Middle Class Tax Cut – not exactly as advertised

The Justin Trudeau government’s Robin Hood mask slipped a bit this week with the discovery that those with high incomes would not co-operate fully in the plan to rob the rich to pay the not quite so rich.

During their recent successful campaign the Liberals said they would increase income tax on the reviled 1% to pay for a tax cut for the “middle class”. Polls show that most Canadians – regardless of income – consider themselves middle class or are middle class wannabes. Combining that with the anti-1% vibes remaining from the Occupy Wall Street movement gave the Liberals a political winner. It was time to fight inequality by making the rich pay and the Liberal platform laid out the formula. The middle class tax cut (MCTC) would reduce the rate on the income bracket between $45,000 and $90,000 from 22% to 20.5% and increase from 29% to 33% the rate on income over $200,000. The cost of reducing the middle rate would be covered by the increased rate on the $200,000-plus a year crowd.

This frontal attack on inequality was nice in theory, but not so easy in practice. On Monday, after a number of reports came out suggesting that making the rich pay is easier said than done, the Liberals adjusted the numbers. Instead of costing about $2.8 billion, the cut would cost $3.4 billion. And instead of soaking the rich for $2.8 billion to offset the cost, the Liberals lowered the projection to $2.0 billion. After making a couple of smaller adjustments they were left, not with the promised revenue neutral tax cut, but one costing $1.2 billion. And the cost could be even greater. As the business friendly C.D. Howe Institute put it, “high income earners find ways to reduce taxable income, leading to shrinkage in the tax base.” The Howe Institute estimated that as a result of tax avoidance, the high-income tax rate could bring in less than one billion for the feds while shrinkage of the tax base will cost provincial governments $1.4 billion in revenue. So the outstanding tab for the MCTC could run as high as $3.6 billion, to be paid not exclusively by the high-income earners as advertised, but by everyone, in the form of higher taxes, higher deficits or reduced services at both the federal and provincial levels of government.

Few Nova Scotians receive benefit of cut

Predictably, the mainstream media and the Conservative opposition zeroed in on the impact of the new calculations on the Liberal promise to hold the deficit to $10 billion next year. For his part, the NDP finance critic raised the more important issue. He echoed criticisms from those few who had pointed out during the election campaign that the Liberal definition of middle class was somewhat narrower than what most people think. The fact that the rate cut would only kick in for people making more than $45,000 in taxable income meant that just 33% of tax filers are eligible, according to Canada Revenue agency data for 2012.

In Nova Scotia, eligibility is even lower. According to CRA figures– just 29.8%, or 219,700 taxpayers, will receive any benefit from the MCTC. Of that group, 84,000 tax filers making from $45,000 to $60,000 will receive a cut ranging from a few pennies at the bottom of the range to $225 at the top. Only individuals making between $90,000 and $200,000 – about 40,000 Nova Scotia tax filers – will get the full $670 middle class tax cut. A couple making $90,000 or more each would save double that. And get this. Even those making over $200,000 a year will benefit from the MCTC. Their taxable income can reach $217,000 before the benefit of the cut is fully offset by the increased rate for earnings over $200,000 and they start paying more. Even at $208,000 the rich are still getting a net tax break of $395 from the MCTC, which is more than the $375 going to the person earning $70,000. Not exactly a middle class tax cut.

So just to recap for Nova Scotia (which is not too much different than the rest of Canada):

  • The middle class tax cut does nothing for more than seven out of ten tax filers in Nova Scotia;
  • The middle class tax provides maximum benefit to about 5% of tax filers, those making between $90,000 and $200,000;
  • Even those making more than $200,000 get a tax cut until their income hits $217,000.

The reason for this somewhat perverse result is that the cut in the $45,000-$90,000 tax bracket benefits all tax filers in higher brackets. Ottawa economist Andrew Jackson, policy advisor to the Broadbent Institute, has estimated that for the country as a whole, one half of the tax savings from the MCTC will go to the top 10% of tax filers. In a paper published this week, the Canadian Centre for Policy Alternatives suggested four ways in which revenue raised from the increased rate on the plus-$200,000 earners could actually be deployed to provide greater benefit to the middle class – i.e. those earning between $36,000 and $62,000. The CCPA’s top choice to replace the MCTC is a significant increase in the Working Income Tax Benefit.[1] Others have suggested that putting the money into affordable child care would be more help to middle class and all other families with children. Considering that the NDP’s signature $15 a day child care plan would have spent under $600 million for 123,000 spaces next year, the $3.4 billion going into the MCTC would pretty much solve the day care crisis in this country.

Child Benefit plan no fix?

Despite critiques such as those from the CCPA, critics have been restrained in their comments on the questionable attack on inequality represented by the MCTC. That’s because two other platform promises by the Liberals would supposedly make inroads against inequality by reducing poverty among seniors and families with children.[2] The commitment to seniors – a 10% increase in the Guaranteed Income Supplement for single pensioners – appears straightforward. The Canada Child Benefit, on the other hand, seems to suffer some of the same defects as the MCTC by directing too much of the benefit to the middle and top.

On the positive side, three existing child benefit programs (the Canada Child Benefit, the Universal Child Care Benefit (UCCB) and the National Child Benefit Supplement), would be rolled into one. The Liberals would add $2.0 billion re-deployed from the Harper government’s misbegotten income splitting initiative and $1.8 billion in new money to create the non-taxable Canada Child Benefit. In keeping with Trudeau’s campaign rhetoric against sending child care cheques to millionaires, the benefits would stop once family income reaches $192,000.

There’s no question that between the Harper Conservatives and the Trudeau Liberals there is a sudden build up in child benefits. In 2013-14 the feds put a total of just over  $13 billion into child benefits. The Conservatives upped the total to a projected $18 billion this year (mainly through the UCCB) and the Liberals are proposing to bring it to $21.7 billion – that’s an increase of about 75% in two years. The issue is how the proceeds of the enriched program are to be distributed.

Impact on child poverty

The Liberals say the new CCB will lift 315,000 Canadian children out of poverty. This is good, but it will still leave nearly 800,000 to one million kids living below the poverty line. In 2012, the anti-poverty group, Campaign 2000, estimated the number of children living in poverty at more than 1,330,000. Statistics Canada reported in 2013 that 16.5% of children younger than 18 – about 1,147,000 in all – were living in low-income households, defined as income below $29,640 for a two-person family and $41,866 for a four-person one.

Despite the proposed infusion of cash into child benefits, three out of four of those children will remain in poverty because of the Liberal emphasis on the middle class. In a campaign interview with CBC’s Peter Mansbridge, Justin Trudeau described the “typical” middle-class family as one with four members, including two children, with $90,000 in household income. That particular middle class family was the target of the Liberal campaign and is featured on the first page of the Liberal platform. Child benefits to that family will go from $3,300 now to $5,875 with the CCB. That family will also stand a good chance of benefitting from the middle class tax cut. Indeed, if it’s a single-earner household, Trudeau’s “typical” family would get the full benefit of the MCTC, which on top of the increase through the Canada Child Benefit, would leave it better off to the tune of $3,545.

Meanwhile, according to the Liberal platform, benefits for a family with two children and a household income of $15,000 would go from $10,175 under the current setup to $11,800 under the CCB, an increase of $1,625. And that family will not benefit at all from the MCTC. A plan that potentially gives more than twice as much in increased benefits to a family at $90,000 than it provides to a family at $15,000 seems more designed to attract middle class votes rather than seriously tackling poverty. In that respect, the Liberal platform also presents the case of a family with two kids and a household income of $140,000. That family’s benefit will go from $2,050 currently, to $3,125 under the CCB. Using the most extreme case, if that $140,000 household consisted of two earners at $70,000 each, the yield from the middle class tax cuts would be worth a combined $750, pushing the benefit from the two measures to $1,825, $200 more than the family buried below the poverty line at $15,000.

The Liberals have put the Canada Child Benefit on hold until at least July 1, 2016, to allow time to talk with provincial governments about the impact of the increased CCB on income-tested provincial or municipal subsidies. The feds and the provinces will also be discussing day care and how infrastructure money – The Liberals’ other big ticket platform promise – may be used to do something about rates for unsubsidized spaces that now run as high as $3,000 a month for two kids in Toronto and $1,600 a month for an infant and toddler in Halifax. The Liberals showed this week they are able to be flexible when it comes to implementing the details of their campaign promises. Hopefully they will use the next six months to re-think and re-work their child benefit initiatives to direct more help to families most in need.

 

 

[1] Real Change for the Middle Class, published Dec. 7 by the Canadian Centre for Policy Alternatives. https://www.policyalternatives.ca/publications/reports/real-change-middle-class

 

[2] https://www.liberal.ca/realchange/

About Richard Starr

RICHARD STARR has had careers as a journalist, public servant, broadcaster, political staffer and freelance policy adviser. He is author of numerous newspaper and magazine articles, appearing in everything from Atlantic Insight to Atlantic Progress. A lifelong student of Maritime history, Starr is married to playwright and former MP Wendy Lill. They live in Dartmouth.
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One Response to Middle Class Tax Cut – not exactly as advertised

  1. Chris says:

    This is great, thank you. I’m passing it around. Keep this up and I might have to find out about this here social media the kids are on about.

    The Liberals will show their true colours eventually, this is just a start. They’re just another shiny new shovel to be used in the 40 year old neoliberal project of shovelling all the money to the top of the hill. A kinder, gentler shovel to be sure but still…

    For your delectation a short and interesting paper on inequality in Canada:
    http://www.uregina.ca/socialwork/faculty-staff/FacultySites/HunterGarsonSite/2012-poverty-paper.pdf

    Quote from the conclusion: “The growing
    inequality gap in Canada testifies to the failure of neoliberal fiscal policy for all but the wealthy.
    If the intent of that policy was to enrich the wealthy at the expense of other Canadians then the
    programme has been an unqualified success.”

    Like

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