Tuesday, May 02, 2006

Tax reduction? Only if you're wealthy enough

I'll try to cover the Harper budget in a couple of posts, but this one is just a quick look at one tax measure that's been presented. The first thing anyone should do is ignore the prose and go to the meat. Annex 3 of the Budget contains the tax measures and if you don't use them, you will not be able to sort through the propaganda in the front end of the document.

Cheryl, with a long career in the accounting industry and with the tax measures provided in Annex 3 of the Conservative Budget ran one quick scenario.

- Assumed wage $30,000.00 annually.
- Single, no dependents.
- CPP deducted at source $1311.75
- EI premiums deducted $585.00

- Old tax rate 15%
- Basic personal exemption $8648.00
- Federal tax payable $2918.00

- New tax rate 15.5%
- Basic personal exemption $8839.00
- Federal tax payable $3039.64

Increase in taxes $121.35

Now the Conservatives will tell you that the same wage earner will realize just a ton of savings from a 1% reduction in the GST. Except that's simply not true.

In order to make up for the increase in income taxes, at a 1% reduction in GST, the earner would have to spend $12,130.00 on taxable goods and services, and the money isn't there. Keeping with the same earner's annual expenditures:

Income $30,000
CPP $1,311
EI $585
Fed taxes $3,039
Prov tax $1,000 (approximate)
Housing $12,000 (ie. mortgage, rent, property taxes)
Food $2,600 ($7 @ day)

Left to spend $9,465.00

If an earner spent all of it on taxable goods and services, they would save $94.65 when the GST is reduced to 6% from 7%. But they have paid an income tax increase of $121.35. The earner has lost $26.70 to a tax increase.

The only way it translates to a tax decrease is if you make enough money to absorb the income tax increase and then spend enough on consumer goods to save more on the resultant GST decrease. That makes it a tax cut for wealthier Canadians and an increased tax burden for the lower wage earner.

Update by Cheryl: Dave made me run those numbers one day after the end of tax season! ONE DAY !!!!! Not only am I not completely awake yet, I'm not even close to being sober yet!

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