Quebec’s marginal tax rate – already the heftiest in North America – is set to rise even more if the minority Parti Québécois government proceeds with its plan to hike personal taxes on the province’s higher-income earners.
The PQ’s pledge to follow through on a campaign promise to immediately impose two new tax brackets on individuals making more than $130,000 and $250,000 has met with a storm of protest from Quebec’s business community.
The reaction prompted newly installed Finance Minister Nicolas Marceau on Tuesday to mull publicly the possibility of watering down the increase, which would also include a higher tax on dividends and capital gains.
In addition to having the province’s wealthier taxpayers shoulder an even larger tax burden – the marginal rate now stands at 48.2 per cent – the move has been slammed for also proposing to apply the new taxes retroactively to the 2012 fiscal year.
But beyond what critics says is an unfair, hasty tax grab in the upper brackets, questions are being raised over the impact such action would have on the province’s already fragile economy.
The new tax measures are meant to replace about $900-million in forgone revenues that will result from the PQ’s promise to repeal an unpopular $200-per-person health tax.
Critics wonder whether it’s wise to plug that $900-million hole using revenues from tax hikes, especially given the poor state of the economy in Quebec, which has the highest per-capita debt in Canada and is anticipating sluggish economic growth this year and next.
“This is a bad choice in a slowing economy. No thought has been given to what this can do to the economic behaviour of those affected,” said economist Youri Chassin of the Montreal Economic Institute.
Many professionals and other income earners in those tax brackets have the freedom to make adjustments to the hikes, such as working less or taking longer vacations, or even moving to less highly taxed jurisdictions such as Ontario, said Mr. Chassin.
Or a company outside Quebec that had been contemplating expansion into the province might take a pass on the move if it meant having to pay higher salaries to employees to compensate for the tax increases, he said.
Higher tax rates for high-income taxpayers can also fail to bring in the hoped-for revenues.
University of British Columbia economics professor Kevin Milligan has pointed to evidence suggesting that some better-off taxpayers simply get their tax advisers to find ways to reduce their taxes when they are hit with an increase.
This year, the British government reduced its highest tax rate to 45 per cent from 50 per cent after failing to take in the anticipated revenues on an increase.
Officials conceded that the increase was not very fruitful because individuals sought out a variety of legal ways to reduce their net income.