BUSINESS

Liberals' Tax Changes Will Cost More Than Advertised, PBO Says

01/21/2016 12:23 EST

The Liberal government’s plan to hike taxes on the rich while cutting taxes for some others will cost more than the Trudeau government has estimated, the Parliamentary Budget Officer says.

In a report issued Thursday, the PBO said what the Liberals had already admitted: That the tax hike on the rich won’t cover the cost of the tax cut to lower earners.

Finance Minister Bill Morneau estimated last month the new tax regime would create a $1.2-billion shortfall annually. The PBO says the effect of the income tax changes will be more like $1.7 billion per year, but that doesn't include a revenue boost the Liberals will see thanks to the rollback of TFSA limits.

tax distribution canada

Only individuals among the top 10 per cent of earners will pay more taxes under the Liberals' plan, but the benefits of the middle-class tax cut will mostly accrue to the top 30 per cent. (Chart: PBO)

In the five years to fiscal 2020-2021, the government will take in $8.9 billion less than it would have without the changes, the PBO estimates.

The Liberals are planning to introduce a new, 33-per-cent rate on incomes above $200,000. At the same time, they are planning to drop the tax rate on incomes between $45,283 and $90,563, to 20.5 per cent from 22 per cent.

The PBO says the tax hike on the rich will directly affect 1.5 per cent of all earners, and cost them an average of $5,255 a year.

The Liberals’ tax cut “will affect 43 per cent of taxpayers, and primarily the top 30 per cent of earners,” the PBO said.

bill morneau

Federal Finance Minister Bill Morneau hosts a holiday party in Toronto on Monday, Dec. 14, 2015. (Canadian Press photo)

The Liberals’ tax plan has proven controversial in some corners, with some arguing the tax hike on the rich should be much larger, and others arguing the government shouldn’t be hiking taxes on anyone.

The Canadian Centre for Policy Alternatives is urging the Liberals to double the rate of the new top tax bracket, to 65 per cent, arguing it would raise $15.8 billion to $19.3 billion in revenue annually — enough, for instance, to cover the government’s proposed stimulus spending plan.

The C.D. Howe Institute, on the other hand, says the government shouldn’t raise taxes on the rich at all, and should look for less economically damaging ways to raise revenue.

The institute suggests the Liberals could raise revenue by ending tax preferences targeted to high-income earners, and to reform the small business tax deduction that some argue is being used by individuals to avoid higher personal income tax rates.