Taxpayers will pay for Ontario government’s $200 rebates

Famed economist Thomas Sowell had a great line about how politicians try to con the public into voting for them. “First you take the people’s money quietly,” he said, “and then you give some of it back to them flamboyantly.” Sowell was writing about the welfare state, but his description applies to a great many other government initiatives.

For example, the Trudeau government’s carbon tax and rebate. Because the tax is not “revenue neutral,” the sum of the total rebates to taxpayers is lower than the total direct costs of the tax, but the federal government is flamboyant in issuing rebates—even going so far as to dictate how banks must label these rebates.

In Ontario, the Ford government is now preparing for its own flamboyant distribution of money it takes from taxpayers. As CBC reported ahead of the government’s fall economic statement scheduled for Oct. 30, the government plans to send cheques of $200 or more to every Ontarian. Reports of the $200 handouts came amid increasing speculation that Ford will call an early election in 2025. But while this flamboyant distribution of taxpayer money may help buy votes, it’s terrible policy.

The Ontario government’s main sources of revenue are personal incomes taxes, sales taxes, business income taxes, and employer and payroll taxes. These are all what economists call “distortionary taxes” that disincentivize and reduce work effort, earnings, business investment and employment. So the government collects money through distortionary and economically damaging taxes, then plans to distribute the money back—in the form of its $200 per person “rebate”—in a way that does not encourage or increase productivity or business activity.

While the Ford government will surely say it’s putting money back into taxpayer pockets, it would make much more sense—and do far less economic harm—to simply not take that money through distortionary taxes in the first place.

Indeed, Ontario’s high tax rates today remain woefully uncompetitive, contributing to slowing productivity and economic growth. The top marginal personal income tax rate is higher in Ontario than in all 50 U.S. states and higher than in every other province except Newfoundland and Labrador and Nova Scotia, reducing innovation and discouraging entrepreneurship.

In fact, according to a paper published earlier this year, tax economist Bev Dahlby estimated that for the Ontario government to raise an additional $1 in income tax revenue, the cost to the private sector (what economists call the “marginal cost of public funds”) would be a staggering $6.76. Payroll taxes, too, have a strong negative effect on workers and the private sector.

When it comes to business income taxes, the news is similarly discouraging. Dahlby estimated raising $1 at the margin in corporate tax revenue would cost Ontario taxpayers $3.59, up from an estimate of $2.89 a decade ago. Notably, before coming to power in 2018, the Ford government promised to reduce the business tax rate—a promise that more than six years later remains unfulfilled.

Flamboyantly send $200 cheques to every Ontarian? As Thomas Sowell suggested, it might be a successful way for the Ford government to increase public support ahead of a potential provincial election. But the economic evidence suggests, assuming personal and business income tax revenues are used to fund these rebates, that for every $1 spent on this scheme the cost to taxpayers is more than $3—a horrendous deal.