Economists have some ideas about how to Trump-proof the economy

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Fatter wallets

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Despite some tepid cuts to personal income taxes in recent decades, economists say Canadians still pay way too much and the problem has been getting worse. Canada now relies more on personal income taxes for its revenue than any other G7 country. 

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While governments’ slice from Canadians’ pay cheques has been climbing for decades, Mintz pointed out that personal income taxes accounted for 11 per cent of GDP in 2010, but grew to 13 per cent by 2023. Personal income taxes are now responsible for easily the biggest chunk of government revenue, and almost twice the amount of any other form of federal or provincial tax. 

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While governments need money to pay for health care, education, defence and other big spending items, economists say it’s critical that legislators take the minimum and in a way that is as harmless as possible. 

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Don Drummond, a former high-ranking official at the Department of Finance and chief economist at TD Bank, said the four big tax baskets in order, from most to least harmful, are: corporate income, personal income, employment insurance and other payroll, then consumption taxes such as the GST.   

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Lower personal income taxes spur growth, economists say, because when people have fatter wallets, they tend to spend it, invest it, or use it to reduce debt which are all good things for the economy. 

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That’s particularly the case when governments cut “marginal” income taxes — the percentage that is taken off the next dollar that someone earns, not the entire amount. That is seen as an important distinction because that marginal rate influences whether people are motivated to work or invest more and high marginal Canadian rates kick in at relatively low levels, economists say, compared to other G7 countries. 

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Lower personal income taxes also help stave off the migration of highly skilled and entrepreneurial people to other countries. 

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Bigger business  

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And if you think cutting personal income taxes has political enemies, try selling corporate income tax cuts.  

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But economists argue that lower corporate income taxes are good for the economy, perhaps the greatest bang for the public buck, because they encourage and lower the long-term costs of investments in buildings, factories, and research.  

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And anything that leads to lower business costs should also lead to more productive employees and lower costs, at least where markets are competitive. 

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More profitable companies are also more valuable, giving them more equity heft to acquire competitors instead of the other way around. They can also pay employees more, which leads to more personal spending and investing, more government tax revenue, and reduces one of the key foreign lures that leads to “brain drain.”  

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To make those changes even more appealing, economists say, the government revenue lost by corporate income tax cuts is mitigated by a number of factors, such as the increased tax revenue derived from new investments spurred by the changes. Tax cuts also lead to behavioural changes, they say, such as multi-nationals moving profits to jurisdictions with lower rates.  

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In short, corporate income tax cuts don’t cost as much as they might appear. 

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In 2000-01, the federal corporate income tax rate stood at 28 per cent, and took in $28.3-billion. Flush at that time with growing revenue, Ottawa started cutting that tax and others. By 2012, it had been cut almost in half to today’s rate of 15 per cent. Ottawa took in $36.1 billion that year. In the last fiscal year, companies paid $97.1 billion in income tax, despite the lower rate