the average Canadian family devotes approximately 43 percent of its income to taxes to all levels of government. So tax relief would be welcome.
So what causes the disconnect between the government’s rhetoric and reality?
Immediately after coming to power, the Liberals reduced the second lowest personal income tax rate from 22 percent to 20.5 percent. This lowered the personal income tax rate for income earned between $45,916 and $91,831 (and anyone with income above $45,916 benefited from this specific tax change).
However, the government also eliminated a number of tax credits, which reduced a person’s income taxes if they qualify for the specific credit. For instance, one of the tax credits eliminated was for children’s fitness. Previously, if a family spent money on their children’s fitness in a qualifying organization, part of those costs would be offset by a reduction in their tax bill. Anyone who previously claimed these now-eliminated credits faces increased income taxes.
The list of eliminated tax credits also includes those for education, textbooks and public transit use.
But the largest source of the increase to the middle-class family’s tax burden was the elimination of the income-splitting tax credit for couples with young children. Various households with similar incomes can face very different income tax bills depending on who earns the income. A household with two earners at $40,000 each, for example, would pay lower combined income taxes than a one-earner household with the same amount of income ($80,000). Households with similar incomes should face similar tax burdens and this tax credit worked, in part, towards that goal.
Eliminating the income-splitting tax credit meant an average $949 tax increase for middle-class families (those families with incomes between $77,089 and $107,624). That same middle-class group only benefited $228 (on average) from the government’s cut to the second lowest income tax rate. So eliminating just the income-splitting tax credit more than offset the benefit of the tax rate reduction.
When you add in the effect of eliminating the other tax credits, 81 percent of middle-class Canadian families will pay, on average, $840 more in personal income taxes this year because of the federal government’s tax changes.
First on the campaign trail, and then repeatedly in office, the Trudeau government has vowed to cut income taxes for Canada’s middle class.
Despite this being a worthwhile goal, the reality is that the government’s income tax changes as a whole have had the opposite effect.
The vast majority of middle-class families now pay more income tax, despite all the rhetoric to the contrary.
Charles Lammam and Hugh MacIntyre are co-authors of the Fraser Institute study Measuring the Impact of the Federal Personal Income Tax Changes on Middle Income Canadian Families.