Analysis: Affordability the issue behind Liberal, Tory income tax plans
As the battle to woo middle-class voters heats up on the campaign trail, the Liberals and Conservatives have unveiled tax plans bearing similar price tags but broadly different benefits depending on income level.
The two packages, announced within a week of one another, come as affordability — particularly in the housing market — emerges as a central electoral issue among Canadians.
“The economy has performed relatively well and Canadians have experienced a lot of job creation,” said Craig Alexander, chief economist with Deloitte Canada. “So the real election debate is about who is painting a portrait of better conditions for Canadians going forward. And the public is indicating affordability is one of the big conditions.”
Indeed, though the Consumer Price Index — a key cost-of-living indicator for economists — has been increasing in line with Bank of Canada targets at about two per cent per year, Canadians’ wages have increased at just 2.3 per cent annually over the past four years, said Alexander. Meantime, house prices have soared.
“If your wages are only rising in line with inflation it feels like you’re not getting ahead,” Alexander said. “So when people say there’s an issue around affordability in this election they are really picking up on two different dimensions. The first dimension is around housing affordability, and all parties will have campaign promises around that. The other dimension is how fast your after-tax income is rising and all parties are addressing that through tax promises.”
On Sunday, Liberal Leader Justin Trudeau said if re-elected, his party would not tax the first $15,000 of income for most Canadians, increasing the basic personal exemption by nearly $2,000 by 2023. The policy would see roughly 690,000 Canadians stop paying federal income taxes and lift 38,000 Canadians above the poverty line, according to an analysis by Kevin Milligan, economics professor at the University of British Columbia.
The biggest percentage change in disposable income would go to families earning between $40,000 and $80,000 annually, he found.
“The novel part of the Liberal proposal is they are phasing out the increase for higher earners,” Milligan said. “What that means is the people in the top one per cent don’t get any benefit from this. It’s not unprecedented, but it is unusual and I think it’s part of their tax policy ethos since 2015, which is they want to make sure the tax system doesn’t give more benefits to the people in the top one per cent (of earners).”
We have two roughly equally sized income tax cuts but they’re structured in different ways. It’s about who benefits and where they are in the income distribution.
Trevor Tombe, economics professor, University of Calgary
The Liberals have yet to release independently verified costing from the Parliamentary Budget Officer, but Milligan estimates the cost of their plan at $5.6 billion.
The Conservatives’ tax plan, priced at $5.9 billion, would see the rate on the lowest federal income-tax bracket fall to 13.75 per cent by 2023 from 15 per cent now. The package would take 60,400 people off the tax roll and boost 18,000 Canadians above the poverty line. The biggest percentage change in disposable income would flow to families earning from $80,000 to $150,000 — “still fairly middle class families but higher up than under the Liberal plan,” Milligan said.
Those earning more than $200,000 still benefit from the reduction.
“We have two roughly equally sized income tax cuts but they’re structured in different ways,” said Trevor Tombe, an economics professor at the University of Calgary. “It’s about who benefits and where they are in the income distribution. So it’s a unique example that way.”
While all of Canada’s nearly 21 million taxpayers get something out of the Conservative plan, the Liberal plan gives something to all but the very top earners, who are excluded from the increased basic personal exemption.
Both plans put a “modest” amount of pressure on the federal budget, at 1.5 per cent of program spending, Tombe said. The Liberals and Conservatives have yet to release full fiscal plans to indicate how the cuts would be paid for.
While the total costs of the proposed plans are not insignificant, a federal deficit of $14 billion likely prevented both parties from providing more sweeping cuts, said Alexander.
“I see two parties picking up on the fact that voters are worried about affordability and that affordability is related to how much after-tax income do they have as well as housing,” Alexander said. “Any promises on the tax front will have to be constrained so it doesn’t break the bank.”
Conservative leader Andrew Scheer followed up his party’s tax plan Monday with a pledge to improve housing affordability by easing the stress test on mortgages and removing it altogether from mortgage renewals. The test requires those taking out mortgages to prove they can still afford payments if interest rates were to rise. Scheer also promised to once again allow first-time homebuyers to take out 30-year mortgages — reversing previous Conservative rules put in place during the financial crisis.
“Measures that make housing more affordable certainly have the support of voters, but they’re also kind of hard,” said Milligan. “But that’s a path we’ve tried before and it didn’t end very well. So there’s a risk there.”