How Taxes Can Reduce Inequality

By Dennis Howlett on July 24th, 2017

How Taxes Can Reduce Inequality

From the Catalyst, Summer 2017

Canada’s tax system can be a powerful tool for reducing inequality and poverty.

We need to tackle inequality at both ends of the income scale. Everyone, even the rich, benefits from a more equal society with better population health, reduced crime, better educational and employment opportunities, and a more vigorous economy.

Recent progressive income tax reforms can only do so much. That’s because our tax system continues to be riddled by unfair and ineffective tax loopholes that allow the wealthy to avoid paying anything close to the top marginal rate on much of their income.

And we don’t have any real tax on wealth (as opposed to income). The Alternative Federal Budget 2017, which CPJ and Canadians for Tax Fairnes (C4TF) have contributed to, proposed that the federal government tax wealth by introducing a minimum inheritance tax of 45 per cent on estates valued above $5 million. This would net an estimated $2 billion annually in new revenues.

C4TF has identified over $16 billion in unfair and ineffective tax loopholes that should be closed. The most egregious ones include the Stock Options Deduction, the Capital Gains Deduction, and the Business Entertainment Tax Deduction.

On the other end of the income scale, Canada’s tax system is also able to transfer benefits to low-income Canadians in a very efficient way. It has reduced poverty among seniors and families with children. But we still have high levels of poverty in Canada and we need to do much more.

The federal government has taken a very positive step in reducing child poverty by introducing a new and improved Canada Child Benefit. Campaign 2000 estimates that even after recent improvements in the child benefit, it would still leave a million children living in poverty. Annual increases of $1 billion to the CCB could do a lot of the heavy lifting and help us achieve the goal of ending child poverty.

Canada has had some success in reducing poverty among Canadian seniors to a low of 3.9 per cent in 1995. However, since then we have been losing ground and poverty rates have risen to about 11 per cent as more Canadians are retiring without adequate company pensions or retirement savings.

Now, there are over 600,000 seniors still living in poverty. The government increased the Guaranteed Income Supplement top-up benefit by 10 per cent in 2016 at a cost of $670 million. This helped remove about 85,000 single seniors out of poverty. But we shouldn’t stop there. There should be annual increases of $670 million with the goal of eliminating poverty among seniors in the next five years.

The Working Income Tax Benefit was introduced in 2007. It aims to help low-income people on social assistance enter the work force. But benefit levels at $1,015 a year for single people and about $1,844 per couple (depending on the province) are too low to do an effective job.

The maximum benefits should be doubled over four years, and the program should extend its reach higher up the income ladder so that it becomes a major income support for Canadians who work but remain poor. This would cost an additional $250 million a year.

More than 12 per cent of working- age Canadians live in relative poverty. Provincial minimum wages and social assistance rates fall far below the poverty line. While child and senior poverty has been the focus of government anti-poverty initiatives in recent years, very little attention has been given to addressing working age poverty. The federal government has some tools available that could tackle this problem. A very cost effective and efficient way to deliver benefits to many low-income Canadians would be to boost the GST/HST credit. This benefit now costs about $4 billion. C4TF recommends doubling this amount for an additional expenditure of $4 billion a year. All of these enhancements to current programs would cost about $6 billion a year. They could easily be funded by closing some of the $16 billion of unfair and ineffective tax loopholes.

Dennis Howlett is the executive director of Canadians for Tax Fairness.