US Tax Cuts and MSP Premium Elimination

We now have the first blueprint of what the US tax cuts will look like, and if enacted, here are my thoughts on what it will mean for the economy, and Canada’s competitiveness.  Our taxes don’t need to be as low as in the US, but they cannot be significantly higher without having a negative impact on our economy.  A 5% difference is not going to hurt us, but  a 15% difference will.  On the economic side, the tax cuts should help stimulate growth provided the deficit doesn’t swell, as firms and individuals are more likely to save, with the  expectation of future tax hikes.  

In terms of competitiveness, there are three aspects to look at, which are how we compare in corporate rates, for the super-rich executives, and for high skilled professionals.  Right now, the combined corporate tax rate of all levels of government in Canada is 26% to 27%, while in the US is around 39%,  giving us a strong competitive advantage for attracting firms to locate their headquarters in Canada.  Under the House GOP Plan, the US federal rate would fall to 20%, putting the total combined tax rate at 24%, meaning we would lose our competitive advantage. However, I think the difference is small enough that it probably won’t cause a major exodus of firms re-locating their headquarters.

For income taxes on those making over $1 million, the top rate will stay at 39.6%, but deductions for state and local income taxes will be eliminated, and property tax and mortgage deductions will be reduced. so w When you factor in these changes, incomes over $1 million will actually be taxed more than current rates, with top rates exceeding 50% in both California and New York City.  What that means for high-end executives is Canada’s taxes will still be fairly competitive, which is a huge relief.  On the other hand, for high-skilled professionals such as doctors, the tax gap will widen.  Instead of the 39.6% rate kicking in at the $470,000 income level, it will kick in at 1,000,000. Those at the $470,000 level will pay 35%, while a married couple making $300,000 would pay only 25%.  This means that for a typical doctor who pays the top rate in Canada (ranging from 47.5% in Saskatchewan to 54% in Nova Scotia), would, in the US, pay anywhere from 25% in states with no state taxes to 34.3% in California.  This could give high- skilled professionals a strong incentive to re-locate from Canada to the US.

I have been critical of Trudeau’s tax increase to 33%, but if he must keep it, it should kick in at $500,000 or $1 million instead of the current $200,000 income level so high skilled professionals can keep their rates somewhat competitive.  Of course, this is a draft that will undoubtedly change, so I will comment more on this in the future, once the changes are finalized.

In BC, the NDP has struck a committee to find a way to scrap MSP Premiums and make up for the lost revenue.  I am of mixed feelings on this.  I agree with the claim that it’s a regressive tax, and in that sense, it would be a good idea to eliminate it.  At the same time, when people pay into health care up front, it can make  them realize its costs and discourages frivolous use.  I think the best way to eliminate MSP premiums would be to wait until the economy grows enough that we can afford it, or use the increased carbon tax revenue to cover it.  If done through an income or payroll tax, many British Columbians will be worse off.  The 2.1% raise in taxes for those over $150,000 only brings in $250 million, while MSP brings in $1.3 billion; if only the top bracket is targeted, it would need to be raised another 10%. This would effectively make BC the highest in North America for top marginal rates, and one of (if not the highest) in the OECD.  I don’t think the NDP are foolish enough to go down this road.  This means the NDP will have to raise taxes either in direct income taxes, or as a payroll tax for those making $60,000 to $70,000, which is the middle class, and would be bad for BC.  They could have employers pay for it through a payroll tax, but this would hurt small businesses.  It will be interesting to see what the committee comes up with, but I am not too optimistic.  Hopefully, whatever the recommendations are, the province holds off until 2022 so we can vote on it, or at least until 2021 so that if we don’t like the proposed changes, we can defeat them.  

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