Taxes and fairness, Part 2: Anti-social transfers

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Tax cuts are not the primary means chosen by governments in Canada to ensure that our tax regimes systemically favour the wealthy. A myriad of methods undermine tax fairness. The combined effect in 2015 of these anti-social transfers reduced by at least $633 million the taxes paid by those earning more than $100,000 a year in Newfoundland and Labrador (NL).

Social transfers are government programmes designed to reduce inequality by helping the vulnerable in society. They can be funded directly out of general revenues, or by contributions from the people and firms who are likely to benefit from the programme. Our income tax system itself can also be thought of as a form of social transfer, inasmuch as it taxes wealthier people at higher rates. A progressive income-tax system is fundamental to reducing inequality in Canada.

By contrast, anti-social transfers are government actions that increase inequality. These can take many forms, but the ones examined here use the income tax system. Income taxes are our only form of progressive taxation: they are the only tax that increases with our ability to pay. If the aim is to reward the wealthy by increasing inequality, then undermining the progressive nature of income tax makes sense.

In the first part of Taxes and Fairness, I examined the highly regressive impact of the tax cuts introduced by the Williams government between 2007 and 2010. By 2015, the province had given away $1.4 billion to people earning in excess of $100,000 a year. The decline in taxation for the wealthiest of these people, those earning above $150,000 did not, however, start in 2007. It started in 2004, well before the Williams tax cuts took effect. In this column I explore the various ways that taxes on the wealthy have been reduced other than through tax cuts.

Tax cuts modify the tax rates used to define tax brackets. In a progressive income tax regime, rates rise as your income increases. Increases in these “marginal” rates only affect income earned above those set amounts. Thus, the actual rate of taxation corresponds to the marginal rate only for people with incomes in the lowest tax bracket, because with each step increase the effect of having earned some income taxed at lower rates reduces the overall amount owed. We can see the difference this makes by comparing the dashed lines of the marginal rates and the dotted lines of the apparent rates on Mind the gap.

On Mind the gap, I plotted the rate owing based on the average incomes that year for each of the income categories. I labelled it the “apparent” rate, because it differs so substantially from the proportion of income that was actually paid in taxes, shown by the solid line.

The flat lines of coloured dots mark the average rate of taxation paid to the provincial (6.5%) and federal (10.3%) governments respectively. Where they cross the amount actually paid is an indicator of the degree of progressivity inherent in these differing tax regimes. The proportionally higher marginal rates charged by the provincial government on middle-income earners, those earning between $35,000 and $70,000, is why the provincial regime is less progressive than the federal.

The gap between the apparent rate and what people actually paid is, at all income levels, very substantial. Five distinct actions explain the gap: privileging universal non-refundable tax credits; differentiating income by source; splitting income; deducting particular expenses; and masquerading tax credits as social programmes. I will explain how each of these types of government action promotes inequality and assess its cost to the public purse.

Whose universe are we talking about?

Universal non-refundable tax credits

I start with the most expensive and widely accepted method: universal non-refundable tax credits. Our tax regime has a number of these, but the most significant one is the basic personal amount, which in 2015 was valued at $11,474 federally and $8,802 provincially. For half of us, these generated tax reductions of $1721 and $678 respectively, but not everyone benefited equally despite its alleged universality. Indeed, many didn’t benefit at all, because to see any of that money you had to owe the government taxes in 2015. Neither level of government owes you this money; this is what “non-refundable” means. It can only be applied as a credit against money you owe the government in the current year. Please note: unlike many tax measures designed for the wealthy, this credit balance cannot be carried forward to be used in future years.

The Canada Revenue Agency (CRA) maintains the fiction of universality in its statistical tables. It misrepresents the value of the federal personal deduction for NL as being $4.9 billion (424,000 tax filers multiplied by $11,474), but many NL tax filers did not owe the federal government enough taxes to claim all of this credit. The Canadian Centre for Policy Alternatives in their study of the federal tax system for 2011 found that it was only when Canadians reached the fourth decile of income earners that they were able to fully redeem this “universal” credit. As a result, two-thirds of this benefit went to the top half of income earners.

CRA does not provide any statistics on the smaller provincial basic personal amount, but it was probably fully claimed by people earning over $25,000 a year. In any case, the personal deduction for those basking in the sunshine cost us $33 million provincially and $64 million federally in 2015. This deduction is fully indexed, but most wages, salaries and pensions are not, so every year it becomes in its application more and more selective.

Now the ostensible purpose of the basic personal amount is to ensure that basic needs are met before taxes kick in. It is, however, a very costly programme that in NL is more than a bit of an anomaly. For the last 15 years, we have had a special programme of targeted tax credits, which in 2015 ensured that no individual earning less than $19,000 or family earning less than $32,000 paid any provincial income tax whatsoever. Individuals and families earning slightly more are also eligible for some relief. This Low Income Tax Reduction programme costs the province $35 million annually. If we redirected the funds currently given away just through the basic personal amounts of those in the upper tax brackets, we could easily raise those thresholds to eliminate provincial income tax for individuals earning less than $30,000 or families earning less than $40,000.

When is a dollar not a dollar?

In the 1960s, the Royal Commission on Taxation, the Carter Commission, recommended that the best way to achieve tax fairness was to consider a dollar a dollar, no matter how it was earned. Our entire income tax system is based on a fundamental rejection of that simple principle. Income earned through dividends, or rents, or interest, or capital gains, or commissions are each treated as qualitatively different from wages, salaries or pensions. The most egregious inequity is our treating capital gains as being worth only half their real amount, but each of these differing forms of income receive special treatment that enable the wealthy to reduce their taxes.

Furthermore, only the “net” personal incomes from professional, business, fishing or farming enterprises are subject to income tax.  Much is, quite deliberately, not caught in that net. So, for example, the 7,140 tax filers in NL who declared a business as their principal source of revenue earned on average only $22,692 net income from it in 2015. As a result, they were assessed as having $10,592 in taxable income less a year than the average Newfoundlander. In addition, small business owners are eligible for a lifetime capital gains exemption worth $813,600 in 2015.

Dividends issued by Canadian corporations have already been taxed and so, through one of our more obtuse calculations, people in receipt of dividends receive a targeted tax credit that significantly reduces any taxes they might owe. Capital gains are considered to be a reward for risk taking and the reward is that these gains are worth, for taxation purposes, only half of their actual amount. It matters not at all that capital losses, the presumed cost of the risk taken, are themselves deductible against any future capital gains as long as the tax payer may live.  Capital gains realized on your principal residence are exempt from taxation. This tax break has been particularly valuable in the hot housing markets of Toronto and Vancouver, but undoubtedly the near tripling of housing prices in St John’s during the boom also generated unequal benefits.

Our treatment of dividends and capital gains are understandable fictions; after all we live in an advanced capitalist society, which helps explain why their application is so selective. In 2015, more than three-quarters of both eligible dividends and capital gains went to people earning more than $100,000. The special treatment accorded dividends gave these members of the sunshine list $39 million in provincial credits that year and a further $44 million in federal credits; whereas, if both dividends and capital gains had been considered as regular income, they would have owed $69 million to the province and $132 million to the federal government, not quite enough to fill the gap, but something to be mindful of nonetheless.

Promoting family values

Income splitting allows a person to split their income with their spouse when calculating the taxes they owe. It was a key policy plank of the Harper government. Initially, it was only for private pension income, but it was then extended to include all income of families with children. Cancelling this extension was one of the first actions by the Trudeau Liberals in 2015, but their more recent attempt to scale back a similar arrangement within family-owned corporations was successfully blocked by professional lobby groups representing those high-income earners.

Income splitting benefits spouses who are in differing tax brackets. By transferring up to half your eligible income to the spouse with the lower income, you save on taxes. The greater the income disparity between spouses, the greater the potential tax savings. Furthermore, miracle of miracles, you don’t even have to provide any proof that the spouse actually received the “transfer”. The tax refund, of course, goes directly to the spouse with the higher income. Think of it as an inverse Mothers’ Allowance.

When both economic inequality and poverty are such gendered phenomena, it is difficult to think of a policy choice that promotes inequality more effectively. Unfortunately, due to the nature of this particular transfer, we cannot know what the savings were for the really high-income earners. All we can state with certainty is that one in twenty tax filers in Newfoundland split their income and half of the designated spouses were in the lowest tax bracket, so the savings were substantial. This was a federal measure, which the Newfoundland government could have chosen not to apply to provincial taxes, but why in the province with the greatest gender pay imbalance in the country should we have refused such an iniquitous policy option?

Deducting our way to inequality

Anti-social transfers promote rather than reduce inequality. For the public purse, the single most expensive transfers are those measures that allow particular expenses to be deducted from your declared income before establishing what your taxable income will be. This positioning of deductions ensures that exactly the same deduction generates greater savings the higher your income, because it is deducted off the top, at your highest “marginal” rate of taxation.

The inherent inequity of this system is well illustrated by spousal support payments. If you earned $50,000 a year in 2015 and provided your estranged spouse $1000 a month, your taxes would be reduced by $2,724, ($12,000 multiplied by the combined marginal rate of 22.7%) but if you earned $200,000 a year and provided exactly the same monthly payments your taxes would be reduced by $5,160 ($12,000 multiplied by the combined marginal rate of 43.3%).

Understandably, people on the sunshine list took considerable advantage of this type of subsidies in 2015, to the tune of $76 million in lost provincial revenues and $150 million federally. RRSP contributions were the single most popular deduction among those earning in excess of $100,000. They socked away a total of $318 million in 2015, or almost two-thirds of all RRSP contributions made in the province. Depending where on the sunshine list you stood, this generated tax savings from 39.3% to 43.3% of the value of the contributions made. Registered pension plans (RPP) were the second most important deduction made by the wealthy, and they too often generated subsidies at almost double the maximum possible rate accorded contributors to the public Canada Pension Plan.

The ostensible reason for these particular deductions is to encourage people to save for their retirement. They benefit, however, quite disproportionately high-income earners. Four-fifths of RRSP contributions and two-thirds of RPP contributions in NL were made by people earning over $70,000 a year in 2015. Meanwhile, the maximum payout permitted by our publicly mandated CPP that year was $13,600 and the average paid out was only $7,700. So instead of developing an adequate public pension plan that would allow all working Canadians to retire with dignity, we use public monies to subsidize retirement savings for those who are wealthy enough to afford it, and who then place those funds in privately-managed investment vehicles. For our banks and the brokerage firms they own, as well as for the wealthy, this is a highly profitable arrangement. For the rest of us, it is quite another matter.

Crediting the wrong solutions

The final major type of anti-social transfers are the plethora of tax credits masquerading as social programmes that have been introduced over the past two decades. These have become the favoured fiscal fix for just about any social problem.

The high cost of pharmaceuticals are affecting your health? Dental work is not covered by Medicare? Young people are too obese? Speculative markets have driven housing prices through the roof? Rural communities cannot afford proper fire-fighting services?  You need home support for an ill relative or a disabled person? Tuition fees just keep rising and you are finding student loans too onerous? Public transit is just too expensive? Youth are spending too much time on computers and phones?

Don’t worry! No matter what the problem is, we have a one-size solution that fits all: a tax credit redeemable against taxes owed. In 2015 we had personal tax credits for: medical expenses, charitable donations, first-time home buyers, infirm children, children’s art and music classes, children’s team sports, volunteer fire fighters, search and rescue volunteers, tuition fees and text books – transferable to a spouse, parent or grandparent, interest on student loans, disabled people, disabled dependents, care-givers, monthly bus passes, donations to provincial and federal parties, adoptions, select household renovations, seniors, low-income spouses, and indeed one for simply being in the paid workforce.

Many of these are capped at amounts that mean they would not really pay for the activity. So, for example, the maximum subsidy for a child playing hockey was $113.50 in 2015. These would help parents who have already made the expensive decision to allow their child to join a team. It is not enough to bring new players to the game. The charitable donation is also skewed in favour of the wealthy, but in a quite different way. The first two hundred in donations generate $30 in federal tax credits, but above that amount the credits roll in at 29% federally and 14.3% provincially on every additional dollar.

In 2015, personal tax credits claimed in NL deprived the federal government of $179 million and the provincial government of $91 million, funds that were sorely needed to address collectively the very real problems we face. So, although these credits are not as skewed towards the wealthy as the other measures discussed, as only $26 million went to those on the sunshine list, they share a common philosophy. Problems are seen as individual rather than social and to be resolved by market-based solutions. Indirectly then, this approach by both promoting neo-liberal solutions and impeding the development of public programmes tailored to our needs ensures that inequality will continue to grow in Newfoundland and Labrador.

Choosing our future

In 2007, the year Danny Williams chose to slash taxes for high-income earners, social transfers from general revenues equalled 43% of the total income of those basking in the sun. By 2015, income from social assistance, child benefits, workmen’s compensation, old age security and guaranteed income supplements had fallen to 19% of the income of those on the sunshine list, despite the addition of 29,140 people to the old age security programme.

The combination of anti-social transfers and Danny Williams’ tax cuts to the wealthiest amongst us cost the provincial treasury $488 million dollars in lost revenue in 2015, while federal anti-social transfers to our wealthy cost a further $407 million. Such privileging of the wealthy over the vulnerable was a choice. To put this choice in perspective, our total expenditure on social assistance that year was $206 million. So, the province could have tripled welfare payments, which would have gone a long way to eliminating the scourge of childhood poverty, and still had money left over to address the highest illiteracy rates in the country. Our democratically elected leaders chose to promote a different vision for our future. Is this really the world we want for our families, friends and communities?