When politics crowds out good tax policy

Glen Hodgson is a senior fellow at the C.D. Howe Institute.

Canada’s tax system should be a cornerstone of strong economic performance, encouraging private investment, higher personal savings and high levels of labour force engagement and work effort while also addressing social priorities such as reducing child poverty. However, populist and opportunistic politics too often drive changes to the tax system, not considered analysis about what is best for long-term economic and employment growth and a healthy society. Is it possible to change how tax policy is made and refocus on the potential benefits to the economy and society?

All too often, proposed changes to the tax system have been designed first and foremost to win popular support, regardless whether there is any hard evidence that it would be good for the economy and society. Numerous recent examples quickly spring to mind.

The Conservative promise over a decade ago to cut the GST rate may have been good politics at the time, but the opposite of what good economics would advise. Lowering sales tax rates encourages more consumption, which does nothing to boost long-term savings, private investment and potential growth – as many private-sector economists reminded the government. Economic analysis suggests sales tax rates should be raised and personal income taxes cut to improve incentives to work and save.

Politically inspired tax policy has cut across party and ideology. For example, increasing the top income tax rate was justified by the current Liberal federal government as a way to improve tax fairness. However, the increase means taxpayers in every province east of Saskatchewan now take home less than 50 cents of every additional dollar earned above $210,000 when combined with provincial income taxes. The economic literature suggests a higher top marginal…

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