Liberals' Middle Class Tax Cut Won't Be Revenue-Neutral, Morneau Says

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OTTAWA - The Liberal government is poised to make good on its promise to cut federal income taxes for middle earners by raising the rate on the richest Canadians — cuts that the government admits won't be revenue-neutral.

Finance Minister Bill Morneau is conceding for the first time that the changes are going to cost the federal treasury $1.2 billion annually, starting in the 2016-17 fiscal year.

The government has introduced a motion in Parliament lowering the income-tax rate on Canadians earning between $45,282 and $90,563 per year from 20.5 per cent from 22 per cent, to take effect starting Jan. 1.

To offset most of that tax-rate change, the Liberals are also imposing a higher tax rate of 33 per cent on earners in the top one per cent — those who make more than $200,000 per year.

Morneau says the government is being forthright with Canadians about the total cost of the tax changes.

bill morneau
Minister of Finance Bill Morneau enters the House of Commons. (Photo: Matthew Usherwood/CP)

Those changes also include cancelling a Conservative plan to increase limits on tax-free savings accounts from $5,500 to $10,000.

"We are starting today with middle-class tax breaks, a key part of our initiative," Finance Morneau told the House of Commons on Monday.

"Today is the day where we have said we are going to reduce middle-class taxes by asking those Canadians who are doing very well to pay a little bit more. This is an important first part in our tax program."

But some say the tax changes, a central pledge in the campaign platform that helped propel the Liberals to victory in October, are likely to cost public coffers more than the government expected and could provide more benefit to richer Canadians.

For example, a study released Monday by the Canadian Centre for Policy Alternatives found that higher-income earners — those who make more than $124,000 — would benefit most from the middle-class rate cut as long as they did not earn enough to land in the new upper bracket above $200,000.

Those making more than $90,563 are taxed at three different rates: one rate on the first segment of income up to $45,282, the second, newly reduced rate on the next segment of income, up to $90,563; and a third rate beyond that, up to $200,000.

As a result, they will realize a greater total benefit from the middle-bracket cut than will an income earner whose annual salary lands within that bracket, the study says.

"Today is the day where we have said we are going to reduce middle-class taxes by asking those Canadians who are doing very well to pay a little bit more.

Another recent study by the C.D. Howe Institute think tank said the changes would encourage big earners to make more of an effort to avoid taxes, while the rate reduction itself could cost government finances more than expected.

In its platform, the Liberals estimated the tax increase on the top earners would fall a little short of covering the full costs of the tax cut. It projected the reduction to cost close to $3 billion annually over its four-year mandate.

Combined with the sting of the struggling economy, the new Liberal government is facing increasing pressure to meet its election vows to cap annual deficits at $10 billion over the next two years and to balance the federal books in the fourth year of its mandate.

Morneau has said the Liberals are facing a slower economy and a worse-than-expected fiscal environment handed over from the former Conservative government.

"We have inherited a situation that is more challenging than what was foreseen in the budget," he said.

Last month, Morneau announced a $3-billion deficit forecast for the current fiscal year. In April, the Tories projected a $2.4-billion surplus for 2015-16 — including the $1 billion set aside for contingencies.

The proposed changes to the tax brackets will help boost the economy, the Liberals say.

$10-billion ceiling

Last week, however, Morneau backed away from the Liberal vow to keep annual shortfalls under $10 billion in 2016-17 and 2017-18.

He said the government would focus on its pledges to invest in infrastructure, lower the federal debt-to-GDP ratio and balance the books before the next election, but dodged when asked directly about the party's promise to keep annual shortfalls under the $10-billion ceiling.

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