As Canadian political parties battle for the support of voters, income-tax cuts are taking center stage, with promises aimed at easing the financial burden on middle-class citizens. Both the Liberal and Conservative parties have proposed reductions to the lowest income-tax bracket, but economists warn that these plans could have unintended consequences, particularly in light of Canada’s ongoing trade war with the United States.
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Tax Cut Proposals and Their Impact on Canadians
The Liberal and Conservative parties have both introduced proposals to reduce the lowest income-tax bracket, which applies to taxable income of $57,375 or less. For taxpayers in this bracket, the cuts would result in varying degrees of savings.
- Liberal Proposal: The Liberals are offering a 1 percentage point reduction, which would save Canadians up to $400 annually.
- Conservative Proposal: The Conservatives are more generous, promising a 2.25 percentage point cut, which could save taxpayers up to $900 each year.
Both proposals target the middle-income group but would also benefit Canadians with higher taxable incomes, diluting their focus on low- and middle-income earners.
In contrast, the NDP is proposing a different approach to the issue. Their plan includes increasing the basic personal amount—the income that is tax-free—for Canadians earning less than $177,882. This would ensure that the first $19,500 earned by these individuals is tax-exempt, effectively reducing their taxable income. For those making more than $177,882, the NDP would reduce the basic personal amount to $13,500.
The NDP’s approach would save about $500 annually for those making between $19,500 and $177,882.
Economists’ Concerns: Tax Cuts vs. Economic Stability
While the proposed tax cuts have been framed as a means to help Canadians cope with rising inflation, economists are raising concerns about their long-term impact on the federal budget.
Kevin Page, former Parliamentary Budget Officer, expressed concerns that the tax cuts, though popular, represent a metaphorical “present under the Christmas tree,” meaning they offer short-term relief but lack long-term benefits in the current economic climate.
Kevin Milligan, a professor and director of the Vancouver School of Economics at the University of British Columbia, also weighed in, noting that the tax cuts, while well-intentioned, would not provide significant enough relief to Canadian families. More importantly, these cuts would cost the government billions in lost revenue annually—$6 billion for the Liberals, $14 billion for the Conservatives, and $10.4 billion for the NDP.
According to Milligan, the combined impact of these cuts, along with the expected economic downturn caused by U.S. tariffs, would put further strain on Canada’s fiscal situation. A reduction in federal tax revenues would limit the government’s ability to invest in essential public projects like defense and infrastructure, which are critical in strengthening Canada’s economy and international trade relationships.
The Impact of U.S. Trade Tariffs on Canada’s Economy
The ongoing trade war with the United States looms large over Canada’s economic future. U.S. tariffs are expected to slow down Canada’s economy, reducing tax revenues and creating additional pressure on government spending. For instance, Liberal Leader Mark Carney recently proposed a $2 billion fund to protect Canada’s auto sector, only for President Donald Trump to announce new tariffs on automobile imports from Canada.
These tariffs are expected to slow Canada’s economy further, exacerbating the fiscal challenges faced by the federal government. Economists are concerned that any additional spending on income-tax cuts could increase the federal deficit, which is already projected to hit $50.1 billion in the 2024-2025 fiscal year.
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Political Responses and Plans for Funding
Despite these concerns, political leaders are maintaining their positions on how best to fund their proposed tax cuts. Conservative Leader Pierre Poilievre has pledged to match every dollar spent with a dollar cut, targeting reductions in foreign aid, corporate subsidies, and consultant fees. However, the practicality of these cuts covering the full cost of his proposals remains unclear.
Liberal Leader Mark Carney has suggested that the federal government could save money through increased efficiency, while the NDP believes that enhanced corporate tax compliance could help offset the costs of their plan.
Do Income-Tax Cuts Make Economic Sense?
Alexandre Laurin, a leading expert at the C.D. Howe Institute, pointed out that while income-tax cuts can encourage people to work more, the proposed cuts would likely have limited economic benefits. Low-income Canadians are already incentivized to work, and the modest savings promised by these tax cuts may not be substantial enough to stimulate significant changes in behavior.
In conclusion, while the political parties’ promises of income-tax cuts may appeal to voters seeking financial relief, economists argue that they could be a poor use of the country’s fiscal resources during an economic slowdown. With the looming trade war with the United States and the pressure it will place on Canada’s economy, many believe that tax cuts should be reconsidered in favor of more strategic, long-term investments that can protect Canada’s economic future.