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Reality check: Do ‘payroll taxes’ really hurt young workers?

Andrew Scheer speaks after being elected the new leader of the federal Conservative party.
Andrew Scheer speaks after being elected the new leader of the federal Conservative party. THE CANADIAN PRESS/Frank Gunn

OTTAWA – Newly minted Conservative Leader Andrew Scheer was hoping to lure young voters into the Tory tent this week when he said “payroll taxes” ultimately hurt new and young workers —a key constituency in 2015’s Liberal election win.

“The first people who suffer when payroll taxes go up are young Canadians and new entrants into the workforce,” Scheer said.

Such workers would be left behind if increased payroll costs, linked to plans to expand the Canada Pension Plan, dissuaded businesses from making new hires, he argued.

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“This is the great lie of the left,” he said — “that they hurt the people they claim to help.”

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So how much truth is there to Scheer’s statement?

Spoiler alert: The Canadian Press Baloney Meter is a dispassionate examination of political statements culminating in a ranking of accuracy on a scale of “no baloney” to “full of baloney” (complete methodology below).

This one earns a rating of “a little baloney” – the statement is mostly accurate but more information is required.

THE FACTS

Scheer’s argument stems from a concern the Conservatives have voiced for years: increased Canada Pension Plan premiums dampen employer interest in expanding workforces because of increased labour costs.

Over seven years beginning in 2019, CPP premiums will be gradually increased as the program is expanded, resulting in a one per cent increase in the premiums paid by employers and employees.

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That’s about $408 more per year coming off paycheques — hence the Conservative “payroll tax” label.

The Tories point to 2014 research by the International Monetary Fund on youth employment in Europe that suggests a one per cent increase in payroll taxes can increase youth unemployment by between 0.3 and 1.3 per cent, compared to 0.5 per cent for adults.

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Likewise, Scheer’s staff point to a 2011 Organisation for Economic Co-operation and Development (OECD) paper that said it is “reasonable to conclude” that higher labour taxes affect unemployment.

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A University of Calgary study this year found higher corporate income tax rates tend to result in lower wages for workers. Older research papers suggest similar effects on wages in Colombia and Chile from changes in payroll taxes.

When looking at cost reductions, a 2014 Queen’s University paper found that employment rates increased between one and two per cent for young workers between the ages of 18 and 24 when the federal government offered would-be employers rebates on EI premiums.

The Liberals promised to do something similar in their election platform, but have yet to follow through on the pledge.

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THE EXPERTS

Markets decide how best to deal with the costs of payroll taxes, be it through increased consumer prices or reduced shareholder revenues, but they mostly materialize through lower wages,

Companies decide best on how to deal with the costs of payroll taxes, either by passing the extra cost along to consumers in the form of higher prices, cutting dividends to shareholders or — as is most often the case — by cutting wages, said Ken McKenzie, an economics professor at the University of Calgary who co-wrote the 2017 paper.

“Most of the action happens on lower real wages and it takes some time for this to happen,” said McKenzie, who has studied and advised Canadian and international governments on taxation.

“Companies faced with higher payroll tax costs will just give lower increases in wages, or inflation will go up because labour costs go up, and that slowly erodes the real wages.”

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Businesses can adjust their spending in the face of higher labour costs by cutting back on hiring, which affects new entrants to the labour force, said Craig Alexander, chief economist at the Conference Board of Canada.

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Just how much the CPP premium increase, spread over several years, would affect hiring is unclear, but it would likely be minimal, Alexander said.

Tammy Schirle, an associate professor of economics at Wilfrid Laurier University in Waterloo, Ont., said a payroll tax that is clearly visible and directly connected to an individual benefit — saving for retirement, for instance — ought not have negative employment effects as long the benefit is of value to people.

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CPP premium increases will likely reduce employment levels in the short term and be replaced in the long run by lower wages, said Ted Mallett, vice-president and chief economist with the Canadian Federation of Independent Business.

CFIB modelling suggests new entrants to the labour force, including youth, are likely to be disadvantaged in the long run as employers look to hire someone with more employment history.

It is possible that some employers will cut back on their private pension plans as a way to neutralize the effects of a CPP premium increase, but it’s unclear by how much, Mallet said.

Employees, too, will likely cut back a bit on retirement savings, he added.

THE VERDICT

There is evidence to support Scheer’s comments about the general effects of payroll taxes. His statement, however – one of his first as Opposition leader – lands a rating of “a little baloney” because of a shortage of evidence when it comes to young workers.

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“For political reasons, you can see why he would say that. His comments, as far as I can see, weren’t totally offside. He’s basically saying that payroll taxes may actually hurt people,” McKenzie said.

“He focused on young people, and that’s an area where there’s not a lot of empirical work, because most payroll taxes affect everybody.”

METHODOLOGY

Baloney Scale Chart

 

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