Thank you, Mr. Chair. No apology is required. The business of government precedes the business of witnesses.
Thank you very much for the opportunity to speak to you today about the proposed amendments to the Income Tax Act. I can look at each of the measures in terms of the pros and cons, but I also would like to provide a couple of comments about the efficiency of the items in terms of fostering inclusive economic growth in the years ahead.
I'm really going to focus on three items. The first one is the cut to the middle-income tax bracket, the second one is the introduction of the high-income tax bracket, and the third is the reduction in the contribution limit ceiling for TFSAs.
In terms of the middle-income tax bracket cut, the estimated revenue impact to the federal government is $3.5 billion. That's a tax saving that will go into the hands of households. As an economist and a former forecaster, I have little doubt that the bulk of that tax savings will in fact go into expenditure and will be stimulative to economic growth. To the extent that some of the money is saved, although it won't add to economic growth or real GDP growth, it will come at a time when Canadians are carrying an awful lot of debt. I think, then, that there is a strong economic rationale for providing tax relief to middle-income households.
As for the introduction of the new income tax bracket, there are really two different dimensions that have been discussed or focused on. The first is the revenue capacity of the tax revenues that will be generated by the high-income tax bracket. There was a suggestion that the middle tax bracket cut could be paid for largely by the implementation of a high tax bracket. The Department of Finance's estimate on the revenue generation from the high tax bracket is roughly $2 billion, so there is a revenue shortfall.
However, analysis by the C.D. Howe Institute suggests that there is a downside risk to the amount of revenues that will be generated by the high-income tax bracket. This fundamentally has to do with what you estimate will be the behavioural response of high-income earners who are facing the higher tax rate. There's a sort of economic jargon expression, the “elasticity of taxable income”. You fundamentally have to make an assumption as to what the reaction function is going to look like.
Alexandre Laurin of our institute did work on this. He looked at 11 different studies, some from Canada, some international, and what he found was that the response of high-income earners could be more pronounced than the Department of Finance is currently anticipating. As a consequence, his estimate is that the high-income tax bracket could generate perhaps only $1 billion in new revenues. This is not to suggest that the Department of Finance is wrong; it is really about what assumption you make with respect to the behavioural response. As a consequence, what I want to flag to the committee is a downside risk to the revenues that might be generated.
However, you might argue that the introduction of the high-income tax rate is not just about generating fiscal revenues. You could argue that it is about increasing the progressivity of the tax system. We really should ask questions about whether this will create more inclusive growth and whether it will actually reduce income inequality.
If we think about it from this point of view, one big risk related to the behavioural response is the level the tax rate is going to get to by way of a combined federal–provincial tax rate in various provinces. It will be above 50% of income in a number of jurisdictions. This can lead to distortions, and in fact it could lead some provinces to cut their high-income tax rates. As a consequence, what you have to wonder about is whether this creates an environment in which we end up with a transfer of tax points from the provinces to the federal government, when in actual fact I'd argue that given the fiscal pressures on provinces to deal with education and health care priorities, if anything, we should be seeing a transfer of tax points going in the opposite direction.
Nevertheless, there is no question that when you look at the empirical data, the high end of the income spectrum has seen more income growth over the last decade or longer. This is a reflection of a global trend. It represents a global competition for talent, as a consequence of which labour is now being marketed in the global arena, and this is putting pressure on high-income earnings.
From a financial capacity point of view, one could argue that the high-income tax bracket is reflecting the fact that high-income earners have more capacity to contribute to tax revenues, but there are a few potential unintended consequences I would like to flag to the committee.
The first one is that Canada is in a war for global talent. We are competing to attract and retain talent, and the high-income tax bracket may deter that—