By David Clinton

It won’t happening. And perhaps it shouldn’t happen. But we can talk.

By reputation, income tax is an immutable fact of life. But perhaps we can push back against that popular assumption. Or, to put it a different way, thinking about how different things can be is actually loads of fun.

That’s not to suggest that accurately anticipating the full impact of blowing up central economic pillars is simple. But it’s worth a conversation.

First off, because they’ve been around so long, we can easily lose sight of the fact that income taxes cause real economic pain. The median Canadian household earns around $85,000 in a year. Of that, some 13 percent ($11,000) is lost to federal income tax. Provincial income tax and sales taxes, of course, drive that number a lot higher. If owning a house is out of reach for so many Canadians, that’s one of the biggest reasons why.

Having said that, the $200 billion or so in personal income taxes that Canada collects each year represents around 40 percent of federal spending. In fact, in the absence of other policy changes, eliminating federal personal income tax would probably lead to significant drops in business tax revenues too. (I could see many small businesses choosing to maximize employee salaries to reduce their corporate tax liability.)

So if we wanted to cut taxes without piling on even more debt, we’d need to replace that amount either by finding alternate revenue sources or by cutting spending. If you’ve been keeping up with The Audit, you’ve already seen where and how we might find some serious budget savings in previous posts.

But for fascinating reasons, some of that $200 billion (or, including corporate taxes, $300 billion) shortfall could be made up by wiping out income tax itself. How’s that?

For one thing, many government entitlements and payouts essentially exist to make up for income lost through taxes. For example, the federal government will spend around $26 billion on child tax credits (CCB) in 2025. Since those payments are indexed to income, eliminating federal income tax would, de facto, raise everyone’s income. That increase would drop CCB spending by as much as $15 billion. Naturally, we’d want to reset the program eligibility thresholds to ensure that low-income working families aren’t being hurt by the change, but the savings would still be significant.

There are more payment programs of that sort than you might imagine. Without income taxes to worry about:

• The $6.2 billion GST/HST credit would cost us around $3 billion less each year.
• The Canada Workers Benefit (CWB) could cost $1.5 billion dollars less.
• The Old Age Security (OAS) Clawback would likely generate an extra billion dollars each year in taxes.
• The Guaranteed Income Supplement for low-income OAS recipients could save $4 billion a year.

Even when factoring in for threshold recalculations to protect vulnerable families from unintended consequences, all those indirect consequences of a tax cut could easily add up to $20 billion in federal spending cuts. And don’t forget how the cost of administering and enforcing the income tax system would disappear. That’ll save us most of the $11 billion CRA costs us each year.

Nevertheless, last I heard, $30 billion (in savings) was a long, long way from $300 billion (in tax revenue shortfalls). No matter how hard we look, we’re not going to find $270 billion in government waste, fraud, and marginal programs to eliminate. And adding more government debt will benefit exactly no one (besides bond holders).

Ok then, let’s say we can find $100 billion in reasonable cuts (see The Audit for details). That would get us close to half way there. But it would also generate some serious economic turbulence.

On the one hand, such cuts would require dropping hundreds of thousands of workers off the federal payroll¹. It would also exert powerful downward pressure on our gross domestic product (GDP).

On the plus side however, a drop in government borrowing of this scale would likely reduce interest rates. That, in turn, could spark private investment activities that partially offset the GDP hit. If you add the personal wealth freed up by our income tax cuts to that mix, you’d likely see another nice GDP bump from sharp increases in household spending and investments.

Precisely predicting how a proposed change might affect all these moving parts is hard. Perhaps the ideal scenario would involve 20 percent or 50 percent cuts to taxes rather than 100 percent. Or maybe we’d be better off by playing around with sales tax rates. But I’m not convinced that anyone is even seriously and objectively thinking about our options right now.

One way or the other, the impact of such radical economic changes would be historic. I think it would be fascinating to develop data models to calculate and rank the macro economic consequences of applying various combinations of variables to the problem.

But taxation is a problem. And it’d be an important first step to recognize it as such.