Manitoba Taxes, Ontario Tax Cuts, And Bracket Creep

Commentary, Taxation, Frontier Centre

As the cynical saying goes: there are lies, damned lies, and then there are statistics. A recent column by University of Manitoba economist Costas Nicolaou ("Balance approach to tax woes", Free Press, September 13) used various numbers to downplay the case for tax cuts in Manitoba. That’s too bad, since there is widespread agreement that high taxes depress both economic growth and individual living standards.

In a world where labour is mobile and technology allows instantaneous global operation, Professor Nicolaou’s call for higher income taxes on corporations and high-income earners amounts to a recipe for debilitating revenue drops and service cuts. Manitoba does have deceptively low living costs, but that does not justify higher taxes. Manitoba’s modest cost of living is an illusion because 1) excessive realty taxes have collapsed property values to among the lowest in Canada, and 2) an uncompetitive tax regime has slowed growth and exported corporate headquarters and their high value jobs to places like Alberta. Living here seems more affordable because these poor fundamentals depress our economy.

The personal incomes of Canadians, after taxes and inflation, grew by 30% in the 1980s. But taxes, especially at the federal level, grew 60% faster than incomes during the 1990s. Average after-tax incomes in Canada are actually lower today than 10 years ago.

The primary culprit is bracket creep, a tax policy restored by the Mulroney Conservatives in 1985, that uses inflation to silently push Canadians into tax brackets with higher rates. The Toronto-based C.D. Howe Institute calculates that the values of the personal amounts and bracket thresholds that determine federal income tax liability have increased by less than 8% over the last decade, while the cost of living went up 30%. This has produced a silent income tax windfall for both the federal and provincial governments (since provincial income taxes are calculated as a percentage of the federal rate). The Canadian Taxpayers Federation estimates that bracket creep produced an extra $104 million this year alone for the Manitoba government.

It is against this revenue-rich background enjoyed by government that Manitobans should consider their options during the present election campaign.

None of Manitoba’s main political parties are daring to promise any official tax increases. Minor tax cuts are the order of the day. The Liberals have a solid plan to eliminate the provincial education levy on property. Even the NDP, whose public sector allies — the education and health-care unions, the civil service and government companies like Manitoba Hydro — have a vested interest in bountiful government spending and taxation, has promised to keep the balanced budget law and bring back a $75 property tax credit.

The Conservatives have offered the most ambitious tax reductions. Besides removing the education support levy, the PCs propose a 21% cut in the provincial income tax rate over five years to meet the competitive challenge presented by aggressive rate reductions in Alberta and Ontario.

The Tory plan has evoked hostile reaction from academics who favour heavy government intervention in the economy. Not surprisingly, their criticisms have received a high profile during the heat of the campaign. Their main point of attack is that the numbers "do not add up", whatever that means.

Manitoba is a place where old ideas die hard. The fanciful belief that governments can spend money more wisely than the individual appeals particularly to tenured, old economy types on campus. But considerable experience with tax cuts in the real world clearly shows that lower tax rates, especially cuts to high marginal income tax rates, actually raise government revenue by producing higher economic growth.

Economies are dynamic, and people respond to the changed incentives produced by lower taxes. They work harder and invest more if that puts more money in their pockets. They spend it more effectively than layers of bureaucracy deploying resources through inefficiently delivered public services. By increasing market activity, tax cuts enable government coffers to grow by capturing a smaller slice of a much larger pie.

Dr. Mark Mullins, a tax policy expert and former chief economist of a national investment dealer, has examined the numbers behind the Conservative plan and sees them as reasonable, if overly prudent. He believes the government could lower taxes even more while maintaining room for debt reduction and additional spending.

Certainly the experience with tax cuts in Ontario supports his analysis. Despite a 30% (or $5 billion) provincial income tax rate cut (really only a 15% cut when taken as a percentage of the federal rate), Ontario’s annual provincial income tax revenues increased by almost 3% between 1995 and 1999. Over 80% of Ontario’s growth during that time was due to expanded local economic activity. In other words, the auto boom and the thriving U.S. economy were not the primary drivers of the rapid upswing in the Ontario economy, local activity aided by tax cuts was.

Mullins suggests that the former Ontario NDP government’s increase in top marginal income tax rates to 53% produced such a growth penalty that the Harris tax rate decreases raised two-and-a-half times as much revenue as a tax increase normally would have.

Manitobans need to examine their options in light of this evidence, not the static and ultimately flawed analysis from our local "old ideas" crowd. If anything the Tory plan disappoints because it unnecessarily increases spending when all statistical indicators show that our public services are more than adequately funded. But it is the only plan that comes closest to the major tax cuts needed to discourage movement of our most valuable tax base – well-paid and educated people — to Alberta and Ontario and to compensate Manitobans for years of bracket creep.