BOUTIQUE TAX CREDITS PUSHING SINGLES INTO POVERTY-Part 2 of 2

BOUTIQUE TAX CREDITS PUSHING SINGLES INTO POVERTY-Part 2 of 2

These thoughts are purely the blunt, no nonsense personal opinions of the author and are not intended to provide personal or financial advice.

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(The last two posts discussed how detrimental boutique tax credits can become to the financial well-being of a country and its citizens.  These were based on ‘Policy Forum:  The Case Against Boutique Tax Credit and Similar Expenditures’ by Neil brooks (abstract).

This post itemizes four personal finance cases showing how certain family units may benefit far more  than other family units like ever singles and singles with children).

CASE 1 – Financial Post Personal Finance Plan, June 11, 2016 – ‘Farm Plan Risky for Couple with 4 Kids’ (financialpost)

Ed age 32 and Teresa 33 have four children ages 5, 3, 1 and newborn in British Columbia. Ed works for a government agency, Teresa is a homemaker.  At age 32 and 33, already have a net worth of $502,000 ($208,000 home not in the Vancouver area fully paid and $177,000 land with $37,000 (21%) mortgage.  They would like to sell their house, move out of town and set up a small farm.  Ed would give up his government job and secure income by selling eggs and produce.  Would like to retire with about $4,000 in present-day dollars and after tax.

Ed brings home $2,680 per month plus tax-free Canada Child Benefit (CCB) $1,811 for their four children, all under the age of 6 for total family disposable income to $4,491 per month (CCB is about 40 per cent of take-home income.  (When all four children are ages 6 to 17, the CCB will be $1,478 a month based on 2016 rates).

Financial Planner’s Recommendations – Maximize Registered Education Savings Plans (RESP), so they can capture Canada Education Savings Grant (CESG) of $500 per beneficiary for total of $7,200 (three per cent annual growth after inflation would generate about $270,000 or about $67,500 per child for post secondary-education).  Advice is that Ed continue working until the age of 60 and when the youngest child is 18.  Advice is also given for purchase of the farm, details of which will not be discussed here.  Each spouse would add $5,500 to their TFSAs for every year until Ed is age 60.

At retirement, if Ed retires at age 60 and Teresa continues as a stay at home spouse, in 2016 dollars they would have a total pre-tax income of $68,495, or $5,137 per month to spend after 10 per cent tax and no tax on TFSA payments.  At age 65, they would have total income of $86,163 with no tax on TFSA payouts and pension and age credits or $6,460 a month to spend.

If they follow financial planner advice for retirement at age 60 and maxed out contributions of RESPs and TFSAs, rough calculations show they will have received approximately $339,000 child benefits, $308,000 tax free TFSA savings  and $28,800 RESP government grants for total $675,800.  This does not include all possible benefits from other sources such as provinces, GST/HST credits and interest generated from investments.  If Ed is deceased before Teresa, as a widower Teresa will receive even more benefits as a survivor with survivor pension benefits.

All things remaining the same their assets at age 60 with farm/house $485,000, RRSP $48,000, and TFSA $349,000 will equal a total of $882,000.  So, at age 60 they will have assets close to millionaire status while paying very little in taxes.  (Financial Post rating – two stars out of five).

CASE 2 –  Financial Post Personal Finance Plan, March 24, 2016  ‘Couple sick of existing like college student are living below their means, but could still use a financial tuneup’ (financialpost)

Ontario couple Mark 45 and Cathy 43 have two kids 9 and 12 and bring home $8,670 per month ($7,000 from jobs and net rent income $1,670 from two rental properties that produce good income  in North).  At ages of 45 and 43 they already have assets of $1,480,272 including RRSPs of $300,322, liabilities of $536,315 for net worth of $943,957. Their two cars are 10 and 15 years old.  They feel like they are living like college students. Mark’s job is not secure and produces a lot of stress. They have not contributed to children’s RESP and 130 year old house requires repairs.

Financial planner advice is to restructure their finances, put money into RESPs for children and maximize RRSPs.  Both spouses have defined benefit pension plans from past employment..

At retirement pensions, RRSP, rental income and CPP/OAS at age 65 would generate  pre-tax income of $105,672.  After age and pension splitting, after-tax income at 16% tax would be about $7,400 a month.  Financial planner states they would have surplus income for travel and pleasure which they now forego, (plus they will still have assets of home and rental properties). (Financial Post rating – four stars out of five).

 

 

CASE 3 – Financial Post Personal Finance Plan, May 21, 2016 ‘Home Ownership Possible but Tight’ (financialpost)

Jessica, age 54 lives in Ontario and has three grown children.  She would like to buy $150,000 house in small town Ontario.  Assets are $40,000 LIRA, $2,400 in TFSA, $10,000 RRSP and $19,000 in company defined contribution pension plan, car $10,000 and debts of $10,700 for $70,400 net worth total.  Her take home pay is $3,315 per month. She puts $240 in TFSA, $100 in RRSP and $300 in non registered account per month. “Her outlook is to retire in 10 years, but that will be struggle.  She has to make a middle income (so stated) go a long way”.

Financial planner advice is to pay off debts in nine months.  Advice is given for purchase of a home with three per cent twenty five year mortgage and saving for retirement but it will be on a financial shoestring.  At retirement and after age and pension credits and 10% tax, she should have take home pay of $2,300 per month.  Final comment:  “her retirement will be hostage to unexpected expenses.  But she will have the security of a home of her own”.  (Financial Post rating two stars out of five).

CASE 4-Public Service Canadian employees

In same job/wage categories with 2013 annual income around $67,000 for never married singles, no children (calculations may vary slightly in provinces regarding tax and other deductions) approximate payroll deductions include income tax $11,000, CPP and EI $3,200, union dues $900, public pension contributions $5,300, RRSP deductions $3,500, parking $1,200, health premiums and insurance $600, for total of $25,700.  This leaves $41,300 take home yearly income or $3,441 per month.

personal finance cases 1

personal finance cases 2

CONCLUSION

The above four cases show four distinctly different cases, two family units with children, one single parent family unit with children and one family ever single family unit.

  • It is astounding how two parent family units with children can accumulate wealth while single parent and unattached person family units struggle to live on on $3,300 and $3,400 after tax dollars per month or $39,600 and $40,800 annually while working and into their retirement years.
  • It is absurd that tax credits should comprise 40 per cent of a family’s income when  they have the ability to become wealthy enough to not have to pay mortgage or rent. In some provinces, singles cannot have assets of more than $7,000 to get affordable housing, so why should families have assets of half a million dollars and still get full child tax credits?
  • It is absurd that a family unit never pay full taxes at any time during child rearing years only to have the ability to retire early at age 60 and have more retirement income than they had during child rearing years  and have paid little or no taxes.
  • It is absurd to claim poverty because of what it costs to raise children when in age thirties and forties family units with children already have assets of half a million dollars and higher.
  • It is absurd that married/coupled family units with children in retirement pay less than 20 per cent in taxes on very healthy retirement incomes because of pension spitting and other credits.  Where is fairness when they pay same or less level of taxes as singles on lower incomes?
  • Financial planner calls Jessica’s income middle class, but she has difficulties living on it.
  • Married or coupled family units possibly have a much better retirement life than singles in family units with and without children.  (Singles with children generally have the greatest financial struggle).
  • Life during working years is just as difficult for singles as it is for married or coupled family units.
  • Government, politicians and families need to consider all family units in financial formulas.  These should be based on equivalence scales to provide financial fairness for all family units.  Financial fairness should include not only income, but also assets.
  • It should also be stated that when examining many of the Financial Post profiles for divorced persons with children, particularly those beyond child rearing years, many appear to have assets beyond $750,000.  How is this possible?  One reason might be inherited wealth.  Second reason which has been stated over and over again in this blog is the ability for married/coupled persons with children family units to gain wealth and, therefore, already have considerable wealth when they are divorced later in life.

LESSONS LEARNED

IT IS INHERENTLY WRONG FOR GOVERNMENTS TO NOT INCLUDE ASSETS AS WELL AS INCOME WHEN DOLING OUT TAX CREDITS.  THESE CREDITS SHOULD BE GIVEN TO THE POOR, NOT THOSE WITH LOW INCOME AND WEALTHY ASSETS.  BETTER YET,  TAX CREDITS SHOULD  BE COMPLETELY ELIMINATED AND REPLACED BY TAXES WHICH ARE BASED ON  INCOME AND ASSETS.

(This blog is of a general nature about financial discrimination of individuals/singles.  It is not intended to provide personal or financial advice).

BOUTIQUE TAX CREDIT INCONSISTENT AND FINANCIALLY DISCRIMINATING (Part 1 of 2)

BOUTIQUE TAX CREDIT INCONSISTENT AND FINANCIALLY DISCRIMINATING (Part 1 of 2)

These thoughts are purely the blunt, no nonsense personal opinions of the author and are not intended to provide personal or financial advice.

Revisions were applied to this post on June 19, 2016.

(Preface:  Every political party has introduced tax credits to give financial benefits to certain members of the population more than others.  However, during the reign of the Conservative party under Prime Minister Stephen Harper, a plethora of tax credits were introduced.  This led to coining of the phrase ‘boutique tax credits’.  Much of the following information has been taken from the ‘Policy Forum: The Case Against Boutique Tax Credits and Similar Tax Expenditures by Neil Brooks’ (brooks).  The Neil Brooks discussion provides an excellent overview of why boutique tax credits are so wrong and discriminatory.  While many families, especially poor families do not benefit from boutique tax credits, ever singles also do not benefit from most of the tax credits.  If there are any negatives to the study it is that financial discriminatory impact of tax credits and expenditures for ever singles and to some extent single parent with children family units is not fully recognized).

The author of this blog has long thought that boutique tax credits are financially discriminatory to singles.  However, we cannot even begin to articulate what Neil Brooks has so eloquently stated in his article.  The entire article is worth a read including the footnotes which provide excellent information on many commentaries and studies of this topic.  For this post, we attempted to condense the PDF from 68 pages to 8 pages, for example, by eliminating the many footnotes – see condensed version at the end of this post.  Blog author’s comments have been highlighted in blue).

This has been a very difficult post to write in terms of length as there is so many excellent points that have been made by Neil Brooks in his study, so be forewarned that the condensed version of the Brook;s article is eight pages long).

PROBLEMS WITH BOUTIQUE TAX CREDITS (AS IDENTIFIED BY BLOG AUTHOR)

SUMMARY OF TAX PROBLEMS:

Problem 1 – Conservative boutique tax credits purposely target traditional family values (single income families). Boutique Tax Credits initiated by the Progressive Conservative Party under Stephen Harper purposely target traditional family values. The party never gives a definition of traditional family values or who is included in the traditional family.  They talk about the family unit as ‘essential to the well-being  of individuals and society’.  A reflection of their belief in the importance of the role of the traditional family in society, another objective was to privilege single-earner families through the tax system (page 76).   (Blog author’s comments:  Ever singles are generally not included in these boutique tax credits).

Problem 2 -tax expenditures introduced by the Conservatives of Boutique Tax Credits were targeted at relatively narrowly defined groups of potential Conservative voters (page 67).  Finance Minister’s budget moved to put the finishing touches on building a new Conservative coalition through a series of tax cuts, rebates and other subsidies aimed at select segments of the voting population  (page 73).   By enacting these tax expenditures, as opposed to across-the-board tax cuts, the Conservatives were able, at a much lower cost, to favour middle-class families with children, middle-income and well-to-do seniors, and other much more narrowly targeted groups ( page 77).   (This is what this blog author calls ‘selective’ democratic socialism).

Problem 3 – Tax Credits and Expenditures ignore traditional tax criteria that apply to technical tax provisions, namely, equity, neutrality, and simplicity (page 69).

Problem 4 Conservatives were “pleasing their electoral base with . . . dollars in pockets for boutique programs rewarding wealth and socially conservative values  (page 69).  An example is pension splitting where wealthy married/coupled persons benefit the most, poor and married or coupled persons with equal incomes benefited to a lesser extent.(Blog author’s comment:  Ever singles and divorced/separated persons are not able to use this tax credit).

Problem 5Tax Expenditures Can Serve as a Bribe to Potential Voters (page 77)    By enacting these tax expenditures, as opposed to across-the-board tax cuts, the Conservatives were able, at a much lower cost, to favour middle-class families with children, middle-income and well-to-do seniors, and other much more narrowly targeted groups.

In 2011, the average taxpayer with an income between $100,000 and $150,000 paid $3,633 less in taxes.  The average taxpayer with a very modest income of between $20,000 and $25,000 saw only $475 back in the same period.  These numbers are before the impact of the new Family Tax Cut and the doubling of the Child Fitness Tax Credit – both of which are likely to accelerate the same trend.  (/canada2020).   (Blog author’s comment:  Poor families and ever singles including seniors are least likely to benefit (senior-singles-pay-more).

Problem 6 –  It is very difficult to get rid of tax expenditures or tax credits once they are  implemented.  Political parties are reluctant to eliminate them even if they are discriminatory for fear of losing votes.  Also, tax expenditures are extremely hard to repeal, even the truly awful ones, since eliminating a tax expenditure will be framed as a tax increase (page 78).   (Blog author’s comments:  Will it ever be possible to eliminate the pension splitting from which wealthy families benefit the most?  And, who is paying for this?)    Neil Brooks calls pension splitting an “outrageous pension income splitting scheme that should be repealed and the revenue used to enrich, or reduce the clawback, of the old age security pensions” (page 122).   Reducing clawback will not solve problem of inequality if clawback is not increased for singles and reduced for married or coupled persons through income-testing.

Problem 7 Tax expenditures that are relief measures transfer income from one group of individuals to another.  (Blog author’s comment:  Instead of these relief measures targeting lower income individuals and families, many have benefited wealthy families the most.  Ever singles benefit the least).

Problem 8Psychological impact of tax credits or expenditures (The Public Appears to Favour Policies Framed as Tax Breaks-page 83).  people’s psychological biases predispose them to favour tax expenditures, certainly over direct spending programs……label—tax relief versus direct outlay—matters.”  These studies are also consistent with other survey results in which respondents admit to have benefited from tax expenditures and yet deny ever having used a government social program.(Blog Author’s comments:  The reverse effects of Tax Credits and Expenditures are often not discussed, that is, the anger and financial despair that some citizens feel towards those that are receiving more of the benefits without, for example, application of income-testing  principles).

Problem 9 – Tax Expenditures Reduce the Political Pressure for Public Programs (page 84)  One of the Conservatives’ major political goals has been to resist the public provision of social programs. Hence, another explanation for the popularity of tax expenditures under the Conservatives is that they were a step forward in implementing a broader political project, a private-sector welfare state.Tax credits for private caregiving work reduce the political pressure for publicly provided long-term care facilities.. …. Supplementing the wages of low-income workers with a tax credit reduces the pressure to offer public service jobs to the unemployed…..The tax subsidization of tuition fees, textbooks, and interest on student loans reduces the political pressure for more direct government support for universities.

Problem 10 – Tax Expenditures Make the Tax System Less Transparent (page 94) and Tax Expenditures Divert the Resources of the CRA and Create Administrative Problems That Damage Its Reputation (page 94)

    • Complexity and number of tax credits make them very difficult to interpret and lawyers and accountants become intimately involved in their implementation.  As a result attention is directed towards interpretation of these credits instead of tracking abuse of the tax system.
    • Many are badly designed (page 96)
    • Tax Expenditures Often Do Not Serve Important Objectives of Government Policy (page 97)
    • Tax Expenditures Often Do Not Achieve Their Objectives Equitably (page 104)
    • upside-down effect of tax deductions
    • all tax credits should be refundable.

(Blog author’s comment:  Past posts have talked about upside-down financial effects (housing),  and tax credits should be refundable and income-tested.  To have someone else confirm these facts is reassuring.  It would be nice if political parties and governments also realized these facts.)

Problem 11 Education – Conservatives completely exempted certain scholarships and fellowships from tax in their first budget in 2006.  The exclusion of a $10,000 scholarship for a low-income student who has no other income provides that student with no implicit subsidy. However, the same exclusion will provide an implicit subsidy of $2,200 to a higher-income student in the 22 percent tax bracket. If the point of the exclusion was to benefit needy students, this upside-down effect is perverse (page 104)

Problem 12 – Low income individuals and families benefit the least.   A credit that can be offset against a taxpayer’s tax liability is of no value to a low-income person who has no tax liability because his or her income is less than the amount of the basic personal tax credit, for example. Hence, all tax credits should be refundable (page 106)…..In terms of delivering subsidies equitably through the tax system, if the primary purpose of a tax credit is to incentivize or assist low- or middle-income individuals, entitlement to the credit should be income-tested so that it vanishes when a taxpayer’s income reaches a certain amount (page 108).  Income-testing so that it vanishes when income reaches a certain amount should vanish quicker for for married or coupled persons than singles as it costs more for singles to live than married/coupled persons as a family unit.

Neil Brooks has also stated that analysis of  financial formulas such as distributional tables should show beneficiaries by income class, gender, household type, age cohort, and geographical region.  This is based on known facts that females and disadvantaged persons based on race likely benefit least from tax credits (page 111). (Blog author’s comments:  Analysis of household types is important as ever singles and early divorced singles are likely to benefit the least from all tax credits).

Problem 13 – The proliferation of tax expenditures, such as the boutique tax credits, gives rise to significant rent-seeking social costs. (page 114) and encourages relevant interest groups to lobby for analogous tax expenditures. (page 114).  (Blog author’s comments:  Powerful lobby groups such as families and seniors often lead to tax credits and expenditures targeting these groups.   Ever singles do not have this kind of financial and lobbying power.  As a result they are likely to receive less of these benefits).

Problem 14 – Boutique tax credits are useless when they target everyone in a group, for example, seniors.  Giving age credit to all seniors benefits wealthiest seniors more as poor seniors do not have enough income to apply tax credits (page 122).

Problem 15 – This problem as been added by the blog author, that is there is a compounding effect to tax credits when they are applied one on  top of another for specific groups.  An example is when child tax credits are given to married or coupled family unit, who then are also able to use pension splitting credits as seniors.  As a result, married or coupled persons with children are able to gain more wealth than ever singles who are not able to use any of these credits.

Problem 16 –  This problem has been added by the blog author,  that is the so called ‘merry go round credits and expenditures which disappear and reappear.  Some citizens can never  get on the merry go round because their place in line keep getting pushed back or they are kicked out of the line or they excluded from the lines.  For example, there are some parents who have never benefited from any the child tax credits because they had no children during implementation of some tax credits only to have these tax credits abolished when they do have children.

CONCLUSION

(Blog author’s comments: it would seem that a solution to the elimination of Tax Credits and Expenditures with fairness, equality, neutrality and simplicity for all, perhaps, should be to provide three government funded basic rights: healthcare, college/university education, and universal day care).

THECASEAGAINSTTAXCREDITSANDOTHEREXPENDITURESCONDENSED

This blog is of a general nature about financial discrimination of individuals/singles.  It is not intended to provide personal or financial advice.