SPECIAL REPORT

FIGHTING A TAXING BURDEN

TAXES ARE ERODING THE MIDDLE CLASS

PATRICIA CHISHOLM November 6 1989
SPECIAL REPORT

FIGHTING A TAXING BURDEN

TAXES ARE ERODING THE MIDDLE CLASS

PATRICIA CHISHOLM November 6 1989

FIGHTING A TAXING BURDEN

SPECIAL REPORT

TAXES ARE ERODING THE MIDDLE CLASS

The ras of anti-tax rallies, petitions and threats of civil disobedience mushroomed across the nation. The furor was sparked by Finance Minister Michael Wilson’s April 26 announcement of a major tax change which would replace existing levies with a lower, but almost universal, nine-per-cent tax on goods and services. Amid the protests, the House of Commons finance committee last week wound up three weeks of cross-country hearings into the tax, with its chairman, Conservative MP Donald Blenkam, merely saying that the committee would consider the submissions made to it. Due to report by Nov. 28, the committee will make its recommendations in a climate of growing anger over the tax. In Windsor, Ont., incensed citizens held a tea party on the banks of the Detroit River, modelling their protest on the opening days of the American Revolution. In Red Deer, Alta., more than 3,000 protestors crammed into an auditorium on Oct. 10, jeering the federal government and waving antitax placards. And in Vancouver, a coalition of citizens called SCRAP-IT collected thousands of names for an anti-tax petition, mostly by patrolling shopping malls. Many consumers say that the new tax will only widen the gap between rich and poor. Said SCRAP-IT chairman Benjamin Wolfe:

“Wilson keeps buying new shoes, but I keep resoling mine.”

Erupted: Intense debate over the Goods and Services Tax (GST) has erupted at the same time that more and more middle-class taxpayers are speaking out against their total tax burden. According to the Vancouverbased Fraser Institute, taxes from all sources—federal and provincial income taxes, consumption taxes, and municipal taxes— now consume about 50 per cent of a taxpayer’s income.

That amounts to a tax bill of $23,094 on the average Canadian family income of $46,000.

In addition, federal tax reforms that began in 1984 have had a net effect of boosting total personal income taxes by replacing deductions with tax credits, by deindexing tax brackets and by introducing so-called clawbacks of social welfare benefits such as the family allowance.

While many Canadians say that they are committed to paying taxes to support social-spending programs, they also maintain that the tax burden is too heavily weighted on middleincome groups.

Many of the changes have particularly affected the middle class. Most of the newly introduced tax credits are available only to lower-income groups. At the same time, the favorable tax rates for investments, such as the 25-per-cent tax paid on income from private, Canadian corporations, are used mainly by wealthier Canadians. Such rates are irrelevant for many middle-income earners, who lack the

resources to take advantage of them. As a result, income-tax revenues collected by the federal government have increased by 70 per cent since 1984, with most of the increase coming from middle-wage earners.

The rising tax revolt is taking place just as the federal government is conducting an aggressive campaign to promote the GST to Cana-

dians. But so far the government has been unable to convince Canadians that the tax is fair and workable: a September poll by Gallup Canada Inc. found that an overwhelming majority of Canadians, 72 per cent, are opposed to the tax.

During hearings in the West, the Atlantic Provinces and Ottawa, the all-party committee has been heavily criticized by groups from all levels of society, ranging from the Canadian Bar Association to the National Council of Welfare. Larry Alexander, 78, a chemical consultant in Edmonton, said that the committee failed to even give his submission fair consideration. After only four minutes, Blenkam told him that he was wasting the committee’s time, Alexander said.

His concern,said Alexander, is that the tax may put him out of business because the price of his services will rise when the tax is imposed.

Then, two weeks ago, most provincial finance ministers, as well as at least one rebellious federal Conserva-

tive MP, openly attacked the tax, calling it onerous and overly complex. Said David Kilgour, Tory MP for Edmonton Southeast and a vocal critic of the tax: “The more I found out about it, the less I liked it.” But a senior federal official who requested anonymity acknowledged that the tax is almost unsellable. Said the official: “Taxpayers are mad, but they also accept the fact that it’s going to happen.”

In defending the new tax, Wilson has promised that it will be “revenue-neutral.” He says that after taking into account the offsetting GST tax credits—available to households earning less than $30,000—income-tax cuts and administrative costs, total tax revenues will not increase. Wilson adds that eliminating a 13.5per-cent manufacturers’ sales tax will help stimulate economic expansion.

Difficult: In fact, part of the government’s difficulty in promoting the sales tax lies in convincing Canadians that it will be revenueneutral. Michael Walker, executive director for the Fraser Institute, said that claims of revenue neutrality are “nonsense.” According to Walker, the tax will scoop up to an additional $7 billion out of the income of middle-class Canadians, who will not be eligible for the sales tax credit, even though they make up the largest group of consumers. He added, “From the point of view of the people who will pay the tax, there is a net loss.”

Other economists claim that the goal of economic expansion is an illusion. According to Dalhousie University economist Michael Bradfield, there is no guarantee that business lead-

ers will use their higher profits to re-invest in Canada. There is also a possibility that the new tax could actually slow the economy by inhibiting consumption. Bradfield, for one, says that many sectors which rely on retail sales, such as the clothing industry, are likely to be hurt by the tax. He added, “The retail sector knows that their ox is going to be gored on this one.”

Members of many families say that they simply are not willing to pay another tax, even if it replaces exisiting ones. Catherine Stewart, 40, who lives in Toronto with her husband,

Darryl Peck, 38, and daughter Amelia, 3, says that the new tax will put her family into a very difficult financial position. “I do not want to sound whiny, but we make $100,000 a year, for heaven’s sake, and we are struggling,” said Stewart, a self-employed education consultant. The GST will be “disastrous” for her family, she said. “Why are we being punished for having children?” Paying: The GST debate has also brought into focus arguments about the overall fairness of the tax regime. Said White Rock, B.C., accountant Jack Narsted: “As soon as you get employment income you are guaranteed to be paying taxes at 35 per cent. An individual

seems to bear more of the burden to pay taxes than corporations and entrepreneurs.” Leslie Mezei, a financial planner in Toronto, said that the tax burden is not spread equally. There is no longer a truly “middle” tax bracket in Canada, Mezei says, only a lower bracket and an upper bracket. He said that

condition has arisen because, out of a total of the three existing brackets of combined federal and provincial tax, the two highest are only about four percentage points apart, at 40 per cent and 44 per cent. The third stands at 26 per cent.

Another phenomenon that hurts middle-class taxpayers is what tax planners like Mezei call “bracket creep.” That phenomenon occurs when inflation eats into real wages, and tax brackets are

not indexed upward enough to offset cost-ofliving increases. While some indexing is still in place, tax reforms introduced by Wilson in 1988 have resulted in tax brackets lagging about three percentage points below the rate of inflation. “At the current rate of inflation,” said Mezei, “those earning $45,000 will be in the top tax bracket in eight years.” That means such a taxpayer will move from the combined rate of 40 per cent to 44 per cent

without any increase in real income.

Still, many taxpayers emphasize that they are willing to pay taxes that are used to fund vital services. Donald Walker, 41, a funeral director who lives in Dartmouth, N.S., with his wife Joanne, 37, son Jason, 12, and daughter Sarah, 10, said that the “have-nots” must be provided for. He added: “The money has to come from somewhere and the middle class is where it comes from. There has to be some light at the end of the tunnel, but I don’t see any there yet.”

Angered: The view that social services are an essential safety net appears to be widely shared in Canada. But many consumers say they are angered by their belief that their tax dollars are wasted. Peter Ripple, 48, a Liverpool, N.S., industrial arts teacher, said that there are too many giveaway programs, such as subsidies for state-owned industries that compete with the private sector. “The way I see it,” said Ripple, “is that the government is buying our votes with our money.” This concern could be another obstacle for Michael Wilson, who, as he continues in his efforts to sell the GST, may find that Canadians are protesting more than their growing tax burden.

PATRICIA CHISHOLM

GLEN ALLEN

LISA VAN DUSEN

ANN WALMSLEY

DEREK WOLFF