Tax cuts leave out ‘vast majority,’ NDP says
Only 15% of households will see impact of Harper’s income-splitting measures
OTTAWA— The tax shakeup announced by Prime Minister Stephen Harper last month will leave many Canadians in the cold. And while others will benefit, detailed calculations show the benefits may fall far short of expectations.
The changes in income tax and family supports are being trumpeted as a huge package of breaks for Canadians. At a cost of $26.7 billion between now and 2019, they will eat up the bulk of total budget surpluses forecast for Ottawa during that period.
Each taxpayer will be impacted differently by the complex interaction of new measures. But analysis shows the major benefactors will be households where one spouse earns a hefty income and the other earns a low income or no income.
For instance, a two-earner couple with young children where one spouse brings in $95,000 a year and the other earns $25,000 could see tax savings of nearly $3,000 in 2015 as a result of the new measures, according to Finance Department calculations.
Most of that windfall arises from the centrepiece of the Conservatives’ package, the so-called Family Tax Cut, a version of income-splitting for families with children. Single people, single-parent families or families with children who are no longer minors do not qualify for any kind of tax break under this measure.
In fact, only about 15 per cent of households will benefit from the $2 billion a year in foregone federal revenue devoted to income-splitting, with one-earner families at the top of the income scale coming out best. Two-earner families where spouses make similar incomes will see little or no benefit.
The average income of families that would receive any benefit from the Family Tax Cut exceeds $123,000, according to calculations done for the Caledon Institute of Social Policy.
Studies done in advance of Harper’s announcement had found that a family with one breadwinner in the highest income tax bracket could see the family’s federal tax bill reduced by $5,000 or more a year as a result of the Family Tax Cut. To eliminate such a huge windfall and keep the cost of the measure from skyrocketing, the government capped the possible tax savings from this policy at $2,000 per year per family.
But the fact that most households will not benefit at all from the costly Family Tax Cut still prompted widespread criticism.
The Fraser Institute, a conservative think-tank, published a statement titled: “Income splitting not the best economic bang for the buck.”
“Reducing personal income tax rates would provide broader-based tax relief and an enormous improvement in our tax competitiveness while strengthening the incentives for work effort, savings, investment and entrepreneurship,” the institute said. “Canadians would get far bigger bang for their buck with big-picture reforms such as broad-based personal income tax cuts than tinkering with income splitting.”
In Ottawa, the Family Tax Cut sparked outrage from opposition parties who denounced it as a Mad Men- era scheme and a handout to rich families who don’t need a break from the federal government.
“Canadians would get far bigger bang for their buck with big-picture reforms such as broad-based personal income tax cuts than tinkering with income splitting.” THE FRASER INSTITUTE CONSERVATIVE THINK-TANK
“The Conservatives have presented a plan that will do nothing for the vast majority of Canadians,” NDP Deputy Leader Libby Davies said in the Commons. “They were warned by their own finance minister that it was a policy that would increase inequality,” she said, in a reference to Jim Flaherty’s public questioning of the fairness of income-splitting. “Why are the Conservatives deciding to spend billions on a plan that will do nothing for 80 per cent of Canadians?” In response to such complaints, the government has focused on the whole package of measures that was announced Oct. 30. Besides incomesplitting, that included increases in the monthly support payments Ottawa sends families with children and the tax writeoff for child-care expenses. These changes, while still of no value to single people without children or families with children over age 18, will provide some financial assistance to a much wider swath of the population than the Family Tax Cut. “Every single one of the four million-plus Canadian families with children will benefit from this plan,” Harper has said. He acknowledged that bringing in the Family Tax Cut alone and without modification would have been politically damaging. On Oct. 30, he said “concerns have been expressed that too much of the benefit of (the Family Tax Cut) would go at very high income levels. “So that’s why we limited the benefit under this and also expanded other benefits to Canadian families to make sure that all Canadians across the income spectrum benefit from these measures.” The package, which will cost Ottawa $4.6 billion annually once fully in place, includes a significant en- hancement of the Universal Child Care Benefit. Beginning next year, benefit payments to families will increase to $160 a month per child under age 6, up from $100 a month. And families with children aged 6 through 17 will next year for the first time receive $60 a month per child.
The Child Care Expense Deduction, as of 2015, will rise to $8,000 from $7,000 per child under age 7. For children age 7 through 16, it will rise to $5,000 from $4,000.
The overall dollar total of the new Conservative package is big, but how much any family will benefit depends on its particular circumstances and many taxpayers may be disappointed when they see the final results.
Analysts say it’s important to remember that the child-care benefit payments are taxable.
Also, the government is giving with one hand while taking back with the other.
In a little-noticed move that will defray the cost to the federal treasury of the new measures, the government plans next year to scrap the standard Child Tax Credit, a change that will recoup $400 million for federal coffers in 2014-15 and $1.8 billion in 2015-16.
Jonathan Kesselman, an expert in public finance at Simon Fraser University, said eliminating the Child Tax Credit will sharply reduce the net benefits from the enhanced Universal Child Care Benefit.
Except for families in a very low income-tax bracket, the additional $60 of monthly payments could be reduced by taxes to about $35 or $40 a month, he said. When the loss of the value of the Child Tax Credit — $28 a month — is factored in, “you don’t get a lot in the pocket,” Kesselman said.
“It’s kind of smoke and mirrors. It’s a clever way of doing it but it’s less than meets the eye,” he told the Star.