May 7, 2015 4:18 pm
Updated: May 10, 2015 12:46 pm

Could Justin Trudeau’s tax-the-rich scheme cause brain drain, stall economy?

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WATCH: Liberal leader Justin Trudeau defends his economic plan against critics who say the new tax scheme could harm the economy.

OTTAWA —The Liberal plan for the middle class, two planks of which were unveiled this week, could risk another brain drain in Canada, stalling the national economy, says one public policy and economics expert.

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“It’s a real possibility,” said Charles Lammam, director of fiscal studies at the right-leaning think tank The Fraser Institute.

“When you look at Canada’s current personal income tax system, there are some problems when it comes to us being competitive relative to other countries in attracting and retaining skilled workers.”

Studies of the country’s brain drain —the movement of highly trained or educated people from Canada —have established a clear line between income gains and motivations for moving to the United States.

READ MORE: Trudeau’s middle class would get $3 billion back in tax, thanks to the country’s richest

Both Stephen Harper’s government and previous Liberal governments have identified marginal tax rates as an issue for remaining competitive in the global economy, Lammam said —though neither has addressed them.

Part of Liberal leader Justin Trudeau’s plan to help the “middle class” goes in the opposite direction, creating a fifth tax bracket for anyone earning more than $200,000 per year.

READ MORE: Trudeau unveils major economic plank

In order to remain competitive, Lammam said, a tax system shouldn’t “overly penalize people” for working, saving or being entrepreneurial.

“We don’t want our personal tax rates to be higher than in other jurisdictions like the U.S. for example, and we don’t want the income levels to be too low,” he said in an interview this week.

The new tax bracket the Liberals proposed would increase the personal tax rate for the country’s highest earners to 33 per cent from 29 per cent. Combining that hike with the provincial rates leaves no question, Lammam said, Canada will become less competitive as a nation.

“It makes it more difficult for business and our economy to compete with other countries when we’re penalizing people for being more successful,” he said. “Increasing tax rates, that basically discourages people from making those types of investments in human capital, which we know are the corner stone of the growing economy.”

READ MORE: Trudeau sets sight at countering Conservative budget

Of course, personal income tax is not the only factor that influences a jurisdiction’s economic landscape, Lammam said.

David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives took that sentiment one step further.

“If the tax rate is more important than who you marry, where your house is and where your job is, maybe you’ll move,” he said.

“The tax rate in Canada has been higher than in the U.S. for some time. So if that was the deciding factor, then you would quit your job and move to Alabama where it’s cheaper. But that’s not what most people do … They go where they get a job or they go with the person they’ve married.”

Encouraging tax avoidance

What’s of greater concern, Macdonald said, is Trudeau’s income tax plan could well encourage tax avoidance.

“You might see an uptick of people being paid in stock options instead of money because the tax rate is half of what it is on stock options compared to money,” he said, adding that doing so is completely legal. “So simply changing the top marginal rate, you often lose some of that money due to increased uses of legal loopholes.”

During his announcement this week, Trudeau said the new tax bracket would generate $3 billion in federal revenue.

In the days following the announcement, though, Macdonald said he modeled the proposed income tax scheme and found the Liberals booked the entire value without accounting for any behavioural changes among Canadians.

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Some behavioural changes could include reporting less income, using tax planning techniques to reduce the tax burden, working fewer hours or even not seeking job promotions.

“I think if you want to capture that money, it’s not enough to just change the marginal tax rate, you have to close some of the loopholes and tax credits that are exclusively for the wealthiest,” he said.

Though there’s been no mention of the Liberals closing any credits the Conservatives either created or expanded upon, they have said there are more planks to come in their economic policy.

Federal Finance Minister Joe Oliver told reporters this week the new tax bracket wouldn’t generate the $3 billion the Liberals have said.

READ MORE: What the 2015 federal budget means for Canadian families

“There are historical examples that show increasing personal income tax doesn’t produce the amount thought,” he said.

Similarly, The Fraser Institute’s Lammam said the potential payoffs of this policy are unknown for the federal government.

“It’s not clear that these kinds of tax-rate increases will generate more revenues for the government,” he said. “Multiple studies have looked at peoples’ responses to increasing tax rates, and the consensus is that higher and increasing tax rates reduce peoples’ incentives to do economically productive things, and it doesn’t increase government revenues on a one-for-one basis.”

In an interview Thursday, Trudeau said he’s heard the concerns economists have raised regarding the possibilities of tax avoidance and not bringing in as much revenue as he’s said.

“The fact is, in Canada we’ve always been able to ask those who’ve done very well to help out those who haven’t,” he said in an interview airing Sunday on The West Block with Tom Clark. “We were responsible and conservative in our estimates … We really made sure that we checked with great academics, researchers and financial experts.”

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