The federal government's personal income tax cuts were relatively modest, and for the most part merely a rollback of the tax increases in his first budget, according to an analysis by a think-tank that was involved in preparing projections for Finance Minister Jim Flaherty's recent economic statement.And those measures will only temporarily ease the personal income tax burden, and not by much, and won't keep that burden from rising in the future, says the analysis Wednesday Global Insight's chief economist Dale Orr, which warns that burden will rise in the years to come.
"Finance Minister Flaherty is fond of telling us that Canadians pay too much tax," it said, noting that last week's economic statement promised about $60-billion in tax relief over the next five years.
However, almost 60% of that is the goods and service tax reduction, a cut that Global Insight say will do little to boost the overall performance of the economy.
"Only 18% is in personal income tax reductions," the report said. "From almost any perspective, the personal reductions in the economic statement were very small, smaller than they could have been, and smaller than they should have been."
The economic statement, which was widely perceived as a pre-election mini-budget, reduced the lowest personal income tax rate to 15% from 15.5%, retroactive to January 1, 2007. It also increased the amount people could earn before being taxed, providing $10.9-billion in personal income tax relief over the 2006- 2013 period, with about about half of it this year and next.
"What the Finance Minister Flaherty didn't tell us is that the lowest marginal rate was 15% in 2005, and in 2006 until the Conservative government raised it to 15.5% in budget 2006, to help finance the first GST reduction," Orr said, adding that the rollback of the earlier Tory tax hike accounted for almost 80% of the total personal income tax relief .
"Thus, this personal income tax 'relief' is relief only because the Conservative government took it away in their budget 2006, to have it restored again in the November, 2007 economic statement."
And the amount of "relief" is tiny relative to its impact on the personal income tax burden, which is measured as the proportion of personal income paid in personal income tax, and it's temporary, the analysis argues.
The rollback of the earlier tax hike reduces that burden slightly to 9.8% this year from 10.1%, but the tax burden will rise back to 10.1% next year as the projected increase in after-inflation earnings pushes more income into higher tax brackets, it said.
While tax brackets rise with inflation, any real or above-inflation increase in incomes, means more of that income is taxed at higher rates, Mr. Orr explained in an interview, adding that were it not for the re-indexing of the income tax system, which occurred under the former Liberal government, the tax burden would rise even faster.
"Roughly speaking, if personal income increases by five per cent, federal personal income tax collections will increase by about six per cent of $7-billion a year if the increase in personal incomes is evenly spread across the income distribution," it said. "Personal income tax collections ... are the proverbial 'cash cow'."
In fact, in recent years the faster growth in incomes at the upper-income level has resulted in personal income tax collections rising by closer to eight per cent for every five per cent increase in personal incomes, it said.
The analysis, for example, calculated that for every $100 increase in income an individual's income the government collects an extra $29 from an upper income tax-filer but just $15 from a low-income one.
The analysis was prepared for Global Insight clients which include governments of virtually all stripes and corporations, Mr. Orr said.
Canada's rich pay less in taxes than poor, report finds
OTTAWA — The era of tax cuts ushered in by federal and provincial governments in recent years have made Canada’s tax system so regressive that the country’s richest now pay the lowest rates of all income groups, says a report to be released Thursday.
The report by the Canadian Centre for Policy Alternatives, an advocacy research group that has pressed in the past for more social spending and bigger taxes on corporations and higher-income Canadians, looked at what percentage of income Canadians pay in taxes to all levels of government.
The study shows that Canada’s progressive tax system has become less so between 1990 and 2005, and for the richest Canadian families — those with annual earnings of $266,000 a year and more — the era of tax cuts since the turn of the century has been like manna from government.
Those very rich Canadians paid 30.5 % of their income in federal, provincial and municipal taxes in 2005, as opposed to the 30.7 % for those with incomes under $13,523, the lowest 10 % of family earnings.
That’s a big difference from 1990, when the top 1 % of earners paid 34.2 % of their incomes in taxes, as opposed to 25.5 % for families in the bottom 10 %.
“The tax system as gotten less progressive,” said the group’s senior economist Marc Lee.
“There’s something in the overall tax system now that most people would find offensive. The idea that someone who is in the upper middle class is paying a higher tax rate than someone much wealthier is not fair.”
In last week’s mini-budget, Finance Minister Jim Flaherty cut the GST as well as personal, corporate and other taxes by $60 billion over five years, declaring that “Canadians pay too much tax.”
In recent years, several provincial government have also cut taxes, but in many cities, property taxes and users fees have been rising as local governments try to cope with rising costs and service demands.
The highest taxed Canadian families are those earning between $120,000 and $151,000, who pay 36.9 % of their income in taxes. This group is followed closely both those earning $57,460 and $72,299 — whose tax bill represents 36.5 % of their total income.
Lee said his report is different from other such analyses in that he included all sources of income, including salaries, inheritances, employer provided benefits and capital gains. As well, the report calculates all taxes, including property and corporate taxes and user fees charged by governments.
He said he chose the 1990 to 2005 timeline because the last time a similar methodology was used to analyze the Canadian tax system was in 1988, and because the 15 years covers a time of government deficit cutting and tax hikes, followed by several years of tax cuts.
The main finding is that on average, tax rates dropped by 2 % between 1990 and 2005 as both federal and provincial governments undid the tax increases of the 1990s with deeper and broader reductions.
But the relief wasn’t spread equally. Those in the top 1% of earners actually saw their tax bill drop by about 4%, whereas those at the very bottom saw the take rise by 5%.
Lee said although the lowest income earners generally pay no or very little income tax, they do pay a disproportionately high amount in relation to their income in sales taxes, property taxes and other government revenue generators, such as gaming and liquor sales.
Tax cuts by provinces was the main impetus behind the flattening of the system, says Lee, although federal cuts, such as the elimination of the 5% high income surcharge after 2001 also reduced progressivity.
Provincial taxes are less progressive than federal levies because of their greater reliance on sales tax and fees for such things as driver’s licences. As well, provinces generally have flatter provincial income tax rates.
“Provincial income tax cuts are the major culprit behind Canada’s eroding tax fairness, an important consideration given allegations by the provinces of a fiscal imbalance in Canadian federalism,” the report finds.
Upper-income earners benefited from a 2001 federal decision to eliminate the 5 per cent "high-income surtax" and from preferential treatment of capital gains from the sale of stock market shares and real estate.
The affluent were also better able to take advantage of increased allowable tax deductions for RRSPs, Lee said.
At the other end of the scale, low-income earners saw their tax rates accelerate as a result of increases in payroll, consumption and property taxes, as well as user fees.
The analysis concludes that there is scope for raising income taxes at the top of the income ladder to make the system fairer.
"Such changes would help to ensure those who can afford to contribute more for public goods and services valued by all Canadians can do so," the study says.
Tax cuts won't buy a cup of coffee
Analyst says savings for low-income earners are, at most, 39¢ a day
Unveiling tax goodies on mini-budget night, a beaming Finance Minister Jim Flaherty declared to a national audience that "these tax cuts will move some 385,000 people off the income tax rolls altogether."
Sound good?
It should. This kind of thing has been a staple of federal budgets for many a year.
But analysts scoff at this supposed manifestation of a government's goodwill toward Canadians at the bottom of the financial scale.
In fact, there's widespread agreement the tax changes introduced by Flaherty do little to improve the lot of low-income earners.
"Don't get sucked in by that," says TD Bank chief economist Don Drummond when asked about Flaherty's claim 385,000 people won't pay federal tax as a result of the Oct. 30 mini-budget. "Most of those people were paying $5 or $10."
He said he completely agrees with the idea that someone earning under about $14,000 should not be taxable. "But just bear in mind the amount of taxes they are paying. It's not a very meaningful statistic."
The main lever used in Flaherty's mini-budget to ease the tax burden on low-income Canadians was raising the basic personal amount that can be earned without paying federal taxes to $9,600 – an increase of $671.
The people supposedly removed from the tax rolls, then, are those whose taxable earnings would have been slightly higher than the old threshold of $8,929.
"There are people who would be just barely above the amount of the non-refundable credit, so, in effect, you put them in a zero tax position," says Hugh Mackenzie, a research associate with the Ottawa-based Canadian Centre for Policy Alternatives. "They're not eliminated from the tax rolls. The position that they find themselves in is that when they go through the tax calculation, they find at the end of it they don't owe anything.
"It's not as if these people are exempted forever from paying tax," Mackenzie added. "As inflation goes on and economic circumstances change, you could have a very similar income and find yourself taxable again."
In his mini-budget, Flaherty also said he is helping taxpayers by dropping the lowest personal income tax rate to 15 per cent from 15.5 per cent. This helps all taxpayers but is proportionately more helpful to those with low incomes.
But Flaherty's budget measures still aren't great news.
Cutting the lowest tax rate will return about $1.3 billion a year to taxpayers, notes Drummond. "When you've got 20 million paying taxes, $1.3 billion doesn't go very far."
However, he says, the Harper government decided to spend the money it had for tax cuts on reducing the GST another percentage point to 5 per cent.
With a GST cut, "there's no incentive to work, save and invest. In fact, if it gives any incentive, the incentive is only to spend more and consumption is not one thing the Canadian economy is short of by any means," Drummond said.
As a result, Flaherty's income tax moves do little for Canadians with the smallest earnings packets, economic analysts say.
First of all, it's universally noted the reduction in the lowest income tax rate to 15 per cent only reverses a tax increase brought in by Flaherty in his 2006 budget. Taxpayers are getting a benefit they would have received anyway had he not raised income taxes last year.
It's a similar situation with the increase in the basic personal amount to $9,600. Flaherty is only moving forward increases in that tax break put in place by the Liberals in 2005.
Taken together, the Oct. 30 measures will provide only very modest help for low-income earners.
The CCPA's Mackenzie estimates the mini-budget changes will result in a maximum income tax reduction for individuals of $242 in 2007, $187 in 2008 and $144 in 2009.
For a single parent, the maximum reduction is $298 in 2007, $184 in 2008 and $94 in 2009, he said.
And those savings will be less for anyone with an income below about $38,000 a year, Mackenzie said. So, as a result of the way taxes are calculated, Flaherty's income tax changes will amount to a gain of at most 39 cents a day for a single individual and 25 cents a day for a single parent, he estimates.
It marginally helps people with very small incomes, says Rob Rainer, executive director of the National Anti-Poverty Organization.
"But we're not going to see any major, substantive visual evidence on the streets, so to speak, of people really having their financial fortunes reversed by this," Rainer said.
Analysts and anti-poverty advocates agree that Canadians must go way beyond tax cuts if they are going to use government fiscal measures to effectively reduce poverty.
Reducing taxes for those at the low end of the income ladder only helps if governments refrain from cancelling out any benefits by clawing back income supports and social assistance as taxpayers' incomes begin to rise above the subsistence level, economists stress.
These clawbacks, designed to keep support programs from becoming too expensive, act as a disincentive for low-income workers to extend their hours or upgrade skills because the reduction in social benefits, combined with rising tax rates, leave them with less money. As a result, what economists call their marginal effective tax rate can reach the same level or higher than top income earners.
"You really have to get the effective rates on low-income people down," says Dale Orr, an economist with Global Insight. "Some of these people are subject to very high effective marginal rates because they lose tax credits and subsidies and things. So we really have to do something better for them."
The federal Conservatives have taken a step in this direction, introducing the Working Income Tax Benefit, a $550-million-a-year program designed to help eliminate some disincentives for low-income earners. However, critics say it needs to be expanded to be of maximum value to working families.
Federal government shows no interest in making Canada better
Lana Payne
The Telegram
Before kids even go to school, we expect them to connect the dots.
My daughter has been doing it for years and she’s only 6. When she’s finished connecting the dots, she is left with a clear picture that she then colours a multitude of shades and hues.
You soon learn, though, that children are very good at connecting other kinds of dots. At Thanksgiving, like most kids in the city, she was asked to bring items to school for the food bank. We talked to her about food banks and explained that not everyone had enough money to buy food, pay bills and buy clothes for their kids. And that food banks help, but they are not the answer.
This must have stayed on her mind, as a few days later she asked, out of the blue, if we had food banks because “rich people didn’t share enough.”
Canada’s not-so-new prime minister and his blustery finance minister are counting on us having forgotten to connect the dots.
They certainly don’t want us questioning their tax-cut agenda and the damage it is causing and will continue to have on the country’s social fabric.
They most certainly do not want Canadians contemplating this failed and flawed public policy.
Because if Canadians start connecting the dots, they may discover that despite tens and tens and tens of billions of dollars in tax cuts, they are still not feeling that financially secure.
Despite a 30-year unemployment low, despite more than a decade of government surpluses and despite unprecedented economic growth, Canadians are a worried lot — at least according to polling by the Canadian Centre of Policy Alternatives.
It may have something to do with all the debt families are carrying and a lack of household savings. Or it may be because real wages, excluding inflation, have not increased since the recession year of 1981-82.
Not shared
It’s no wonder Canadians are feeling a little shaky. After all, the country is generating more wealth than ever before, they see politicians giving away billions, but it isn’t filtering down to them.
And despite this failed and unimaginative economic policy of tax cutting, the federal Conservatives persist with the finance minister announcing at the end of October another $60 billion in tax cuts — almost 25 per cent going to corporations.
This is what Canadians do know and what Stephen Harper ought to fear.
They know how expensive it is to send their big kids to university or college because taxes haven’t been used to reduce the cost of post-secondary education.
They know that only the lucky and the fortunate can access affordable child care and early learning programs for their smaller kids. They know that tax cuts won’t repair mould-infested schools. They know tax cuts won’t build bridges or pave roads. Nor will they build hospitals, buy cancer-treatment equipment or pay home-care workers a decent wage. Tax cuts do nothing for homeless people, except keep them homeless.
And tax cuts for corporations do even less, except feather a few already cushy nests.
Canadians know that the last thing hugely profitable corporations need is more of their hard-earned cash. Yet the Harper Conservatives have done just that, handing over another $14.8 billion in corporate tax cuts, including to obscenely rich oil and gas multinationals.
It’s no wonder a study last week by the Centre for Policy Alternatives discovered that Canada’s tax system is becoming less and less progressive. According to the report, by economist Marc Lee, the richest one per cent of families pay a lower percentage of their income to governments than the poorest.
Lee’s conclusion was that Canada’s tax system, after years of cuts, now fails a basic test of fairness.
And this was before the Conservatives’ latest round of tax cuts, which had many economists warning that Harper had slammed the door on any new major programs.
What a waste. This money could have made a real difference in the everyday lives of Canadians. An average $200-a-year individual tax cut won’t buy a coffee a day. But collectively, it could have done a lot of good.
That’s, of course, if you are interested in making that difference in the first place.
Government doesn’t care
What is becoming increasingly clear is that Canada’s slightly used Conservative government has no interest in that. They are much too busy managing the public relations of a war, shutting out the media and playing politics.
And while they play politics — fencing with each other over who is the sharpest politician in the lot — another child’s sense of wonder is dimmed by poverty because government chose tax cuts over action.
And that is the whole problem. We have a federal government that doesn’t believe in government, and so most days are spent dismantling and diminishing government as a force of change.
The message to Canadians is: don’t look to Ottawa to be part of the solution.
Unfair burden on poor
EDITORIAL
TheStar.com
Whether taxes are high or low, they ought to be fair, with those with the greatest ability to pay contributing a larger percentage of their income than those with less ability to pay. Such a progressive tax structure has long been a core Canadian value – at least in principle.
But the reality of our current tax system tells a far different story.
In 2005, the richest Canadians actually paid a smaller share of their income in taxes than those who earned the least. In a country that prides itself on fairness, all levels of government took a combined 30.7 per cent of income in taxes and fees from those with incomes under roughly $13,500, but only 30.5 per cent from the top 1 per cent of Canadians, those with incomes of more than $265,800 a year.
In the broad middle between the poorest and the richest, the tax system was mildly progressive, which means that the very richest Canadians paid a lower overall tax rate than any other group.
These findings come from a new study by the Canadian Centre for Policy Alternatives, which looked at changing taxes from 1990 to 2005, a period when the rich were getting richer and the poor poorer. Astonishingly, it found tax cuts had exacerbated that trend.
During this period of big tax cuts, the overall tax rate for most Canadians fell 2 percentage points. For the wealthiest, the drop was 4 percentage points. But while others were getting tax breaks, the poorest Canadians saw their tax rate rise more than 5 percentage points.
By their very nature, some taxes are regressive, hitting the poor harder than the middle class and the rich. Property taxes are one such tax and while they took a diminishing share of everyone else's income over the period, for the very poor they took a rising share, increasing to 5.9 per cent in 2005 from 5.1 per cent in 1990.
Sales taxes, which are also regressive, had the same effect. Rising more slowly than income for most Canadians, they increased significantly relative to income for the two lowest-income groups.
But if that wasn't bad enough, cuts in progressive federal and provincial personal income taxes favoured those with higher incomes, particularly the rich, at the expense of the poor. To create greater fairness, Marc Lee, the study's author, suggests hiking taxes on the rich.
But taxing the rich would do nothing for the poor. It is far more important to tackle poverty head on, and raising incomes of the 10 per cent of Canadians who live on less than $13,500 a year.
