Santa Claus model of tax policy doesn’t work

Christmas is just around the corner, and governments across the country seem intent to play Santa Claus by promising to send cheques out to taxpayers. Recently, Doug Ford’s government in Ontario announced that it would send out a onetime $200 “tax rebate” to all Ontarians. Now the Trudeau government is getting in on the act, and plans to send $250 cheques out to millions of Canadians.

Instead of sending taxpayers back their own money in the form of onetime rebates that do nothing to help the economy, governments across Canada should give all Canadians the gift of permanent pro-growth tax reductions and reforms.

Let’s start by considering the reasons that onetime rebate cheques are generally a bad approach to tax policy. While politicians like to make the case that onetime cheques will spur the economy because people will spend the money, decades of research show this often isn’t true. Most people make spending decisions based on how much income they expect to earn over the longer term, not based on small windfalls such as a $250 onetime giveaway from the government.

So while a permanent tax cut may induce families to spend more knowing they can count on a steady stream of higher income in the future, decades of economic research demonstrate one-time rebates don’t have the same effect. Economists such as Milton Friedman have shown that people don’t view temporary increases in their bank accounts (i.e. $250 cheques) as a change in their permanent incomes so they tend to save the new money or pay down debt, rather than spend it.

If the Santa Claus model is misguided, how should governments use tax policy to help the economy grow?

In short, governments should permanently lower income tax rates that let people keep more of the money that they earn. Lower tax rates are better than onetime payments because they improve the incentives people face to work, save, invest, and start a business. Why? Because they are allowed to keep more of each additional dollar that they earn. These positive incentive effects make the economy grow faster and, in return, help create jobs and boost incomes for individuals at all income levels.

Rebates and giveaways such as those being promised by the Ford and Trudeau governments don’t produce similar benefits because people receive the one-time lump sum payment regardless of the economic choices that they make. As a result, they do nothing to improve economic growth or make life better in the long term for workers.

The folly of sending out onetime rebate cheques and creating short-term tax holidays is even more stark when you consider that governments across Canada have been enacting income tax increases in recent years. In Ontario, for instance, federal and provincial tax policy changes have seen the top marginal personal income tax rate climb from 46.41 per cent in 2011 to 53.53 per cent today. Many other provinces have seen similar tax increases. Reversing the tax hikes that have made Canada’s marginal tax rates uncompetitive with the rest of the industrialized world would be a much better approach to tax policy than the current model of maintaining high tax rates and arbitrarily sending some of that money back to taxpayers at the whims of government.

It’s great watching children open presents from Santa over the holidays, but grownups should demand a different approach from their governments when it comes to tax policy. Instead of playing Santa with onetime tax rebates, governments should instead let workers and entrepreneurs keep more of what they earn with lower income tax rates to help make Canada more prosperous.