Trudeau's Tax Hike on Canada's Richest 1 Percent Comes Up Poor

  • Liberals also cut rate for those in middle-class bracket
  • Moves pitched as revenue neutral will now cost C$1.4 billion

Canada’s government is increasing taxes on high-income earners by four percentage points next year while conceding the move won’t raise as much revenue as initially planned.

Finance Minister Bill Morneau announced the change, effective Jan. 1 and a key pledge of the Liberal Party ahead of its election in October, after markets closed Monday in Ottawa. Canada will also cut taxes on middle-income earners by 1.5 percentage points, he said, and roll back annual contribution limits on tax-free savings accounts to C$5,500 ($4,065) from C$10,000 for the coming year.

“A fundamental part of this plan is a fairer tax system for those who need it most -- those in the middle class,” Morneau said at a press conference in Ottawa. “We are also asking Canadians who have the most to contribute a little bit more.”

Canada’s move comes amid a global debate about income inequality and taxing “the 1 percent” that has stretched from Wall Street protests to Argentina’s election of a pro-business government last month, fueled in part by French economist Thomas Piketty’s best-selling book “Capital in the Twenty-First Century.” Trudeau’s tax on the rich follows seven Canadian provincial governments that have done the same since 2010.

New Top Bracket

The increased levy on high earners applies to those making more than C$200,000 annually, creating a new tax bracket with a rate of 33 percent, up from the 29 percent currently paid on earnings C$140,388 and above -- the previous highest bracket. Prime Minister Justin Trudeau campaigned on increasing taxes on the “wealthiest one percent,” saying it would raise C$2.8 billion in fiscal 2016 and pay for the corresponding cut for middle-income earners. The Liberals now predict it will only raise C$2 billion.

Erik Hertzberg/Bloomberg

There have been warnings the Liberals were overestimating how much money the increase would bring in. The C.D. Howe Institute, chaired until 2014 by Morneau himself, reported on Dec. 3 that the Liberals would generate “less than C$1 billion” from the measure.

The Liberals will also cut the tax rate on incomes between C$45,282 and C$90,563 to 20.5 percent, from 22 percent -- a move they say affects about 9 million Canadians. Trudeau has cast the measure as a form of stimulus to rejuvenate the middle class, and the Liberal platform forecast the cut would cost $2.9 billion in fiscal 2016. They now predict it will cost C$3.4 billion.

In other words, the middle class tax cut and corresponding increase on high earners was pitched as roughly revenue-neutral and will now cost C$1.4 billion.

Tax-Free Accounts

On tax-free savings account, Monday’s move amounts to reverting to the previous limit. The measure is expected to boost government tax revenue by C$80 million in fiscal 2016 -- again, less than the Liberal campaign platform predicted. The 2015 contribution limit remains unchanged.

The Liberals took power Nov. 4 and quickly released a fiscal update showing they inherited a deficit of C$3 billion for the fiscal year that began in March, not a surplus as forecast in the previous government’s 2015 budget. The Parliamentary Budget Officer, an independent watchdog, said this month the outlook is worse than the Liberals are saying.

Trudeau campaigned on running deficits of no more than C$10 billion per year, on lowering Canada’s debt-to-GDP ratio and on returning to balance by fiscal 2019, when the country’s next election scheduled. When asked about deficits Monday, Morneau declined to reiterate the government’s commitment to a C$10 billion cap.

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