The Tax Debate

January 27, 2006

Off the Hook on Income Tax Non-Confidence

The Liberal's bungling of the cut in the income tax rate for the bottom bracket and the increase in the personal deductible will allow Mr. Harper to rescind the change without facing a confidence vote because the Liberal's Bill did not pass the House of Commons. Tax changes are usually introduced sufficiently in advance so that they can take effect in an orderly way on either January 1 or July 1. In a rush to make an election promise, the Liberals introduced a tax cut in November 2005, retroactive to January 2005, without passing the required legislation.

Bill C-80 provided for the increase in the personal deduction and the reduction in the tax rate for the bottom bracket. It did not progress beyond first reading; however, $4 million was spent sending out amended tax forms that reflect the provisions of C-80. This means that everyone in the country could file their 2005 income tax incorrectly since the rates on the revised forms are not law. Mr. Harper has said that he will accept the revised rates for 2005, hence he can introduce legislation that amends the Income Tax Act for 2005 but for only that year; consequently, he'll probably be able to word a Bill that will receive all party support and not have to face a loss of confidence with a Bill that rescinds the tax cut. However, employers are already making payroll deductions for 2006 based on information provided by Canada Revenue Agency about the rates that aren't law and that Mr. Harper will increase. That means that adjustments will have to be made before the year is out in order to capture underpayments, or if he restores tradition for the effective dates of tax changes, Mr. Harper will lower personal deductions and increase the bottom tax rate so they take effect July 1, 2006.

January 25, 2006

The Tax Debate

Did Stephen Harper learn anything from Joe Clark's mistake, or will he also try to govern as if he has a majority? Clark tried to push an 18 cent per gallon gas tax through Parliament in December 1979 even though he was warned that he didn't have the votes. Since tax measures are confidence votes, the bill's defeat caused an election. Pierre Trudeau rescinded his resignation as Liberal leader, coming back to defeat Clark.

Dealing with the opposition parties on an issue by issue basis can be very tricky because not being able to implement one plank of the Conservative platform can have significant implications for other planks. During the campaign, including in a statement in the television debates, Mr. Harper confirmed that his government would allow the Liberal income tax cuts to stand for 2005 but in his first budget he would put the rate for the lowest income bracket back to 16% and he would raise the personal deductible by $400. A tax bill is a confidence motion, so Mr. Harper could end up repeating the mistake of Mr. Clark and Canadians could be back at the polls for a second time in 2006. The Conservatives might gamble that the other parties could not afford another election so soon, that the Liberals wouldn't want one without a leader, and that Canadians would punish those who triggered it. That might be a very bad bet that could repeat the Joe Clark mistake.

If Mr. Harper follows the prudent course and recognizes that he doesn't have the votes necessary to reverse the income tax cut, he will either have to run a deficit or compensate by not implementing other promises. The Liberal's November 2005 fiscal update which announced the tax cut, estimated that it cost (return to Canadians) more than $30 billion over five years. Not being able to reverse a $30 billion revenue hit would put a big hole in the Conservative fiscal plan. It estimates the cost of the promised GST cut at $32.5 billion over 5 years. Without the money from reversing the income tax cut, what can pay for that? All of the rest of the Conservative tax cuts, including restoring corporate tax cuts and allowing wealthy families to defer capital gains, is estimated to cost $12.6 billion over 5 years. Cancelling all of that package wouldn't begin to cover the shortfall from not increasing income taxes. All of the Conservative spending promises are estimated to cost $30 billion over five years, including $9.5 billion for their "child care" program. They could cancel all of their spending promises and use the money to finance the GST tax cut, but that is not likely. They claim that they can pick up $6.8 billion over five years by cancelling the Liberal's child care program and cancelling climate change fund funding of a tax credit for transit passes, but that doesn't provide enough to reverse the income tax cut.

If Mr. Harper wants to avoid setting a record for the fewest days in office, some serious rethinking needs to be done.