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Economics versus Politics in Canadian Payroll Tax Policies

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  • Jonathan R. Kesselman

Abstract

In recent years the federal government has increased its reliance on payroll taxes. This approach is revealed most directly in Employment Insurance premiums but also emerges in planned increases for Canada Pension Plan premiums. Economic criteria support these moves to the extent that premiums are strongly linked to benefit entitlements. However, much of the EI and increased CPP premiums are unrelated to benefits and thus constitute general payroll taxes. Such taxes compare favourably in economic terms with some alternative taxes but are regressive when imposed with a ceiling on taxable earnings. These developments appear to be driven by political pressures rather than economic criteria. If the government is politically constrained from raising the rates of other, more visible taxes (such as income tax and GST), then the payroll tax changes may be economically optimal choices subject to the constraint. In the longer run, basic reform of the other taxes and reduced reliance on general payroll taxes would be desirable.

Suggested Citation

  • Jonathan R. Kesselman, 1998. "Economics versus Politics in Canadian Payroll Tax Policies," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 381-387, September.
  • Handle: RePEc:cpp:issued:v:24:y:1998:i:3:p:381-387
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    References listed on IDEAS

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    1. D. Peter Dungan, 1998. "The CPP Payroll Tax Hike: Macroeconomic Transition Costs and Alternatives," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 394-401, September.
    2. Hettich, Walter & Winer, Stanley L, 1988. "Economic and Political Foundations of Tax Structure," American Economic Review, American Economic Association, vol. 78(4), pages 701-712, September.
    3. Stuart Landon & David L. Ryan, 1997. "The Political Costs of Taxes and Government Spending," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 85-111, February.
    4. Louis Beauséjour & Munir A. Sheikh & Baxter Williams, 1998. "Experience Rating Employment Insurance Contributions," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 388-393, September.
    5. Dungan, P., 1998. "The CPP Payroll Tax Hike: Macroeconomic Transition Costs and Alternatives," Papers 98-2, California Davis - Institute of Governmental Affairs.
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