Tucked away in a dull Canadian federal tax document is a little-known statistic. In 1982, 239 Canadians with an annual income of more than $250,000 paid no income tax.
This select group of Canadians was able to convince Revenue Canada they owed nothing to the public purse by claiming a series of deductions on their tax forms - deductions available to everyone, but in many cases only applicable to the wealthy.
Ironically, when a similar statistic became known in the United States 15 years ago, it sparked a public outcry that eventually led to a major change in US tax laws.
As a result the United States now has a minimum tax of 20 per cent to ensure that high-income individuals cannot reduce their taxes to zero.
But Canada has not been so hard on its wealthy.
The country still has an income tax system under which a millionaire can go tax-free while someone with an income near the poverty line will have to pay more than $1,000 in tax.
Even within the same income group, there are surprising discrepancies. Some people who earn $100,000 a year, for instance, pay tax at a rate of 30 per cent while others with the same income, pay no tax.
The federal Finance Department, which designs Canada’s tax policy, has itself commented that such figures reflect ‘a source of unfairness among tax-payers that is difficult to justify.’
Those comments were made in 1981 in a Finance Department brief called Analysis of Federal Tax Expenditures for Individuals. At that time, Ottawa was flirting with the idea of closing some of the loopholes that the Finance Department identified as primarily benefiting high-income Canadians. The same document also argued that if all special tax breaks were eliminated, tax rates for all Canadians could be cut by 45 per cent.
Those radical notions proved short-lived.
Ottawa quickly retreated from promises of reform made in a November 1981 budget, after then finance minister Allan MacEachen encountered a storm of protest - primarily from high-income Canadians and business groups - over plans to plug some of the loopholes.
Instead of reforming the tax system to correct the situations described as ‘troubling’ by the Finance Department Ottawa simply stopped publishing information that suggested the system was unfair. It stopped, for instance, printing its tax expenditure account which documented who was benefiting from various tax breaks. It also stopped producing analyses of ‘inequalities’ in the tax system.
Not only has the Government retreated from reforming the tax system in the way it had planned, it now appears to have gone in the other direction.
In addition to reinstating most of the tax breaks it had removed in 1981. Ottawa has since created generous new ones, such as a research and development tax credit and planned increases in the allowable contribution levels for retirement savings plans. Both measures are primarily available to upper income groups.
The Government has also lowered the top tax rate for the highest income group to about 50 per cent from about 65 per cent.
Ernie Lightman, a University of Toronto economist and professor of social policy, says that because of such measures discrepancies in the tax system are becoming even more dramatic than they were in 1981 when the Finance Department criticized the system as unfair. He argues that once the Government introduces a tax break, it is very difficult, politically, to take it away because the group that benefits will fight to hold on to it.
And as they pile up, creating greater savings for those who can use them, Government revenue diminishes and has to be made up by the rest of the taxpaying population.
And they do pile up.
In 1979, $20 billion in Government revenue, including provincial revenue, was lost to tax breaks for individuals.
Some tax breaks, such as home ownership and retirement savings plans, help reduce taxes for those in the low and middle income range as well as for upper income Canadians.
But even those kinds of breaks end up benefitting the rich more because their tax rates are higher and their savings from deductions are thus larger.
There are also other types of tax breaks, such as deductions for investments and special treatment of investment income, that can only be used by people with capital to invest.
All this adds up to a considerably greater advantage for high-income taxpayers.
As the Finance Department pointed out the average benefit due to tax breaks for individuals with incomes of more than $100,000 was $46.000 in 1979. Yet for those with incomes between $10,000 and $15,000, the average benefit from tax breaks was only $771.
Linda McQuaig is a staff writer with the Toronto Globe and Mail. This article © Toronto Globe and Mail.
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