Cost estimate of Election Campaign Proposal Publication date: 2019-09-15 Short title: Personal income tax rate reduction Description: Reducing the rate of the lowest federal income tax bracket from 15% to 13.75%. The reduction will be implemented progressively, starting with a decrease to 14.5% on January 1, 2021, followed by a decrease to 14.0% on January 1, 2022, then finally falling to 13.75% on January 1, 2023. Operating line(s): Personal income tax revenues Data sources: Estimation and projection method: Variable Source Taxable income SPSD/M, Statistics Canada Federal income tax payable SPSD/M, Statistics Canada Federal PIT baseline PBO economic model Elasticity of Taxable Income (ETI) PBO economic model Marginal Effective Tax Rate (METR) PBO and SPSD/M We use Statistics Canada’s Social Policy Simulation Database/Model (SPSD/M, version 27.1) to estimate the static fiscal impact of a 0.5-, 1.0- and 1.25percentage point decrease in federal PIT rate from 15.0% to 14.5%, 14.0% and 13.75% respectively and repeat the simulation until 2025. 1 We use PBO projections to extend the variables until 2028. For the behavioural impact, we use PBO’s estimate of ETI for low-income earners (0.10). The new policy is assumed to be implemented on January 1st 2021. All numbers are adjusted to reflect fiscal year amounts. Uncertainty assessment: The estimate has moderate uncertainty. The uncertainty arises due to the assumptions with respect to the ETI and from the long horizon of the projections. This analysis is based on Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M). The assumptions and calculations underlying the SPSD/M simulation results were prepared by the Office of the Parliamentary Budget Officer (PBO) and the responsibility for the use and interpretation of these data is entirely that of the PBO. 1 Cost of proposed measure $ millions 20192020 20202021 20212022 20222023 20232024 20242025 20252026 20262027 20272028 20282029 Total cost - 548 2,778 4,860 5,890 6,085 6,302 6,572 6,849 7,134 Notes: Estimates are presented on an accrual basis as would appear in the budget and public accounts. Positive numbers subtract from the budgetary balance, negative numbers contribute to the budget balance. “-“ = PBO does not expect a financial cost