Tuesday, May 20, 2008

The tax increase Flaherty won't admit to

In 1985, as a budget restraint measure, then finance minister Mike Wilson ordered a partial deindexing of tax brackets and personal credits, saying they would increase only on the portion above 3%, if inflation was above that level. Because of sound economic fundamentals from the private sector, however, the CPI most years was either below or barely above that. As a result, we Canadians got hosed because even though the tax rates didn't increase more and more of us creeped up into higher brackets with annual wage increases.

Thankfully, Paul Martin finally put an end to this shell game in 2000. True, he made us wait six years -- but he finally restored full indexing. Unfortunately, general increases in the personal exemption over and above inflation hasn't been entirely retroactive. Right now, the federal exemption is $9600; inflation dictates it should be about $12,000 to $13,000 if we set today's dollars back in 1985.

So what's my beef on this one? Well, first, the exemption should be raised up to its proper level, maybe not immediately but phased in over four years. But there's another one.

Although inflation last year was 2.5%, the personal exemption remains frozen at the same level as last year. It should be, at a minimum, $9840. Flaherty will argue that the brackets went up. Fine. He will also say Canadians are saving income taxes, what with an exemption for kids and a working income tax benefit. That's fine too, I do support both also.

But single people need a tax break too. Either the exemption should be increased across the board for all which works for everyone (since putting the exemption where it should be at least would save everyone $14.76, but hey every little bit helps!); or the feds should adopt something similar to what exists in Québec, a "living alone" amount.

Otherwise, the "tax cutter" is actually increasing taxes behind our backs. Which makes Slim Jim a liar.

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Saskboy said...

This is a tax flaw that routinely is overlooked. I think the exemption should be close to $20,000. Can we really expect single people or families to pay taxes on the other $10,000 when they only make enough to be considered impoverished?

BlastFurnace said...

That's actually one thing I like about Alberta. Whatever beefs one may have about their social and environmental policies, they have set their exemption at a very high level since they introduced the flat tax in 2001 -- it's $16,161 for this year. No "living alone" amount, unfortunately, but even single parents can claim the "equivalent to spouse amount" so they don't have to pay income taxes until they hit just over $32k.

Other provinces are starting to get it but use really confusing calculations -- here in Ontario, we have an "income tax reduction" but an amount for children plus an addition one for disabled dependents would be so much more transparent.

There is indeed an argument to set the basic amount at the low income cut off -- what used to be called the poverty line. To do that might require increasing baseline rates across the board. It would be revenue neutral in the end but might not be so obvious at the front end.

Anonymous said...

Plus, there's the added benefit of reducing the load on the CRA each year, and making a smaller tax law, and smaller agency if fewer people have to pay tax each year, and go through the bother of forms.

BlastFurnace said...

Fewer forms, perhaps -- but most people still have to file a return, even if it's the one page "simplified" version, to get their entitlements such as the child benefits or the guaranteed income supplement for seniors.

If no taxes are payable to begin with, why put people through the process since they already have the numbers? I can't count the number of seniors who freak out when they haven't filed their taxes because they're told they don't have to, then in July their pension drops from $1300 per month to just over $500.