The intricacies of marginal effective tax rates don’t usually – or ever – take centre stage in political campaigns, but Conservative leadership candidate Pierre Poilievre is pushing that concept as part of a pitch for broad tax reform.
“Now, before you go to sleep with all this boring accounting terminology, you better wake up,” he says in the video, seemingly giving a nod to the nerdiness to follow. “Because this is the reason why, no matter how hard you seem to work, you never get ahead.”
Mr. Poilievre cites as an example a single mother with three children, earning $55,000 a year. If she were to earn an additional dollar, he says, clawbacks and taxes would eat up 80 cents – creating a marginal effective tax rate (METR) of 80 per cent.
Interestingly, the Conservative candidate makes the case for tax and benefit reform not on the typical right-wing terrain of economic efficiency but rather through an appeal to equity. Olivier Rancourt, economist with the Montreal Economic Institute, said that framing is more effective political marketing and more likely to directly appeal to the middle class. “It’s a message that conservatives are trying to embrace more and more,” he said.
Mr. Poilievre’s specific example does not appear in a recent Department of Finance report on the issue, but the problem that he discusses is certainly a real one. As this chart shows, the report illustrated that average METRs rise quickly for relatively modest income levels, peaking for incomes between $24,739 and $33,724. (The Finance analysis adjusted household income to account for family size. A family of four would have half the adjusted income of a single-person household earning the same amount of nominal dollars.)
That conclusion might seem counterintuitive, since income tax rates rise along with earnings. But clawbacks of income-tested benefits are also part of the equation. For the hardest-hit income group, such clawbacks account for 14.3 percentage points of their average METR. But for the highest earning income group ($114,570 or more), clawbacks add only six percentage points to their effective tax rate.
All of those figures are averages for those income groupings, meaning that there are individuals within them – such as Mr. Poilievre’s working single mom – who could face much higher marginal effective tax rates.
Mr. Poilievre’s solution is broad-based tax reform: cuts to income and payroll taxes, what he describes as a cap on government spending, simplification of the tax code and a joint federal-provincial effort to reduce clawback rates in order to lower METRs. (And, of course, he says he will scrap the current federal fuel charge.)
That joint effort is an acknowledgment that much of the problem is at a provincial level, and is particularly acute for Canadians who face clawbacks of social assistance payments once they start to earn income. The Finance Department analysis found that one-third of social assistance recipients had a marginal effective tax rate of 70 per cent or more – far beyond what even the highest earning Canadians pay.
Mr. Poilievre contends that his tax cuts and other changes could end up generating more revenue.
Economists think that scenario is virtually impossible in the short term and unlikely in the longer term if there are significant changes to clawback rates. University of British Columbia economics professor Kevin Milligan points out that reducing clawback rates necessarily means that more people (with higher incomes) will end up receiving greater benefits.
So, lower income earners might benefit from lower marginal effective tax rates. But governments would end up spending more – a lot more. Eventually, greater economic activity could defray some of those costs.
Prof. Milligan said the notion that cutting payroll taxes would increase revenue is not supported by evidence, particularly since Canada’s payroll tax rates are among the lowest in the advanced economies that make up the Organization for Economic Co-operation and Development.
But he gave the Conservative politician high marks overall for accuracy, noting he is taking the unusual step of discussing the complex and important tax issue with a broad audience. “I have heard politicians talk like this behind closed doors,” he said. “I think it is pretty rare that they get out their nerd like this.”
(Prof. Milligan advised Mr. Poilievre on a private member’s bill concerning METRs several years ago. He was also seconded to the Privy Council Office in fiscal 2020-2021.)
Mikal Skuterud, economics professor at the University of Waterloo, said that Mr. Poilievre’s message doesn’t get into the historical context of benefits reform. Thirty years ago, dollar-for-dollar clawbacks were commonplace, creating the so-called welfare trap that created disincentives for recipients to work. In the mid-1990s, however, clawback rates were reduced substantially to reduce those disincentives.
There has been progress on tax-code simplification, as well. Prof. Skuterud said the Liberal government has eliminated many of the boutique tax credits implemented by its Conservative predecessor (in which Mr. Poilievre was a minister).
Jason Clemens, executive vice-president of the Fraser Institute, views Mr. Poilievre’s tax pitch as a decisive break with the micro-measures of the Harper era. There are many details that need to be filled in, he says, but the broad outlines look like a starting point for the kind of large-scale tax reform that Canada needs, he says. “In some ways, it seems to me Poilievre is swinging for the fences.”
Tax and Spend examines the intricacies and oddities of taxation and government spending.
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