The new Conservative leader Pierre Poilievre is correct when he says governments discourage work by taxes and clawbacks.
The Marginal Effective Tax Rate (METR) measures what government takes from each new dollar earned in taxes and in clawbacks of income-related government benefits. In his leadership acceptance speech and an August 19 video called “Make work pay,” Poilievre said a single mom with three kids making $55,000 had an METR of 80%.
“Nobody can work for that. It’s not even minimum wage. She’s earning effectively $5 an hour in Canada. That is crazy. And it’s even worse for many people on disability assistance or on welfare,” Poilievre said in his video.
“No wonder we have one million job vacancies in Canada.”
Franco Terrazzano, Federal Director for the Canadian Taxpayers Federation, says Poilievre is a welcome contrast to the Trudeau government.
“All we hear from this government is more spending more debt and higher taxes. And it’s time that we hear politicians come up to the plate with ways to actually make life more affordable by letting Canadians keep more of their own money from taxes,” Terrazzano told the Frontier Centre for Public Policy (FCPP).
“What Canadians need is real broad-based tax-relief. We want to see income tax rates going down, not just tax credits here and there, but real tax relief for Canadians who work hard and see too much of their paychecks going to government.”
A federal study released earlier this year analyzed METRs based on data from 2017. Those making $24,739 to $33,724 per year had the highest METR at 41.3%. This gradually lowered to 35.6% for those making $60,904 – $72,547, then progressively rose to 40.3% for those making $114,570 or more.
Current METRs are probably higher still. The Liberal government increased Canadian Pension Plan payroll taxes from 9.9% in 2019 to 11.9 in 2023, to which workers contribute half. A federal carbon tax of $20 per tonne was introduced in 2019, rose gradually to $50 in 2022, and will be $170 by 2030.
Terrazzano can’t believe COVID-19 didn’t stop these tax increases but it stopped so many other things in their tracks.
“Why is the government raising payroll taxes during the middle of a pandemic?” Terrazzano asks.
“Talk to so many Canadians, everyday Canadians. It’s tough to get ahead in this game. And one of the things that is making it tough to get ahead is the high taxes that governments continue to take from Canadians’ pockets.”
In his video viewed more than 161,000 times, Poilievre promised to cut payroll taxes and income taxes, cap government spending, establish a task force to simplify the tax code, and work with the provinces to reform “intertwined and convoluted” welfare programs.
Canadian tax expert Jack Mintz, a long-time federal finance bureaucrat and former president of the University of Calgary School of Public Policy, says Poilievre is “absolutely right” about the problem and calls his solutions “sensible.”
“The introduction of the new [Canadian] Child Benefit program increased the clawback rates over a larger range of income. One example [of how the] Liberals made it worse,” Mintz told the FCPP.
“It is not just the income tax that creates higher tax rates but also income tested origami. For example, a senior with $20,000 in income pays 20% MTR under the income, but loses 50 cents in guaranteed income supplement for each additional dollar of income. So, a small pension or RRSP withdrawal gets taxed at 50%. That is why low-income people should not hold RRSPs,” Mintz said.
In 2018, Poilievre introduced a Private Member’s Bill C-395, the Opportunity for Workers with Disabilities Act. The bill said workers with disabilities must always be allowed to earn more in wages than they lose in clawbacks and taxes. Unfortunately, the House of Commons voted the bill down at second reading.
In an interview with FCPP, UBC economics professor Keith Milligan said Poilievre had some email and phone exchanges with him prior to the bill’s introduction. He says the federal surplus of $10.2 billion from April through June this year makes it easier to lower the METR.
“It’s a real issue with the design of our tax and transfer system. It certainly was something that mattered,” Milligan said.
“I’m most concerned for people out there who are struggling to enter the labor market, that we do these kinds of calculations to make sure that we don’t put up barriers to them entering the workforce. We know a lot of people who are struggling, who really want to work to support their families, want to make sure that work pays off for them.”
Lee Harding is Research Associate for the Frontier Centre for Public Policy.