Tax & Spend: Inflation could be history by 2025. Its political fallout won’t be.


Inflation will no longer be an economic or political issue by the time Canadians vote in the next federal election, a line of argument has been made by some media commentators.

Sure, Pierre Poilievre has cleverly exploited today’s blistering inflation to win the race for Conservative leadership, but he won’t be so lucky, they say, when Canadians go to the polls in 2025 (assuming the parliamentary alliance between Liberals and NDP lasts that long). ).

But this notion ignores some fundamental economic issues, while also highlighting a lamentable disconnect between the media class and Canadian households, which are suffering real and persistent inflationary pains.

It is true that the Bank of Canada forecasts that inflation will fall sharply by the end of 2024. In its July currency report, the bank said it expects inflation to rise to a 3 percent target by the end of next year by the end of 2024. That means a sharp drop from an expected annualized rate of 8 percent in the third quarter of 2022.

But to conclude that the cost of living will not then be a hot political issue is superficial indeed. Assuming the Bank of Canada’s forecast is accurate – and given its recent track record, that’s far from certain – the consumer price index will have risen 18 percent between 2020 and 2024.

Within this surge, there is some scope for some prices to fall, but the bigger picture is clear. The pressures on households from the rising cost of living will get worse, not better, by 2025.

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And that’s a best, or at least better, scenario. The bank concedes that inflation could still be 4 percent into 2025 if a wage-price spiral takes hold.

Even a more optimistic view only means that today’s high prices (overall) will not fall, only rise at a less damaging pace. For example, does anyone think dairy farmers will push for the farm-gate milk price to be reduced in 2023 after securing a rare early raise that goes into effect this month? That the rental costs collapse?

Of course not. The cost of living (as opposed to inflation) will still be higher for all Canadians and painfully high for some. This fundamental fact of economics eludes media commentators, who claim that the nagging effects of inflation will not be a hot political issue in 2025. And it also betrays her privileged position in life.

Only someone who hasn’t had to pull budget-busting items from a shopping cart could possibly say that inflation will no longer be a campaign issue in a few years.

taxation issues

Toronto’s Chetan Raina wonders about Pierre Poilievre’s assertion during the Conservative campaign that a single working mother with three children faces an 80 percent effective marginal tax rate (the combined weight of taxes and recoveries). “The CCB (Canada Child Benefit) tax rate and reclaim only appear to be in the high 40 percent range,” Mr. Raina writes in an email. “I assume there are other recoveries (perhaps provincial?) that he’s referring to.”

It’s difficult to say exactly what is at work in Mr. Poilievre’s example, as his campaign staff refused to provide details. However, if you make a number of favorable assumptions, it’s possible to get closer to that 80 percent figure.

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These assumptions begin by selecting the province with the highest tax rate for those earning $55,000—namely, Quebec, with its 20 percent provincial tax rate.

In addition, it is reasonable to assume that Mr. Poilievre includes contributions to employment insurance and the Quebec Pension Plan as part of the calculation. That’s not far-fetched, as the (now) Conservative leader mentioned payroll taxes in his Twitter video on the subject. Some would argue that pension deductions are a form of saving and should not be considered when calculating marginal effective tax rates. Mr. Poilievre is not one of those people.

Finally, one would have to assume that the working mother in question would receive all federal and state earnings-related benefits to which she is entitled.

Well, the math. Federal and state taxes add up to 40.5 percentage points (20.5 percent for federal taxes, 20 percent for states). EI contributions add another 1.58 percentage points; QPP Contributions, 6.15. That adds up to an overall marginal rate of 48.23 percentage points, still well below Mr Poilievre’s demand of 80 percent.

But just as Mr. Raina assumed, it’s the recovery of benefits that brings that total much closer to 80 percent. Using the federal government’s online calculator, a single mother with three children and a $55,000 earned income would lose 28 cents reclaiming the next dollar earned.

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If you add this burden to the payroll deductions, you end up with a (rough) effective marginal tax rate of just over 76 percent. That is close to what Mr Poilievre was claiming and certainly confirms his point – that a working mother could face a shockingly high marginal effective tax rate.

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Tax stupidities: First, the good news for Ottawa and its budgeting practices — it’s improved since last year and is no longer bottom of the class. That’s pretty much all the CD Howe Institute has to offer in this year’s Federal and State Financial Transparency Rankings.

In last year’s report, Ottawa received an F for fiscal year 2020-21, the worst result of any government, largely due to “its egregious and unprecedented failure to budget,” the report said. This time, the federal government did slightly better, achieving a D+ for the 2021-22 fiscal year. A late budget, backdating expenditure to the previous fiscal year, and the decision to exclude actuarial pension adjustments from the bottom line have hurt the federal government’s ranking.

The Treasury Department can take some comfort in the fact that Ottawa fell short of the D ratings of British Columbia, Manitoba and the Northwest Territories. But that should only be short-lived: the federal government was the last to declare the institute’s initial assessment of the current financial year dead.

follow me on twitter @PatrickBrethour or ask your tax question here.





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