Seeking tax fairness, an inch at a time

Opinion

Hey there, time traveller!
This article was published 01/05/2024 (521 days ago), so information in it may no longer be current.

April has seen presentation of the two budgets, one federal and one provincial, that establish our fiscal framework for 2024-25.

The federal budget concentrated on housing and its affordability for younger Canadians, along with modest additional expenditures in areas such as student assistance and the incipient universal pharmacare program.

The provincial government also introduced modest new expenditures in core areas such as health, education and infrastructure, plus significant across-most-of-the board tax reductions. In each case, the argument for additional tax revenue to pay for some of these new and enhanced programs and tax expenditures revolved around tax fairness, essentially referring to the idea that those who are better off can be expected to pay more for the services government provides.

The “ability to pay” principle of taxation has a long history. The evolution of income taxation in Great Britain in the 19^th century included arguments by renowned political economist and philosopher J.S. Mill for an exemption based on the cost of the necessities of life that would excuse 95 per cent of the population from income taxation. When Canada followed suit during the First World War, an exemption of $2,000 was introduced (about $38,600 in today’s funds) that again excluded about 97 per cent of the population. As the demand for government funding and services rose, along with prices and real incomes, the income tax exemption declined rapidly in real terms to $15,000 federally and $15,780 provincially today, such that most of the population is no longer exempt from tax.

We are clearly in a different environment where the income tax exemption offers limited opportunity to ensure tax fairness.

Moreover, there is no longer an exemption per se, as it was long ago replaced by a non-refundable credit, the basic personal amount. Since 1987, this credit and any other credits taxpayers accrue have been evaluated at the lowest marginal tax rate (10.8 per cent in Manitoba and 15 per cent federally). This makes the credit more fair in the sense that it is less valuable than the earlier exemption to those with incomes above the lowest tax bracket.

Nonetheless, when the Conservatives announced their plan to raise the BPA from $10,145 to $15,000 for 2024, a common criticism was that it was unfair to lower income Manitobans, who would not benefit as much as those with higher incomes able to claim the entire value of the credit. This criticism now applies to the NDP’s decision to honour that commitment in its first budget.

The provincial budget did indicate its intention to introduce a new tax of 7.5 per cent on the basic personal amount once net income exceeds $200,000. This measure would eliminate the BPA for net incomes over $400,000 and effectively raise the tax rate on higher incomes to promote tax fairness.

This measure toward tax fairness, however, is postponed until 2025 and not costed in the budget. Its cost saving will certainly pale in comparison to the estimated cost of increasing the BPA ($326 million in its first full year) while also retaining Conservative promises to raise the tax brackets by more than 25 per cent ($160 million). Raising tax brackets again provides a greater benefit to those with sufficient income to pay higher tax rates and reduces the progressivity, or fairness, of the tax system in that sense.

The federal budget makes explicit reference to tax fairness for every generation and touts measures in earlier budgets to reduce the second bracket tax rate, raise the top bracket tax rate, and modernize the alternative minimum tax. This budget completes the Liberals promise in 2019 to increase the basic personal amount to $15,000, after which it will be indexed to inflation, and the federal BPA is already clawed back at a modest two per cent rate for net incomes over $165,430.

The only significant new measure in this budget, touted explicitly as promoting tax fairness as well as raising about $4 billion per year, would increase the proportion of capital gains taxed from one-half to two-thirds for corporations and for individual sales of $250,000 or more.

There is one other federal tax expenditure measure worth noting. The Canada disability benefit has finally been introduced to provide an annual maximum benefit of $2,400 to persons with disabilities over and above the non-refundable disability tax credit. The benefit is noteworthy because it is refundable, meaning that unlike the disability tax credit, the maximum benefit will go to those with no or low incomes and will be reduced as income rises to target those with truly low incomes. Although modest, the design clearly enhances the fairness of assistance to persons with disabilities much like the guaranteed income supplement has done for seniors. That framework would seem to be the frontier for fairer taxation, since those with low taxable income do not benefit from tinkering with the basic personal amount, tax brackets and related features.

As for tax fairness in the two budgets, it is definitely one step forward and two steps back at the provincial level and perhaps a small step forward federally.

Wayne Simpson is a professor of Economics at the University of Manitoba and a research fellow at the School of Public Policy, University of Calgary.