As Canada’s federal election campaign enters its second day, economist Trevor Tombe has delivered a sharp analysis of competing tax cut proposals from the Liberals and Conservatives, revealing significant differences in their scale and economic impact.
The University of Calgary professor, appearing on The Hub’s election coverage, provided crucial insights into how these plans would affect Canadian households and the broader economy.
Here are three key takeaways from their discussion:
- Tax cuts favour middle-income earners but don’t change economic incentives: Both proposals target the first tax bracket (15 percent rate), benefiting most taxpayers but delivering the greatest savings to those earning between $30,000 and $90,000. Conservative cuts offer nearly double the relief than the Liberal plan, with what Tombe says is typical families seeing $575 of tax relief under the Conservative plan and $255 under the Liberal plan. Neither plan improves work or investment incentives, since marginal rates remain unchanged above $57,375.
- Missed opportunity for growth-focused reform: Tombe said repeated cuts to the lowest bracket (now proposed by both parties and some provinces) consume the fiscal space needed for broader tax reform. Canada faces urgent competitiveness issues, exemplified by the nearly 20-point gap in top marginal rates between B.C. and Washington state. Better approaches, says Tombe, include considering broader tax reforms, as increasing the basic personal amount, which has already been done by the existing Liberal government, limits the capacity for change.
- Deficit risks are manageable, but future pressures loom: The Conservative $11 billion cut represents just 2 percent of federal program spending, potentially fundable through reduced business subsidies. Meanwhile, the Liberal plan will cost $5 billion. Both parties maintain medium-term balanced budget pledges despite tax cuts. But military spending commitments and other platform items may create future fiscal pressures.
Middle-class focus with limited economic impact
Tombe’s analysis reveals both parties are targeting the politically crucial middle-class demographic, though their approaches differ substantially. The Conservative proposal would reduce the first tax bracket rate from 15 percent to 12.75 percent, delivering an average $575 benefit to families, while the Liberal plan proposes a more modest reduction from 15 percent to 14 percent, and $255 in savings.
“I estimate about two-thirds of the value goes to individuals earning between $30,000 and $90,000 per year,” Tombe noted, confirming the middle-class focus. However, he cautioned that these cuts fail to address Canada’s pressing economic challenges.
“If the goal is to enact a tax change that will improve incentives to invest or to work, this is not the kind of tax change that will do it,” Tombe explained, emphasizing that marginal rates—which influence decisions to work extra hours or take on additional clients—remain unchanged for most earners.
Growth opportunities missed
Tombe expressed concern that Canada’s piecemeal approach to tax policy is missing bigger opportunities. He highlighted how repeated cuts to the lowest bracket—now proposed by both federal parties and already implemented in provinces like Alberta—consume fiscal room that could enable more transformative reforms.
Tombe pointed to the nearly 20-percentage-point gap between top marginal rates in British Columbia and neighbouring Washington as emblematic of Canada’s competitiveness crisis.
“That’s a big challenge to recruit and retain highly skilled individuals,” he warned, suggesting tech firms might prefer Seattle over Vancouver due to tax differentials.
The professor suggested alternative approaches, like increasing the basic personal amount (as Liberals did previously) or restructuring business taxes, could better stimulate growth. However, the popularity of the current proposals with voters makes them politically irresistible, despite their economic limitations.
Fiscal math holds—for now
Despite the substantial price tags—an estimated $11 billion for the Conservatives and $5 billion for the Liberals—Tombe believes both plans are fiscally manageable within the parties’ balanced budget pledges. He noted the Conservative cut represents just 2 percent of federal program spending, and could potentially be covered by reducing business subsidies that remain $20 billion above pre-pandemic levels.This includes subsidies delivered by subnational governments, so lowering these could potentially involve adjusting federal transfer programs.
“Moving those subsidies back to pre-COVID averages gives you more than enough room to fund the scale of a tax reduction,” Tombe observed, while cautioning that military spending commitments and other platform items could create future pressures.
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