Dissecting a middle-class tax cut

Hey there, time traveller!
This article was published 28/05/2025 (335 days ago), so information in it may no longer be current.

The federal election generated proposals from both major parties for a tax cut to assist the struggling middle class.

The Liberal victory means that their more modest one per cent cut to the lowest federal personal income tax rate will be legislated before the summer parliamentary recess. Who, then, is in this middle class for whom the tax cuts are intended, do they get the tax cut, who else gets the cut and who is excluded?

The popular international definition from the Organization for Economic Co-operation and Development sets middle-class incomes at 75 per cent to 200 per cent of the middle, or median, household. An interesting feature of this definition is that it leaves the lowest 37.5 per cent of households below the middle class, roughly corresponding to the bottom 40 per cent identified by a recent parliamentary budget officer analysis as those for whom incomes did not keep pace with post-pandemic inflation, representing a genuine affordability issue.

A problem in assessing how households would fare from the proposed tax cut is that we need to account for differences in their size. A larger family, such as the reference family of two adults and two children often used, faces a different tax structure and requires more income to sustain a specified standard of living than a single individual.

To look at incomes by household size, we need detailed data such as is available from the annual Canadian Incomes Survey. The latest survey is for 2022 at this point, as collection, careful vetting and anonymizing of data in accordance with the Statistics Act takes time, but the basic structure of incomes and tax incidence changes little over a couple of years and this data should reveal the impacts of the proposed tax cut to come with modest scaling for inflation (about 10 per cent).

Let’s start with the simpler case of a single individual, since Canadians file taxes individually. Any individual with income up to the basic personal amount, now $16,129, would receive no tax relief. About nine per cent of single individuals fall into this category. And someone at the bottom of the middle-income range would receive only about $175 annually from the one per cent tax cut.

Assuming no other tax credits than the basic personal amount, the full tax cut of around $500 would only accrue to someone two-thirds of the way to the top of the middle-class range, or about 160 per cent of median income. This tax cut would also be realized by the roughly 16 per cent of single individuals with incomes above twice the median, the top of the middle-class range.

For the representative family of four, the tax calculation is more complicated but let’s take the basic case of an adult couple each receiving the basic personal amounts and collectively receiving the eligible dependent amounts, currently $2,616 for each child. Since the sum of these credits would be far below the middle-income threshold, only about two per cent of such families would receive no tax relief and a family at the bottom of the middle-income range would receive about $925. Families with incomes above the bottom 40 per cent, including the eight per cent of such families above the middle-income range, would receive the full benefit of around $1,000 from a one per cent tax cut.

These figures imply that a middle-class tax cut in the current personal income tax system provides a full benefit only to single individuals with incomes in the top third of the middle class and higher. Families of four do better, as the full benefit is realized throughout most of the OECD-defined middle class and beyond. Families with lower incomes, and particularly those in the bottom 40 per cent for both groups, get progressively less tax relief under our current tax structure.

Little was said about poverty in Canada during the election, but a largely ignored accomplishment of the Trudeau era was the Poverty Reduction Act that established a poverty benchmark, the Market Basket Measure, that might constitute an alternative lower limit for the middle class. The latest MBM threshold for 2024 was $53,583 for a family of four in Manitoba which translates to $26,792 for a single individual.

Since these thresholds exceed the basic tax credits, someone in poverty would benefit from the tax cut, but only if they were at the high end of the poverty scale. A single individual at the MBM threshold would receive $118 while a family of four at the threshold would get $177.

The Opportunity for All document establishing these poverty lines also defines deep poverty as three-quarters of the MBM, or $20,094 for a single individual and $40,187 for a family of four. At those income levels, the middle-class tax cut would be only $44 for a single individual and $30 for a family of four. In other words, the tax cut does little to address Canada’s poverty reduction goals. I suspect the Liberal tax cut was designed to pre-empt the anticipated Conservative proposal for a 2.25 per cent cut over three years. Nonetheless, a better tax cut to alleviate affordability issues would taper the tax cut for those above the middle class and redirect that money to those households at the bottom of the income ladder.

Wayne Simpson is a former professor of economics who taught at the University of Manitoba.