Wednesday, 13 April 2011

Modest tax cuts? How about 10th consecutive tax increase?

My fellow Manitobans, you have seen or read stuff in the press about the modest tax cuts in the new NDP budget. You might therefore be surprised to learn that you will probably be paying more income tax next year, not less. There are various targeted credits that apply to certain specific groups of people, but there is only one broad personal tax cut in this budget: a phased increase to the basic personal exemption of $250 per year over 4 years.

Well, that's pretty good, isn't it? Yes, it's good. The basic personal exemption should increase ... every year. But how much does that actually put in to your pocket? $27 the first year. Yes, that's all. You get 10.8% of that $250. $27.

What you won't read about in the press is the personal tax increase in this budget. Aside from the basic personal amount, your personal taxes otherwise remain unchanged. This means that the tax rates remain unchanged, and the tax brackets remain unchanged. How is that a tax increase you ask? I'll demonstrate:

Suppose the Stephen Harper increased the federal income tax rate by 0.5%. Is that a tax increase? I dare you to say "no". Well, the federal government indexes it's tax brackets. That 0.5% tax increase is equivalent to a 0% tax increase with tax brackets that are not indexed, assuming a 2.3% rate of inflation.* In other words, the money out of your pocket is exactly the same.

The Manitoba government does not index it's tax brackets. It has increased the lower tax threshold only once since 2002, and that was only by a meager 1.5%. Let me show you how that looks in comparison to the Federal tax threshold, and that of our arch nemesis Saskatchewan:

Inflation data: 2002 = 100 (right axis) source

Not increasing the tax brackets is just as real a tax increase as actually increasing the tax rate, friends, and in fact for most people this "hidden" increase far outweighs the "modest tax cut" that you'll hear about in the news. If you make $50,000 and you get a modest 2% cost of living increase, you will pay $127.50 more in taxes due to the bracket creep. According to my calculations, which I am willing to share with you, anybody who makes more than $25,000 will pay more tax next year than last year, independent of the miscellaneous credits.

That is called a tax increase.

For more on bracket creep, here's Colin Craig of the Canadian Taxpayer's Federation:



*this is also dependent upon the government indexing the brackets sufficiently to actually mitigate the impact of inflation.

related: budget commentary from some people you may know

4 comments:

Brian said...

To those who will react badly to what you've said because it isn't fawningly pro-government, it might help to note that it was, in fact, Paul Martin and the Liberal Party of Canada that implemented indexation of federal tax rates and ended bracket creep federally. The LPC aren't my people, but I want to give them full credit for doing it, if doing so encourages other MB parties (ehem) to open their minds to the idea.

Increases in the base personal exemption should be a non-partisan, cross-ideological goal that everyone can agree on. To me, (1) ending bracket creep and (2) increasing the BPE beyond inflation was always the most progressive way to deliver tax relief, in that order, for two reasons. First, everyone shares in a tax break so it's popular and easy to sell, but progressive, since low income people benefit much more dollar for dollar.

Second, low income Canadians won't need an accountant or a tax credit remittance consultant to benefit from it; the relief would appear right on their paycheques from day one. In some cases, low income people will fall right off the tax rolls entirely, making it more rewarding to choose to move off social assistance into lower-wage jobs.

It's about as no-brainer as one can get in public policy. And yet, we're still years behind everyone else in grasping that fact here in Manitoba.

cherenkov said...

Well said!

One Man Committee said...

Great post.

I can imagine a future when nearly every employed Manitoban is in the top tax bracket... what an absurd situation that would be. Yet that's exactly the direction in which we're headed.

cherenkov said...

Thanks. I'd like to see the conservatives propose this, but I didn't see anything about this in Hugh's alternative budget announcement. Hopefully they get on it.

 
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