Column

' Bracket creep— a big bonanza for Ottawa

Diane Francis July 20 1998
Column

' Bracket creep— a big bonanza for Ottawa

Diane Francis July 20 1998

' Bracket creep— a big bonanza for Ottawa

Column

Diane Francis

The Liberals like to cloak themselves in fiscal rectitude, taking pride in balancing the budget. This is the Big Lie of Canadian politics—and the figures prove the point.

Since 1993, our federal government has enjoyed a windfall from tax revenue. In part, this has been due to prosperity and trade opportunities resulting from a booming economy in the United States. Excessive Employment Insurance premiums have played their part as well: since 1994, when the Canadian economy rebounded from the recession of the early 1990s, El premiums have poured in far faster than benefits have been paid out. By the first quarter of 1998, the El fund had a surplus of almost $3 billion. The deficit battle, however, has also been won through a hidden, and unfair, tax hike on all Canadians, even the poorest. This occurs because the rate of inflation is not deducted from taxable income. As a result, the taxpayer is pushed into a higher tax bracket even though in real terms his income is not higher. Meanwhile, the provinces have borne the brunt of spending cuts. If Ottawa had matched their efforts, Canadians by now could have enjoyed federal tax cuts or debt reduction—or both—in addition to a balanced budget. That has not been the case.

Ottawa’s tax take has jumped dramatically since the Liberals won power in October,

1993. Federal government revenues in 1992-1993 were $120.4 billion. In the 19971998 fiscal year, they were $147.5 billion, a hike of $27.1 billion or 23 per cent. While expenditures over the same period did shrink, the decline was by only $13.9 billion, or nine per cent. That means Ottawa won its deficit battle primarily through tax increases rather than spending cuts.

Meanwhile, most of the provinces and municipalities have been more fiscally responsible. According to the federal government’s own figures, all levels of government in Canada shared in the revenue boom. In 1997, combined revenues were $401.7 billion, an increase of 35 per cent from $300 billion in 1992-1993. And they kept their collective spending below 12 per cent, less than the rate of inflation for the past five years.

But much of the federal Liberals’ revenue flood has been an undeserved windfall—the result of an arcane tax adjustment called partial indexing. Instituted by Brian Mulroney’s Conservative government in 1985, it replaced the former full indexing that governed Canada’s tax code since the inflationary 1970s. Full indexing means that taxpayers are not punished for illusory income gains that are a result solely of inflation. Partial indexing, which does not adjust tax rates unless inflation runs above three per cent a year, has proven to be a bonanza to the Liberals because of the current low-inflation economic environment. Deliberately

The Liberals have reaped a windfall of tax revenues— much of it from a hidden and unfair tax on the poorest Canadians

left unchanged by the Liberals, partial indexing provides an invisible tax increase also known as “bracket creep.”

Bracket creep has been insidious and has delivered revenues to Ottawa it does not deserve. And it has cost lowerand middleincome Canadians a bundle over the past five years. This year, for instance, 3.5 million Canadians will be hit with a tax increase. In 1980, a single person making $10,505 paid no federal income tax. Now, taxes kick in at only $7,112. Since 1992, more than one million low-wage workers have been paying the threshold federal income tax of 17 per cent. Another 1.9 million taxpayers have seen their marginal tax rate rise from 17 per cent to 26 per cent, while 600,000 had their marginal rates pushed up into the 29-per-cent bracket. Anyone with a taxable income of $73,249 will pay $2,000 more in taxes in 1998 than in 1997. At current inflation rates, 1998 will be the sixth year in a row that taxpayers will be shoved into higher income tax brackets without indexing.

Ottawa instituted indexing as a relief measure in 1973 to prevent exactly the taxation windfall now occurring strictly as a result of higher prices for goods and services. The Tories introduced partial indexing as a compromise measure designed to help cut the deficit. When, for example, inflation is four per cent, Ottawa makes an adjustment of one per cent (deducted from taxable income). If inflation is 10 per cent, the adjustment is seven per cent. Because inflation has not exceeded three per cent for the past six years, income tax brackets have not increased. Under full indexation, the federal government’s tax take would have been one-third less.

The provincial governments also benefit from the partial indexing because their revenues automatically piggyback on these increases—their income taxes are calculated as a percentage of the federal tax. For instance, workers making more than $59,180 are in the top federal marginal bracket of 29 per cent. Depending on where they live, workers in addition then pay anywhere from 40 to 69 per cent of the federal tax in provincial income taxes.

This scandalous revenue grab has escaped the attention of the mainstream media, and, therefore, the public. The Reform party and some of the premiers have complained, but their criticisms have been mostly written off as partisan.

The fact is, the Liberals in Ottawa have enjoyed a windfall that no government deserves. Instead of paying down debt or providing tax relief, they squandered their ill-gotten gains by maintaining government operations in their five years in power. There is no excuse for this when all other governments have made necessary, if painful, spending cuts. And there is absolutely no excuse for the excessive tax grab by Ottawa out of the pockets of ordinary Canadians and families struggling to make ends meet.