A Not So Modest Proposal

Chong’s plan would cut personal income taxes by $22 billion dollars per year, slashing the current five federal tax brackets – 15%, 20.5%, 26%. 29%, and 33% – to two – keeping only the 15% and 29%–a 10% cut in personal income taxes overall. He would also cut corporate income taxes by 5% (roughly 1% off the 15% federal rate), increase the GST credit to low income households, and double the federal Working Income Tax Benefit, which helps low income workers. These changes would be paid for by reducing federal tax deductions, credits, and other tax expenditures by 50%, and by gradually bringing in a new federal carbon tax.

Chong’s federal carbon tax would kick in in 2021, starting at $10 per tonne (on top of the $30 per tonne provincial carbon tax mandated by the Trudeau government). The federal carbon tax would increase by $10 per year after that until the combined carbon price reaches $130 by the year 2030. This is in line with what economists forecast is necessary for Canada to meet its emissions targets of reducing greenhouse gas emissions by 30% from 2005 levels by 2030. Since it is hard to predict exactly how Canada’s economy or emissions will grow 14 years from now, Chong’s plan wisely proposes striking an expert panel of economists to advise on any adjustments to the carbon price necessary to meet Canada’s 2030 goals and maintain competitiveness.

The plan would deal with the challenge of transferring revenues from resource intensive provinces like Alberta and Saskatchewan by leaving the revenues from large industrial emitters, like the oil and gas sector, in the hands of the provinces. The federal carbon tax would only apply to emissions from transportation and buildings (which are roughly equal per capita across the country). The challenge of trade competitiveness for large emitters would be dealt with by a system of output based allocations (OBAs), similar to the plan being brought in in Alberta.

The increasing federal carbon tax would allow Ottawa to get rid of the myriad of regulations and subsidies the federal government currently has in place to deal with carbon emissions – often at a vastly higher price per tonne than a straight tax on emissions. Under the Chong plan, everything from home housing rebates to biofuels mandates to emissions standards for cars would be scrapped. Consumers and businesses could decide for themselves how best to reduce their emissions or face a higher carbon price.

This is bold climate policy, proposing the highest carbon price of any politician except for Elizabeth May and the Green Party. And it is bold economic policy which would slash personal taxes, cut corporate taxes, eliminate regulation and red tape, and help low income households.

Michael Chong calls his plan “revenue neutral,” but it is in fact revenue negative – meaning it will cut taxes overall by more than it will raise. He would bring in his major tax cuts right away, but only increase the carbon price gradually – so over the first ten years of the plan, it would represent a net $87 billion tax cut for Canadian households and businesses.

The Chong plan is full of pro-growth, pro-work incentives – cutting marginal rates for personal and corporate income taxes, which are the biggest disincentives to work and hiring, and increasing WITB encourages people near the poverty line to seek work rather than rely on welfare. So the net effect of this package is likely to contribute to greater economic growth and lead to higher returns than Chong’s proposal is predicting.

And while the federal Conservatives claim to support Stephen Harper’s targets of a 30% emissions reduction by 2030, only Michael Chong has proposed a plan that might actually get the country there.

There are now 10 candidates in the federal Conservative leadership race. Some of them have come out against any form of carbon pricing. Others have kept quiet. But so far none of them has proposed a plan that comes close to doing as much to reduce taxes or reduce emissions as Michael Chong.

The Chong plan is the first bold entry in the Conservative environment and economy sweepstakes. Let’s hope that it isn’t the last.

* In an earlier version of this article, I wrote: “As Chong points out, he is the only candidate currently proposing a net federal tax cut. Even libertarian-leaning Tory Maxime Bernier, who has proposed a similar two rate tax plan based on the same Fraser Institute proposal Chong has drawn on, is merely proposing to swap federal tax deductions and credits for lower rates. Only Chong’s plan would mean less dollars in the federal treasury.” I have been informed by Mr. Bernier and his campaign that his plan would indeed cut net federal taxes. I apologize for my misinterpretation of his plan.

My earlier statement was based on Mr. Bernier’s speech and policy statement on taxation, which states that while he plans to reduce federal income taxes by $30-35 billion per year by eliminating rates and increasing thresholds: “My government is going to cut taxes gradually, over the course of several budgets, only as the fiscal room is found to allow it. There will be no tax cut financed by borrowed money.” Mr. Bernier pointed to three sources to pay for his tax cuts: over $22 billion in tax credits and deductions identified in this Fraser Institute paper as a source for federal tax reductions, spending reductions, and increased economic growth resulting from tax reductions.

Mr. Bernier’s plan already calls for eliminating the federal deficit (from the $19.3 billion the Liberal government is predicting for 2019-20) and delivering around $15-20 billion in tax reductions for corporations and investors (lowering general corporate income tax rate to 10%, eliminating capital gains taxes, and extending accelerated capital cost allowances). Given the large spending cuts these previous commitments would already require, and the language in his speech, I had assumed that he did not intend to cut spending further in the short term to pay for income tax reductions, but would seek to close the gap primarily through eliminating tax expenditures as per the Fraser Institute proposal. However, Mr. Bernier advised me via Twitter that he would only reduce tax expenditures by around $5 billion, and would pay for the rest of his tax reduction plan through additional spending cuts or increased growth. This would seem to require identifying over $50 billion in spending cuts per year to both balance the budget and pay for all of his tax cut proposals, which would be an extremely ambitious target (almost 15% of all federal spending and over 35% of direct program spending). That said, Mr. Bernier’s plan as proposed would indeed result in a deep net reduction in federal taxes.

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