Trudeau’s Plan for the Middle Class Will Reduce Inequality in Canada

July 22, 2015

When casting their ballot in the next Federal elections, there is a fact Canadians should bear in mind: there exists a direct correlation between high rates of income equality and strong, sustained economic growth.

Many studies have proven this link between social equality and prosperity. The International Monetary Fund itself recently insisted on the economic return a country can expect from narrowing its income gap. The Toronto Dominion Bank said that the Government should redouble its efforts to reduce inequality: “Canada could do more in terms of redistribution of income […] Canada’s tax system is not as progressive as many might think.” The CD Howe Institute proposed a plan to increase the progressivity of the tax system. Despite all this, the Harper government is stubbornly going the opposite way.

The regressive Harper plan

Stephen Harper’s fiscal plan includes three measures that will increase inequality in Canada.

First, the Conservative government wants to postpone access to federal Old Age Security and the Guaranteed Income Supplement benefits from age 65 to 67. This measure will almost triple the low-income rate in this age group, from six per cent to 17 per cent, thus throwing some 100,000 Canadians more per year into poverty.

Yet, the Office of the Chief Actuary of Canada, the Parliamentary Budget Officer, the OECD and the Department of Finance itself have proved that keeping the access age at 65 would not put the government’s finances at risk.

Second, the Harper government raised from $5,500 to $10,000 the annual contribution ceiling of the tax-free savings account (TFSA). The Parliamentary Budget Officer says that this measure is regressive, that it mostly benefits higher-income households and that “the contribution limit increases proposed in Budget 2015 would accentuate these distributional disparities.”

The third Conservative regressive measure is income splitting for families with children. According to the Parliamentary Budget Officer, this measure will benefit only 15 per cent of households, particularly the ones who are wealthier than the average. Low-income families will get almost nothing. The Harper Government is bent on widening the income gap, willing to give a $2,000 tax relief to the wealthiest but nothing to single mothers.
 
The Progressive Trudeau Plan

Justin Trudeau’s plan, Fairness for the middle class, consists of two measures that will promote both social justice and economic growth: an allowance for families and a tax cut for the middle class.

The first measure is the “Canada Child Benefit.” Compared to the current system, it sets significantly higher basic annual allowances for low-income families. They decrease in step as family income increases (but more slowly than in the current system) and cease to be paid to the highest income groups. The Canada Child Benefit is fully indexed to the cost of living and completely non-taxable, which is not the case of all Conservative measures. In total, the Canada Child Benefit will ensure that 90 per cent of families will receive larger monthly payments than those received today under the current system.

Bringing together in a single program the current complex system of benefits and tax breaks, the Canada Child Benefit represents an annual 22 billion dollar investment, eighteen billion of which are funded through the replacement of existing programs and two billion through the cancellation of regressive income splitting for households with children. This leaves a new investment of two billion dollars, the source of which will be identified in the Liberal election platform.

The second Trudeau Plan measure is a lower tax rate for the middle class: 20.5 per cent instead of the current 22.0 per cent. Earned income between $44,700 and $89,401 will receive a tax break of up to $670 per year per person — $1,340 per year for a two-income household. This tax cut will be funded through the introduction of a new 33 per cent tax bracket for taxpayers who earn more than $200,000 per year. Only one per cent of Canadian taxpayers would pay more taxes under the Trudeau Plan than under the current Harper Plan.

This Trudeau measure for the middle class has been generally welcomed, despite the misgivings of those who believe that beyond a 50 per cent “psychological” threshold, the tax could become “confiscatory” and kill the tax. For want of authoritative arguments, the Conservative Finance Minister went so far as to evoke the NDP leader: “The leader of the NDP party, Thomas Mulcair, has said: ‘When you get taxes over 50 per cent, it’s no longer taxation — it’s confiscatory.’ It’s a good line.”

But studies have failed to verify the existence of that alleged 50 per cent threshold effect. Presently, the marginal rate exceeds 50 per cent in some U.S. States and large cities, including New York and San Francisco.

Paradoxically, Thomas Mulcair who bristles at the idea of making the income tax more progressive also wishes to finance his many election promises through a significant increase in the corporate tax rate. Not only would a higher tax on the companies’ profits affect their competitiveness, but their richest shareholders would surely not foot the whole bill, leaving small shareholders, suppliers, clients, employees and consumers to absorb the extra costs. For economic prosperity and social justice, the Trudeau plan trumps both the Mulcair and Harper plans.

Conclusion

Reducing inequalities, if well done as per the progressive Trudeau Plan, will benefit our economy; increasing inequality — the regressive Harper or Mulcair way — will only harm it. The Trudeau plan is the fairest and most effective, both socially and economically. It is simple, transparent, inexpensive to administer and almost fully funded through better handling of current measures.

A strong economy, a just society, a healthy environment: why should we have to choose? If we make the right decisions, we can better achieve all of these goals, precisely because we will not have given up on any of them. Trudeau’s plan for fairness to the middle class is one of those good decisions Canadians have to make, in the interest of all.