Liberal tax-switch plan could mean $4B in lost revenue, study suggests

The Trudeaugovernment's plan to boost taxes on the country's top income earners and lower taxes for the middle class could end up costing federal and provincial treasuries billions in lost tax revenue, according to the C.D. Howe Institute.

The Liberal plan calls for the federal tax rate on those with taxable incomes above$200,000 the so-called one percenters torisefrom 29 per cent to 33 per cent. At the same time, the federal tax rate on those with taxable incomesbetween roughly $45,000 and $90,000 would drop from 22 per cent to 20.5 per cent.

But the Toronto-based think-tank said its analysis shows that the tax-switch plan could end up costing governments billions what it calls a "losing proposition."

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"The Liberal election platform said that these changes would be more or less revenue neutral," said the report's author, C.D. Howeresearch director Alexandre Laurin.

"However, we estimate the federal tax changes could result in national tax receipts falling short of commitments for both federal and provincial levels of government by more than $4 billion, meaning higher taxes elsewhere, unplanned spending cuts, or larger increases in government debt," he said.

Liberals may be too optimistic

Laurin said the problem is that high-income taxpayers can take many steps to reduce their taxable income things like changingincome sources, putting off taxable transactions or moving to lower-tax jurisdictions. His analysis cites examples from other jurisdictions where top-income taxpayers changed the way they acted when their marginal tax rates were increased.

Because of that, he saysthe extra tax revenue raised by the higher rate on the top income earners could bring in less than $1 billion far less than the $2.8 billion thanthe Liberals hadforecast in their electoral platform document.

At the same time, the analysis suggests the lowering of the middle-class rax rate could cost the federal and provincial governments a total of $4.9billion ($3.5 billion federally and $1.4 billion provincially).

Includeanother $300 million loss in federal tax revenuefrom the associated rise in the maximum charitable tax credit rate (whichis always equal to the highest federal marginal tax rate), and factor inthe estimated $1 billion the high-income tax rate would bring inand the C.D. Howereport says the total tax revenue shortfall becomes $4.2 billion.

Instead of raisingthe income tax rate on top earners, the report recommendsother ways of raising revenuethat it says would still be "progressive, but less economically damaging."

"One option already envisaged by the new government would be to eliminate tax preferences targeted to high-income earners. Another would be to eliminate or to reform the small business tax deduction to better target younger firms rather than all firms that are small, including incorporated professionals," the report says.