REGRESSIVE TAX EXPENDITURES FINANCIALLY DISCRIMINATE AGAINST SINGLES AND POOR FAMILIES
(These thoughts are purely the blunt, no nonsense personal opinions of the author about financial fairness and discrimination and are not intended to provide personal or financial advice.)
This purpose of this blog has been to highlight the gross financial discrimination singles and poor families face in this country. However, many including governments, families and married persons fail to understand or choose to ignore the real financial truth. The discovery of information on regressive tax expenditures has provided an “OMG moment” because it supports what we have been saying since the beginning of this blog. It provides solid information that poverty is not a figment of the imagination and is not created by the poor. Instead, wealth has been purposefully created for the top 50% of Canadians by government policies, especially regressive tax expenditures.
Blog article discussion on “Out of the Shadows” appears at beginning of article. Reproduction of “Will federal tax review lay the groundwork for real tax reform in the next budget?” appears at the end of this article.
The Canadian Centre for Policy Alternatives (CCPA) “Out of the shadows” (loopholes) report published December, 2016 ‘examines the distribution of benefits from Canada’s 64 personal income tax expenditures where data is available, ranking them from least to most progressive. A tax measure can be said to be relatively progressive if more than half its benefits go to the lower half of income earners. Likewise, a tax measure is regressive if most benefits go to Canada’s higher-income earners’. (It should be noted that the 64 expenditures by no means covers all of the possible expenditures as evidenced by those not reviewed that are listed in Appendix II Excluded Tax Expenditures).
EXECUTIVE SUMMARY -Excerpts from CCPA report pages 5 – 7
ONLY 5 OF THE 64 EXPENDITURES ARE PROGRESSIVE
Only five – the working income tax benefit (only one—the Working Income Tax Benefit—exclusively supports Canada’s working poor), non-taxation of the guaranteed income supplement, non-taxation of social assistance, the refundable medical expense deduction, and the disability tax credit can be described as relatively progressive, with a maximum benefit of $1,100 or less.
THE REMAINING 59 EXPENDITURES ARE REGRESSIVE AND COST $100.5B IN 2011
The remaining 59 regressive tax expenditures cost the federal government $100.5 billion in 2011 while providing more benefit to those above the median individual income level.
FIVE MOST REGRESSIVE TAX EXPENDITURES PROVIDE 99% BENEFITS TO TOP HALF
The five most regressive tax expenditures provide 99% or more of their benefit to the upper half of income earners. These tax expenditures pension income splitting, dividend gross-up, stock option deduction, credit for partial inclusion of capital gains, and foreign tax credit cost the government between $740 million and $4.1 billion each per year, totalling $10.4 billion in 2011. Four of these five tax expenditures have no maximum individual value, while pension income splitting where 83% of the benefit goes to the top income decile maxes out at $11,700 per person. That is 10 times the maximum benefit to Canada’s poorest from the five progressive tax expenditures. If those loopholes were closed, the federal government could use that money to eliminate university tuition and create an affordable national child care program.
IN 2011 TAX EXPENDITURES COST ROUGHLY AS MUCH AS ALL INCOME TAXES COLLECTED
In total, personal income tax expenditures cost $103 billion in 2011, which is roughly as much as all income taxes collected that year ($121 billion). It is also not much less than what the federal government spends annually to pay for the Canada Pension Plan, employment insurance, the GST credit, the universal child care benefit, the Canada child tax benefit and the national child benefit supplement combined ($113 billion).
TWO TAX SYSTEMS, SHADOW SYSTEM FOR THE RICH, THE OTHER FOR POOR AND MIDDLE CLASS
Existing tax expenditures, on the other hand, provide on average a $15,000-per-person benefit to the richest Canadians. By comparison Canada’s poorest Canadians receive only $130 from tax expenditures and $1,130 from all federal income transfers. In essence there are two federal transfers systems in Canada: one for the poor and middle class, and another shadow transfer system for the rich. Each system transfers roughly the same amount of money.
RECOMMENDATIONS RE MODEST STEPS TO ELIMINATING MOST REGRESSIVE AND EXPENSIVE TAX EXPENDITURES
- The annual tax expenditures report from Finance Canada should include the distribution of tax expenditures across the income spectrum.
- Tax expenditures should be included explicitly as costs in federal government financial reporting, including the main estimates, federal budget and fiscal updates.
- The federal government should target annual savings in tax expenditures of 5% (worth $5.1 billion a year) through the closure, capping or phasing-out of the most regressive loopholes. This would take 20 years for total elimination.
- Policy-makers should continue to examine tax expenditures through a broad income inequality or vertical equity lens, and to consider the totality of these expenditures as a grossly unfair shadow transfer system for Canada’s richest tax filers.
REPORTING OF EXPENDITURES AND TRANSFERS OCCUR UNEQUALLY
(Page 9) Reporting of expenditures versus transfers – …. Moreover, while the cost of tax expenditures are individually estimated, they are not evaluated in the aggregate or compared to other large federal expenditures like federal income transfers. The latter are updated regularly and incorporated into public documents like the federal budget, main estimates and fiscal updates. Tax expenditures, on the other hand, are relegated to federal tax expenditure and evaluation reports that are published separately and frequently overlooked.
ASSESSING PROGRESSIVITY VERSUS REGRESSIVITY
(Page 10) Progressivity versus regressivity-…..While it may be tempting to think of one set as progressive and the other regressive based on the types of activities they target, this is not how tax systems are generally judged. Assessing Canada’s tax expenditures through a vertical equity lens allows us to precisely determine what income groups benefit the most.
NET WORTH AND ASSETS LEFT OUT OF ANALYSIS
(Page 11) Report readily admits that ranking scheme focuses exclusively on current annual income and ignores other potential measures of progressivity that one might consider, such as measures based on wealth or lifetime earnings.
Blog author’s comment:
In this blog we have commented many times on how tax expenditures are handed out to the wealthy when they don’t need it because their net worth and assets have not been taken into consideration in financial formulas.
TAX EXPENDITURES PERCENTAGE OF BENEFITS TO BOTTOM HALF
(Page 12) Table 1 shows 2011 Tax Expenditures Cost, Distribution and Progressivity and % of the 64 benefits to bottom half. (The percentage of each individual expenditure is generally below 30% to the bottom half.)
FIVE MOST PROGRESSIVE (VERTICALLY EQUITABLE) TAX EXPENDITURES
(Page 15-17) Only five of Canada’s 64 expenditures are more beneficial for lower-income earners and therefore more positive in terms of correcting income inequalities. These are the working tax credit, non-taxation of the GIS and spousal allowance, refundable medical expenses, non-taxation of social assistance benefits and disability tax credit…..These five most progressive tax expenditures have a few things in common. First, there is either an explicit maximum individual benefit or the value is based on another program that itself is capped…..Second, the maximum benefit is paid out in the lower half of the income spectrum and tapers out afterwards…..Finally, three of the five tax expenditures are related to seniors, including the non-taxation of GIS benefits, the disability tax credit and the refundable medical expenses supplement…..
Blog author’s comment:
This is the way assistance for low income Canadians should work, thus promoting financial fairness for all Canadians.
FIVE MOST REGRESSIVE (VERTICALLY INEQUITABLE) TAX EXPENDITURES
(Page 18) ….The vast majority provide more benefit to the richest half of Canadians. To narrow it down to five (dividend gross-up and tax credit, partial inclusion of capital gains, foreign tax credit for individuals, employee stock option deduction, and pension income splitting), those tax expenditures providing 99% of their benefit to the highest-earning Canadians are isolated (14 of 64 expenditures) then sorted by cost. The first thing that stands out in Figure 2 is the marked difference in distributional impact of Canada’s regressive and progressive tax expenditures. The benefits of the former (regressive) are clearly concentrated in the richest decile, with little or no benefit leaking down even to Canada’s middle-income earners and absolutely nothing for the poorest Canadians. In the latter (progressive) category, benefits generally peaked in the third or fourth deciles, but they also spread beyond this zone, frequently also into the upper deciles.
PENSION SPLITTING MOST REGRESSIVE TAX EXPENDITURE
(Page 18-19) The most regressive tax expenditure, which comes with a cost to government of $975 million annually, is pension income splitting. This tax measure allows a couple to shift up to half the pension income of the higher-earning spouse to the lower earner at tax time. The lower-earning spouse would still pay tax on the amount transferred, but at a lower marginal rate. (Figure 4) This transfer effect is why the distribution shows negative bars in deciles four through seven: lower earners will pay higher taxes as pension income is transferred, but presumably net family taxes will be lower.
Benefits from pension income splitting are concentrated at the very top, with 83% of the value of the expenditure going to the richest decile. In contrast with the other most regressive tax expenditures, there is maximum benefit to this tax expenditure of $11,675 when $128,800 of pension income is transferred from a higher earner to a spouse with no income. While capped, this maximum benefit is 10 times more generous than any of the five most progressive tax expenditures.
Blog author’s comment:
Re pension splitting zero per cent (0%) of senior single person households and equal income married or coupled partners receive any monies from this expenditure. Poor families (bottom half) receive virtually no benefit because they have less income to split than the wealthy.
DIVIDEND GROSS-UP, STOCK OPTION DEDUCTIONS AND PARTIAL INCLUSION OF CAPITAL GAINS
(Page 19-21) There are commonalities among these regressive loopholes whose benefit is most concentrated among the richest half of Canadians. For one thing, three of the five regressive expenditures are related to capital ownership; that is to say, to the ownership, purchase and sale of stocks, real estate, businesses and the like. This is not an activity most Canadians take part in, let alone have to worry about at tax time. Second, four of the five tax expenditures have no maximum value and the fifth has a very high maximum. This also has the effect of concentrating benefits among those with more money to spend.
Blog author’s comment:
These three tax loopholes are available only to the wealthiest Canadians because they are the the only ones with the means to partake of these loopholes. When the wealthiest Canadians have these three tax loopholes why do they need even more loopholes? Article “Will federal tax review lay the groundwork for real tax reform in the next budget?” at the end of this blog post provides a very good comment on what could be done to reduce these tax loopholes.
Dividend gross-up and tax credit
(Page 24) The fifth most expensive tax expenditure is the dividend gross-up and tax credit, which cost $4.1 billion in 2011. As discussed above, the credit is also among the top five most regressive expenditures, with 92% of the benefits going to the richest decile.
(Page 25) In another comparison, recovering three-quarters of what is lost to the dividend gross-up each year could eliminate tuition for undergraduate university students, or it could halve the cost of long-term care for aging Canadians. Tax expenditures are the same as any other real government spending: they are a fiscal choice governments make and can unmake if they want to. The money that today goes to padding the incomes of Canada’s rich could tomorrow go to eliminating poverty and reducing income inequality.
(Page 20) This tax expenditure gives shareholders of Canadian firms receiving a dividend a credit for what the corporation already paid on its profits, so that those profits are not “double taxed.”…..Seen in this light, Canada’s tax expenditure for corporate dividends looks very much like special treatment for the already very wealthy. The dividend gross-up has no maximum value, as it is related to the amount of Canadian eligible dividends paid to any individual.
Blog author’s comment:
Re: Good discussion on “Big 3” regressive tax expenditures (dividend gross-up, stock option deduction and credit for partial inclusion of capital gains) that overwhelmingly benefit rich Canadians is given in article “Will federal tax review lay the groundwork for real tax reform in the next budget?” shown at the end of this blog post. (These expenditures alone cost a combined $12 billion annually – more than enough to pay for, say, a national pharmacare program).
FIVE COSTLIEST TAX EXPENDITURES
(Page 22-25) Though they may not be the most regressive, based on the criteria established above, it is worth commenting on how all five of the most costly personal tax expenditures (Credit for the Basic Personal Amount, net Registered Pension Plan or RRP expenditure, net Registered Retirement Savings Plan or RRSP expenditure, non-taxation of Capital Gains on Principal Residences, and Dividend Gross-up and Tax Credit) still provide far higher benefits to those in the upper income deciles than those in the lower half of Canadian income earners (see Figure 3).
At the top of this list is the basic personal amount all Canadians can claim as tax-free income on their tax forms ($10,527 in 2011). This tax expenditure costs an incredible $29 billion a year. To put that number in perspective, roughly a quarter of every tax dollar collected in 2011 was returned through the basic personal amount. This tax expenditure is roughly equivalent to having an additional tax bracket under $10,527 at 0%, despite the fact that the other tax brackets are not considered tax expenditures. That being said, changing the basic personal exemption would have major implications. Besides being the most expensive, this tax expenditure is the most evenly distributed, at least in this category, with a third of the benefit going to the bottom half of Canadians. The maximum benefit in 2011 was $1,579, accessible to everyone who paid income tax, and received by virtually everyone in the fifth decile and above. The universal application of this tax expenditure to all taxpayers, particularly in the top half of the income distribution, is the reason it is so expensive.
The second and third most expensive tax expenditures are the registered pension plans (RPP) and the registered retirement savings plans (RRSP), which cost the government $16 billion and $9 billion a year respectively. The benefits of these tax expenditures are slightly more concentrated among Canada’s highest-income earners, who receive 57% of the benefit from RPPs and 63% of the benefit from RRSPs, and in both cases there is little benefit outside of the top three deciles.
(The complete discussion of RPP and RRSPs in the report has not been included here).….It is often difficult to contextualize the opportunity costs of spending billions of dollars on a tax expenditure. For comparison’s sake, the combined net loss from the RRSP and RPP tax preferences is $26 billion a year. This is three times the $9 billion spent on the GIS and spousal allowance, which are dedicated to reducing poverty among low-income seniors. By spending only a third of the government revenues lost to RRSP and RPPs every year we could eliminate seniors’ poverty in Canada.
To evaluate the effectiveness of this tax-shifting strategy, Figure 4 shows the distribution of benefits for contributors compared to the distribution of RRSP withdrawals. Assuming that contribution and withdrawal trends continue in terms of percentage benefit, and not in terms of aggregate amounts, it is clear the richest decile will benefit the most. The richest decile sees 57% of the benefits from contributions, but only pays back 31% of the tax on withdrawals. RPPs have a slightly worse distribution, with the top two deciles seeing a net lifetime benefit. Even on a lifetime basis, instead of a cash-flow basis, the top decile sees the most benefit given current trends.
The fourth most expensive tax expenditure, non-taxation of capital gains on a principle residence, cost the government $4.7 billion in 2011. This tax expenditure is of very little use to the bottom half of the population, which sees 10% of the benefits.
The fifth most expensive tax expenditure is the dividend gross-up and tax credit, which cost $4.1 billion in 2011. As discussed above, the credit is also among the top five most regressive expenditures, with 92% of the benefits going to the richest decile.
…..Tax expenditures are the same as any other real government spending: they are a fiscal choice governments make and can unmake if they want to. The money that today goes to padding the incomes of Canada’s rich could tomorrow go to eliminating poverty and reducing income inequality.
TAX EXPENDITURES SHOULD BE TREATED AS A SYSTEM
(Page 26 – 28) 26 Beyond ComparIng Canada’s individual tax expenditures for their progressivity or regressivity, we should be treating these tax expenditures as a system, as we might federal income transfers. In that case, we can apply the same equity lens to the tax expenditure system in the aggregate to determine if the totality of these measures increase or decrease income inequality in Canada.
Based on the analysis above, the answer should be clear: if 59 of Canada’s 64 tax expenditures are regressive (i.e., they benefit the upper half of income earners more than the lower half), we should expect the system as a whole to fail the equity test. In fact, the total cost of these regressive measures is astonishing….As such, only broad conclusions are drawn from the aggregation of tax expenditures. From a policy perspective, if raising money from closing tax expenditures is the goal, a piecemeal approach is unlikely to provide as much benefit as a more comprehensive tax policy reassessment…..
The standout conclusion we come to from aggregating all personal tax expenditures is that that system is very expensive, costing the government $103 billion a year. As shown in
Table 2, this is only slightly less than the $121 billion collected in federal personal income taxes in 2011. Think about that: almost every dollar collected in personal income taxes is immediately given back through tax expenditures. Put another way, if revenues currently forgone through personal income tax expenditures were collected, the federal government would roughly double the amount of money at its disposal for other priorities.
…..While both tax expenditures and traditional income transfers result in effective transfers and are of roughly the same aggregate cost, their distribution differs dramatically, as shown in Figure 5. Federal transfers peak in the fourth decile for those with incomes between $17,000 and $22,000. The average combined federal transfer is $8,400 a person, which is mostly made up of transfers from CPP and GIS/OAS.
Blog author’s comment:
This author has talked about tax loopholes being addressed only in a vertical fashion by governments and policy makers. This has created financial silos (continued-financial-illiteracy) where impact of one loophole is not assessed in totality with other loopholes. However, loopholes are compounded on top of loopholes. For, example wealthy get full OAS who then put this money into their Tax Free Savings Accounts (TFSA) and then don’t have to report investment income from TFSA as income. Financial formulas should be assessed both on a vertical and a horizontal level. Add link on financial silos.
FEDERAL TAX TRANSFERS ARE SMALL FOR LARGEST COMPONENT OF SINGLES AND LONE PARENTS
(Page 28 – 29) FEDERAL TRANSFERS are surprisingly small for the poorest deciles when you consider that most programs target the poorest and clawback transfer payments as incomes rise. There are two reasons for this. The first is that the distribution is based on individual and not family incomes (see Appendix I for more on this). So someone earning no income would fit in the poorest decile even if their spouse made a million dollars a year.
The second, more worrying reason is that many of those in the poorest deciles are either single parents or single adults. Almost all of the federal transfer money paid to the poorest two deciles is for child-related benefits and goes mostly to single-parent families where the parent is almost always a woman. For single adults, or adult couples without children who are not seniors, the only available federal transfer is the GST credit, which maxed out at $253 per person in 2011.
FEDERAL TRANSFERS peak in the fourth decile, but they are slightly skewed to richer Canadians as they provide benefits all the way to the top of the income spectrum. In fact, those in the richest decile, with incomes over $84,000 a year, receive slightly more on average from federal transfers ($1,300) than the average person in the poorest decile ($1,200). This is entirely due to higher CPP payments to the top deciles. Those in the ninth decile, where incomes sit between $61,000 and $84,000 a year, receive on average $2,500 a person twice as much as those in the poorest decile.
TAX EXPENDITURES, on the other hand, have a dramatically different distribution, with benefits highly concentrated (39%) in the richest decile, where the average transfer is $15,000 a year. That amount is double the $8,400 those in the fourth decile receive in government transfers (largely to support low-income seniors). Put another way, tax expenditures provide 11 times more benefit to the richest people in Canada than government transfers do for the poorest (those making under $4,000 a year).
From an aggregate perspective, therefore, the $103 billion lost annually to tax expenditures is an embarrassing failure of Canadian tax policy. With the same amount of money the government could send an annual cheque of at least $21,800 to all Canadians, completely eliminating poverty. The money spent on tax expenditures also has an opportunity cost: it means funds are not available for physical infrastructure or to improve social program, both of which have a much higher economic multiplier in driving economic growth.
Blog author’s comment:
This blog is based on highlighting the financial discrimination of singles (ever singles and divorced early in life persons). The above segment is refreshing in that it supports what we have been saying over the past few years.
TWO EQUAL SYSTEMS OF EQUAL VALUE-TAX INCOME TRANSFERS SYSTEM FOR POOR AND MIDDLE CLASS AND TAX EXPENDITURE SYSTEM FOR THE RICH
(Page 30) In essence, we have in Canada two federal support programs of roughly equal value: income transfers for the poor and middle class, and tax expenditures for the rich. The first (federal transfers) benefits the lower-middle class the most, but spreads widely from the very poorest to the very richest. The second (tax expenditures) benefits mainly those at the top, a shadow transfer system for Canada’s rich.
CONCLUSION (Page 31)
The unequal dIstributIon of tax expenditures remains a critically under-examined problem in Canada, particularly given their enormous cost on par with both personal income taxes collected and total federal government transfers and contribution to income inequality. Given the sheer size of these tax expenditures, it is amazing they are not listed as government spending in federal budgets and fiscal updates.
For every dollar moved into one of Canada’s individual tax expenditures, an equivalent amount is foregone in federal revenues. Since there is no cap on many of the most expensive and most regressive tax expenditures, this arrangement skews benefits toward Canada’s richest, who are more likely to have extra money to put aside (for retirement, investments, etc.). Lifetime caps, as exist for the small business capital gains exemption, would help smooth out the distributional inequities in these expenditures and lower costs for government.
Tax expenditures individually are not purposeless. Sometimes they are meant to encourage behaviour, such as saving for retirement. Sometimes, as with the dividend gross-up, they are driven by concerns about equity (the “double taxation” of dividend income in this case), though almost always in the horizontal sense of treating similar people equally under the tax code. The vertical inequity of this measure, 91% of whose benefits go to the richest 10% of Canadians, is totally ignored.
APPENDIX I – METHODOLOGY (Page 33-36)
(Reading this section in its entirety is worthwhile to understand how statistics were used to develop the report – the following is a brief excerpt from the report).
All values in this report are in 2011 dollars. All tax rates, tax expenditure values, transfers and any other values are as they were in 2011 unless otherwise stated….
All distributional analyses in this paper are conducted for individuals 18 and over based on total income before taxes but after transfers, not families. Examining individual distribution may overstate the concentration of people in the bottom deciles, as it will split up families where one spouse earns an income and the other does not. In a situation where the former takes home, say, $1 million annually, they would end up in the top decile while the latter is in the lowest decile in this distribution. This may tend to overstate the destitution of those in the lowest income deciles on an individual basis. However, taxes are evaluated on an individual basis and Canada Revenue Agency data, in particular, is only available on an individual basis. Future research could better examine the distribution of tax expenditures across the family income distribution in Canada…..
Third, economists are particularly concerned about richer tax filers attempting to avoid any tax changes, whether from marginal bracket rate increases or changes in tax expenditures. There is particular concern that wealthy Canadians will migrate, for instance to the U.S., in a “brain drain” response to higher Canadians tax rates. Natural experiments have shown a surprising lack of migration in response to higher top marginal tax rates…..
A more likely reaction to the closure of certain tax expenditures might be an increased use of related alternatives. For instance, if RRSP contributions were no longer tax deductible, wealthy Canadians might switch those contributions to TFSAs, where a tax preference still exists. This switching of moneys between tax expenditures may mean the total cost would not be recovered even if that tax expenditure were completely closed. The more tax expenditures that exist, the more choice there is as any one tax expenditure is closed. However, as fewer tax expenditures exist, the more likely it is that the closure of any additional tax expenditure will lead to the full cost of the tax expenditure being recovered. Behavioural reaction will tend to decrease the overall cost of tax expenditures. Neither the Finance Canada reporting on tax expenditures nor this report attempts to estimate the behavioural reaction to the closure of tax expenditures.
The final possibility for avoiding taxes, besides moving and switching tax expenditures, is simply to avoid them illegally. The solution here is more straightforward: hire more tax auditors to provide better enforcement of the rules that already exist. More disclosure and international co-operation of tax agencies is also critical in closing the potential for abuse in tax havens.
APPENDIX II EXCLUDED TAX EXPENDITURES (Page 41)
Table 4 details tax expenditures that are not analyzed in this report (approximately another 64). In general, these were excluded either because distributional data or else the estimated value of the expenditure were not available. A few expenditures were excluded for other reasons……Finally, as this report only focuses on expenditures related to personal income taxes, expenditures involving businesses were also excluded from the analysis (see the details in Table 4).
HIGHLIGHTING PROBLEMS OF MAXIMUM INDIVIDUAL VALUE RE TRANSFERS VERSUS EXPENDITURES
While income transfers are tightly controlled as to the maximum value a person can receive and who in the income spectrum receives them, many of the most regressive and expensive tax expenditures do not have a maximum individual value. (Page 15-17) There is either an explicit maximum individual benefit or the value is based on another program that itself is capped…..Second, the maximum benefit is paid out in the lower half of the income spectrum and tapers out afterwards.
(Page 18) The first thing that stands out in Figure 2 is the marked difference in distributional impact of Canada’s regressive and progressive tax expenditures. The benefits of the former (regressive) are clearly concentrated in the richest decile, with little or no benefit leaking down even to Canada’s middle-income earners and absolutely nothing for the poorest Canadians. In the latter (progressive) category, benefits generally peaked in the third or fourth deciles, but they also spread beyond this zone, frequently also into the upper deciles.
HOW INCOME IS REPORTED IN THE REPORT – (BLOG AUTHOR’S COMMENT)
A major shortfall of this report is using income deciles based only on individuals.
Information from page 33 states ‘All distributional analyses in this paper are conducted for individuals 18 and over based on total income before taxes but after transfers….. However, taxes are evaluated on an individual basis and Canada Revenue Agency data, in particular, is only available on an individual basis. Future research could better examine the distribution of tax expenditures across the family income distribution in Canada…..”
(Example: Figure 2, Page 19) For the CCPA report it appears income deciles are divided into nine deciles for income from $0 to $84,000 and tenth decile for incomes over $84,000. The sixth decile shows values of $30-$38K, seventh percentile $38-$48K, eighth decile $48-$61K, ninth decile $61-$84K and tenth decile $84K+.
It is possible to obtain some information on income levels for single person and two or more person households from Statistics Canada – Upper income limit, income share and average income by economic family type and income decile (statcan).
In 2016, income single person household reported in constant dollars were total decile income $35,400, sixth decile $31,000, seventh decile $37,700, eighth decile $45,400, ninth decile $57,800 and highest decile $96,800.
In 2016. incomes for two or more person households reported in constant dollars were total deciles $89,600, sixth decile $84,300, seventh decile $97,400, eighth decile $113,600, ninth decile $137,400, and highest decile $211,600.
(Constant dollars refers to dollars of several years expressed in terms of their value (“purchasing power”) in a single year, called the base year income).
The CCPA report uses $84K+ as the dollar value for the tenth decile, whereas, Statistics Canada shows it not possible for single person households to achieve incomes of $84K+ for any of the deciles below and including the ninth decile. Incomes of $84K+ for two or more person households can be achieved in the sixth decile.
Stated another way Statistics Canada (statcan.gc.ca/n1/daily-quotidien) states couples with children had a median after-tax income of $94,500 in 2016, up 5.6% from 2012. Lone-parent families had a median income of $44,600, while couples without children had a median after-tax income of $76,400. Unattached non-seniors had a median after-tax income of $30,400.
Vanier Institute, Modern Family finances published Jan., 2018 states individuals in Canada whose incomes were in the top 10% had a total median before tax income of approximately $93,700 in 2015 ($75,200 after taxes). This represented approximately 3.1 million Canadians in 2015.
The CCPA report states more work needs to done on separating incomes of single person households from two or more person households. From page 28, a more worrying reason is that many of those in the poorest deciles are either single parents or single adults. Almost all of the federal transfer money paid to the poorest two deciles is for child-related benefits and goes mostly to single-parent families where the parent is almost always a woman. For single adults, or adult couples without children who are not seniors, the only available federal transfer is the GST credit, which maxed out at $253 per person in 2011.
Based on the above information on income deciles, more work needs to be done analyzing singles versus family incomes to achieve financial fairness for singles and lone parents.
FINAL COMMENTS BY BLOG AUTHOR
In 2011, 39% of the benefit of all tax loopholes went to the richest 10% while the bottom half of income earners only saw 16% of the benefit.
As stated on page 30, federal transfers benefit the lower-middle class the most, but spreads widely from the very poorest to the very richest. Tax expenditures benefit mainly those at the top, a shadow transfer system for Canada’s rich.
As stated on page 25 of the above report tax expenditures are the same as any other real government spending: they are a fiscal choice governments make and can unmake if they want to. The money that today goes to padding the incomes of Canada’s rich could tomorrow go to eliminating poverty and reducing income inequality.
Also, transfers are tightly controlled since there is a maximum value a person can receive and who receives them. Many of the most regressive and expensive tax expenditures do not have a maximum individual value.
Examining tax expenditures by income inequality alone will not totally solve the inequality problem. Net worth and assets as well as income needs to be included in financial formulas.
The financial inequality that exists between single person households and two or more person households and between poor and wealthy families needs to be addressed through inclusion of net worth and assets, Market Basket Measure and maximum individual value limits in financial formulas. These should be included in an aggregate format, not on an individual basis to reduce distributional inequities.
Wealthy persons should not be receiving tax expenditure monies when they don’t need it. Net worth and Assets added to financial formulas would help to ensure monies are distributed in a graduated format and gradually diminishing to zero for the wealthy.
Market Basket Measure (MBM) (gov.br) should also be used in financial formulas to ensure financial equality based on number of person in households so that marital status bias with and without children is excluded. It costs more for singles to live than two person households without children. This scale counts an unattached individual as 1.0, and adds 0.4 for the second person (regardless of age), 0.4 for additional adults, and 0.3 for additional children.
Pension income splitting, a blatantly financial discriminatory program against single person households, was implemented in 2006 by the Conservatives, specifically Stephen Harper. Market Basket Measure shows it costs singles more to live, so why was pension splitting given to married or coupled households and to be used by primarily wealthy couples?
Maximum individual value limits on tax expenditures gradually reduced to zero for the wealthy would ensure financial equality and fairness. Tax Free Savings Accounts (TFSA) were introduced in 2008, again by Conservatives, namely Stephen Harper. This has to be one of the most egregiously discriminatory programs against singles and the poor. It is possible for the wealthy to have huge net worth and assets and low incomes excluding huge TFSA investment amounts which do not need to be declared as income. They can then claim poverty and receive OSA without clawbacks, and even possibly the Guaranteed Income Supplement (GIS) which is supposed to be a poverty reduction program for the very poor. Lifetime caps, as exist for some small business formulas, would help smooth out financial inequities between the poor and the wealthy and lower costs for government.
Many regressive tax expenditures have been implemented by Conservatives (some also by the Liberals). The Conservatives always talk about cutting taxes, but never talk about balancing tax cuts with reduction of tax expenditures and benefits for the wealthy.
The Liberal Party to their credit has reduced or eliminated Tax Expenditures for both business and personal financial systems. On the personal tax side they refused to implement Conservative proposal for personal income splitting and increasing TFSA contributions from $5,500 to $10,000 per person. They have also eliminated Child Arts and Child Fitness Tax Credits. On the business tax side (businesses were not addressed in the CCPA report), the Liberals have addressed financial inequalities in income splitting (“sprinkling”) and passive income.
Business income splitting (“sprinkling”) allows some families to use private corporations to sprinkle income among family members to spouse and/or children who are often in lower tax brackets than the primary owner/manager and thus the family’s total tax bill would be reduced.
For example, one of the changes means beneficiaries of business income splitting have to be actively engaged in the business and work in the business at least an average of 20 hours per week. Since singles in their financial circle are basically financially responsible to themselves (no spouse, no children), “income sprinkling’” is of no benefit to single marital status entrepreneurs so they will pay more tax. Tax fairness needs to be ensured regardless of marital status and how income is earned.
In short, the new rules for passive income mean that once a private corporation builds up multi-million dollar passive investment assets, its business income will no longer qualify for the federal small business tax rate (which is being lowered to 9 per cent), and instead be taxed at the regular corporate tax rate (which is 15 per cent). The amount of business income that qualifies for the small business tax rate would be reduced depending on how much annual passive income is declared above $50,000 — and eliminated completely once passive income rises above $150,000.
Political parties concerned about social justice (Liberals and NDP) need to be more vocal about regressive tax expenditures and why changes are needed to promote income and tax equity.
https://canadafactcheck.ca/tax-fairness/ Excerpts from article “Will federal tax review lay the groundwork for real tax reform in the next budget?”. Links have been removed, links may be reviewed in article online.
While little known to the general public, the review is of enormous importance. Every year, Ottawa spends about $110 billion on programs such as health transfers to the provinces, the Canada Pension Plan, Employment Insurance, and other line item programs that comprise the federal budget. These expenditures, as with all direct spending, are put before Parliament for examination. Through this “Estimates” process, information on the costs and impact of these programs is available to the public.
Far less visible and transparent is the roughly $100 billion the federal government forgoes annually in so-called “tax expenditures”. These exemptions, deductions, credits, rebates and surtaxes are not subjected to the same kinds of parliamentary accountability mechanisms that are applied to more direct government spending. Moreover, many of these expenditures (including all exemptions and deductions), while legally embodied in the federal tax code, have huge implications for the fiscal situation of the provinces in that they also define the tax “base” against which all personal and corporate income taxes are levied at the provincial level.
Given the sheer scale of these tax expenditures, there is a strong argument for subjecting this hidden tax spending to the same oversight and public debate as any other spending. This is especially true given just how regressive (i.e. favouring the affluent) many of these expenditures are. If the government wants to provide billions of dollars in tax breaks to the richest Canadians, it should have an obligation to justify these gifts to the vast majority of Canadians who don’t benefit from such largesse.
The last comprehensive evaluation of the federal tax system was the Carter Commission of 1966. It’s clearly time to take a top to bottom look at our tax system to see if it is the truly progressive system the public deserves.
Exactly who benefits from these tax expenditures?
While the true magnitude of federal tax expenditures remains somewhat murky, what we do know is cause for concern. For example, a recent report from the Canadian Centre for Policy Alternatives (CCPA) shows that, while some of these measures benefit the general population, many others benefit most those who need help the least. In fact, of the 64 tax breaks on which solid data are available, all but five provide more benefit to the top half of earners than to the bottom.
In particular, the three most regressive loopholes (the stock option deduction, the dividend gross-up, and the partial inclusion of capital gains), give enormous breaks to the very rich without doing much for the majority. According to the Department of Finance, these expenditures alone cost a combined $12 billion annually – more than enough to pay for, say, a national pharmacare program.
Here’s a brief look at the “Big 3” regressive tax expenditures that overwhelmingly benefit rich Canadians.
The stock option deduction is an offshoot of the 50% capital gains inclusion rate (see below) and cost the federal treasury $840 million in 2016. It is for employees who, as part of their compensation, are given the option to buy company stock at a set price (e.g., today’s price). If the stock rises in the future, an employee can still buy the stock at their set price, but sell it at the going price and generate a capital gain equal to the difference between the two prices. As with capital gains, only 50% of the price difference from a stock option transaction of this sort is taxable, and there is no threshold above which the government taxes 100% of the capital gain.
Another regressive tax expenditure is the dividend gross-up and tax credit. With an annual cost to government of $4.64 billion in 2016, it is also one of the most expensive. This tax expenditure is extremely concentrated, with 91% of the benefit going to income earners in the richest decile. But, again, the decile analysis actually understates the concentration. A paper by Brian Murphy, Mike Veall, and Michael Wolfson estimate half of all benefits actually go to the top 1%. Corporations pay corporate income tax on their profits, which can be paid out as a dividend to shareholders.
A third extremely regressive tax expenditure is the partial inclusion of capital gains which cost the government $6.68 billion in 2016. The tax expenditure for partial inclusion of capital gains applies to an individual who buys a stock or other asset at one price and subsequently sells it for more, realizing a “capital gain” in the amount of the difference between the two prices. It is only the capital gain, and not the entire sale price, that is eligible for taxation. And thanks to this tax expenditure, only 50% of the value of that capital gain is considered taxable income.
With 92% of the benefits going to the top 10% — and very little for anyone earning less than $84,000 — the concentration of benefits related to the partial inclusion of capital gains is similar to that for the dividend gross-up. However, additional analysis by Murphy et al. shows the concentration of this tax expenditure is much worse than a decile analysis suggests. In fact, the very richest 1% of tax filers reap 87% of the benefits.
Is there the political will to scale back capital gains related tax expenditures?
There is also a question as to whether the Trudeau government has the political will to really crack down on the most regressive expenditures given that there are powerful employer and financial interests supporting them.
For example, upon being installed as finance minister, Finance Minister Bill Morneau declared tax fairness his top priority. Yet his record on the issue is mixed. He at first vowed to close the loophole on executive stock options (a Liberal Platform item), perhaps the most objectionable such tax break, but then changed his mind under heavy industry pressure.
The challenge for Morneau is that the government has also promised to make Canada more innovative and attractive to investors. Some supporters of an innovation agenda argue that capital gains taxes hurt innovation by limiting the amount of money in the economy that is free to be re-invested in new projects. There are also numerous voices warning federal Liberals to rein in any proposed tax-the-rich agenda in light of plans by the Trump Administration and the Republican controlled Congress to dramatically reduce personal and business taxes.
On the other hand, policy experts who are concerned with income inequality see tightening up investment-related tax expenditures as a key target given that it is primarily higher-income Canadians who have the means to generate significant additional revenue from investments.
Do we really need regressive tax expenditures to spur innovation and growth?
The argument that tax related investment incentives are required to spur innovation and growth has many doubters – and not just amongst those concerned with inequality. These “pro-growth” critics of the exemptions argue that it is strategic government leadership and public investments that are most critical to building innovative economies. These critics also argue that what is needed it to build on the work being done by publicly funded bodies such as the National Research Council.
In support of this view, the influential UK economist Mariana Mazzucato has shown that publicly funded research as well as direct support for strategic corporate investments through agencies like Defense Advanced Research Projects Agency (DARPA), have been central to the growth of innovative capacity in the United States. Corporate research and development and venture capital often follow in the wake of ground-breaking public sector entrepreneurship.
Mazzucato’s book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, cites impressive evidence in support of this thesis. For example, the parts of the smartphone that make it smart—GPS, touch screens, the Internet—were advanced by the U. S. Defense Department. Tesla’s battery technologies and solar panels came out of a grant from the U.S. Department of Energy. Google’s search engine algorithm was boosted by a National Science Foundation innovation. Many innovative new drugs have come out of the U.S.’s National Institute for Health (NIH) research.
Many innovation experts agree that there is plenty of room to expand direct public investments to compensate for any scaling back of private capital gains incentives. These experts suggest that strategic long-term public investments need to be made across- a much broader range of sectors than is currently the case……
Where does pension fund investment fit in? See article for details.
What are the options for real tax reform?
It goes without saying that there are many options on a continuum somewhere between getting rid of the Big 3 exemptions entirely (an extremely unlikely scenario regardless of which party forms the government) and maintaining a status quo in which the rich get almost all the benefits.
…..focus on practical measures that could scale back the stock option and partial capital gains exemption. With regard to the stock option deduction, the Department of Finance estimates that 8,000 high-income Canadians deduct an average of $400,000 from their taxable incomes via stock options. This accounts for 75% of the deduction’s fiscal impact, which was $840-million in 2016. Most of these 8,000 high-income earners have stock options built into their compensation packages and take advantage of these stock option provisions on a reoccurring basis. Needless to say, only a minority of those who exercise stock options in this manner are employed by a start-up – the ostensible reason for allowing stock options in the first place. There are a number of approaches to stock option deductions that would let the federal government reduce the extreme regressiveness of the deduction, while not penalizing Canada’s startup community.
One approach would be for the federal government to provide a one-time only $750,000 exemption on stock options. This would treat stock options in the same way as one-time capital gains for shares held in a Canadian-controlled private corporation (CCPC) for at least two years.
The $750,000 exemption gives stock option holders significant financial benefits and, at the same time, eliminates a policy that allows well-compensated executives (such as those at Canada’s large banks and insurance companies) to exercise options on a regular basis without any limits.
For startups, a $750,000 exemption is attractive because it is large enough to use as a recruitment tool in a market where there is intense competition for talent…..
There is also plenty of room to gradually phase in an increased capital gains inclusion rate. Such a phased-in increase would be entirely consistent with the history of the exemption. From 1972 to 1988, Canadians had to pay tax on 50 per cent of their capital gains. The inclusion rate was increased to 66 2/3 per cent in 1988, rose to 75 per cent in 1990, before dropping back down to 66 2/3 per cent on Feb. 28, 2000 and then further reduced on Oct. 18, 2000 to 50 per cent, where it has remained to this day.
In other words, a five-year phase-in of an increase in the inclusion rate to 75% (i.e. a 5%/yr. increase) would be just another “up” phase in the ongoing ups and downs in the inclusion rate since the introduction of a capital gains tax in 1972. Certainly no reason for investors to panic!
And keep in mind that, under these proposals, some capital gains would remain entirely tax-free, such as the gain on the principal residence or the gain where appreciated publicly-traded securities are donated to a registered charity.
In the coming budget, the federal government has a historic opportunity to undertake truly progressive tax reform that will finally bring a measure of fairness to Canada’s convoluted tax code. If done properly, the tax expenditure review currently being undertaken will present strong evidence that in the name of fairness, the extraordinarily regressive capital gains related tax expenditures can be scaled back somewhat and that public and pension fund investment can make a growing contribution to Canada’s growth and innovation performance.
The opportunity is there – but will the Trudeau government seize the moment? (End of reproduced article)
(This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice.)