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Who's really winning here?
The real story of the Martin tax cut budget; Part I
By: Hugh Mackenzie
In the Paul Martin era as Minister of Finance, images of war and of battle have been utilized repeatedly as the Government has worked to build public support for the most draconian budget cuts and the most radical decentralization of financial responsibilities in Canadian history.
Those images persist in the triumphalist rhetoric of this year's Federal Budget, with talk of rewards for years of sacrifice in the battle to get Canada's financial house in order. But a closer look at the 2000-1 Budget makes it clear that, after this war, most of the medals are being handed out to the brass hats at headquarters, leaving very little to those who actually took part in the battle.
Who paid the price?
Let's look first at who played the role of infantry in the war, and what Martin's and Chretien's dedication to the struggle has cost them.
Right at the top of the list are Canada's unemployed. Without the $6.5 billion excess of contributions over expenditures in the UI account in 1999-2000, there would have been no surplus. The surplus in the UI account results from changes introduced in the early 1990s that reduced unemployment insurance coverage from 70% of the unemployed to 40% and cut the benefits for those who manage to qualify.
Next is Canada's Medicare system. The Federal Government's withdrawal from its role as a major financier of the health care system dumped huge financial burdens onto provincial governments at the same time as health care need has been expanding with our aging population. Last year, the Federal share reached only 19%, compared with a 25% level of support in 1989.
The budget announces a lump sum contribution to health care and education of $2.5 billion allocated to the current 1999-2000 fiscal year. What it fails to mention is that this is $1 billion less than the one-time-only increase announced in last year's budget and allocated to the 1998-9 fiscal year. What it also fails to mention is that neither of these amounts has been built into base funding, and both are spread out over a five-year period. The budget actually allocates none of the 2000-1 budget surplus to health.
Add post-secondary students to the list. Driven by substantial reductions in Federal Government transfer payments for post-secondary education, college and university tuition has skyrocketed and students are graduating with mortgage-sized burdens of personal debt. Average student debt increased from $8,000 in 1990 to $25,000 in 1998 and is still rising. Tuition fees across Canada have increased by an average of 126%. Education receives no ongoing funding increase from this Budget. Instead, it will receive a share of the budget's lump sum allocation from the 1999-2000 year-end surplus.
Families with children. Whatever happened to the famous, and long-anticipated "children's budget"? The situation facing families with children in Canada has been well documented. Eleven years after the House of Commons passed its resolution calling for an end to poverty by the year 2000, the gap between rich and poor has grown, and is still growing. One in five children in Canada live in poverty. We have 463,000 more poor children in Canada today than we did in 1989. Allocating $2.5 billion a year by 2004-5 to child tax benefit increases out of a total tax reduction of $17.6 billion hardly makes this a children's budget.
What's the real tax relief target?
To listen to the rhetoric of the Minister of Finance, you would think that the budget was a bonanza for the middle class.
It is true that many of the measures announced in the budget sound as if they're targeted exclusively to the middle class:
- The re-indexation of tax brackets and personal amounts effective January 1, 2000;
- The increase in the personal amounts used in calculating non-refundable tax credits, from their current level of $6,794 to at least $8,000 by the end of the five-year planning period as a result of re-indexation; and
- The reduction of the tax rate in the middle tax bracket from 26% to 23%.
The increase in personal amounts will provide a flat benefit of $205 a year to every taxpayer, regardless of income, as long as his or her taxable income exceeds $8,000.
At the current top rate threshold of approximately $60,000, the reduction in the rate for the middle tax bracket from 26% to 23% will cut taxes by a flat $900 a year for taxpayers with incomes above $60,000. It will provide no benefit for taxpayers with incomes below $30,000. Taking into account the higher income threshold for the top bracket resulting from re-indexation, the rate reduction will be worth $1,050 with incomes above $70,000.
That sounds very democratic, until you consider the fact that more than half of all Canadian taxpayers in 1996 reported incomes below $30,000.
Others are presented as if they are providing middle-income relief.
- The elimination of the 5% high-income surtax;
- The increase in the income at which the top marginal tax rate applies from $59,180 to at least $70,000 as a result of re-indexation;
- The increase in the income at which the middle marginal tax rate applies from $29,180 to at least $35,000 as a result of re-indexation;
- The reduction in the capital gains inclusion rate from 75% to 66 2/3%.
On further reflection, however, these latter measures can hardly be characterized as targeted to the middle class.
The high-income surtax applies only to taxpayers with incomes above $65,000. In 1996, according to Revenue Canada data, those with incomes above that level constituted only 6% of taxpayers.
The increase in the threshold for the top marginal tax rate benefits only taxpayers with incomes above $60,000 - approximately 8% of taxpayers.
Finally, in considering the change in the capital gains inclusion rate, it is perhaps worth noting that, in 1996, more than 66% of the total capital gain was reported for income tax purposes by the highest-income 1% of taxpayers.
Even making allowances for the fact that incomes have grown since 1996, these targeted measures apply to a very exclusive group of individual Canadian taxpayers.
Hugh Mackenzie is Research Director at the United Steelworkers of America and a Research Associate with the Canadian Centre for Policy Alternatives.
From Canadian Centre for Policy Alternatives, Behind the numbers: Economic facts, figures and analysis Volume 2, Number 5 - February 29, 2000
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