It’s a Bad Idea to Hit Anyone with Tax Jump

Commentary, Welfare, Frontier Centre

Ontario’s popular new measure to tax the rich will, unsurprisingly to those who understand how economic incentives work, very likely create more economic costs than benefits, according to a new analysis from the C.D. Howe Institute.

The new Ontario tax boils down to a three-plus per cent hit on incomes over $500,000. It applies to only 0.4 per cent of the population, so not many Ontarians are complaining. But you can bet those who are affected will notice, and most won’t be pleased. Many studies show that when taxpayers are hit with a big tax bump many simply take more time off, move somewhere with lower taxes, find ways to change how they’re paid, or use some other trick to avoid or evade the taxman.

But old news or not, there are two timely messages for B.C. in this study.

First, in the current political climate, where it’s fashionable to beat on the “one per cent” and where many of us expect to see a new government in power next year, it’s a cautionary tale. Gordon Campbell’s Liberals wrote the book on how not to introduce a good tax, and now this may become Ontario’s chapter on why we shouldn’t introduce a bad one even if it sounds good. Because it’s never a good idea to provide incentives for people to do the wrong things.

But I find the study even more interesting for something it didn’t talk about — the impact of bad tax policy on people at the other end of the spectrum. If you accept — as I do — that over-taxing often causes rich people to take it easier than they might otherwise do, then why wouldn’t you expect poor people to react the same?

This is especially so when you realize how hard the tax system can wallop the working poor. When you look at the one-two punch of higher benefit costs and lower entitlements as income increases, earning a few dollars more can actually leave people who get a second job or a modest raise with less money, not more, in their pocket or purse.

Michael Goldberg and Steve Kerstetter set out a case study for CPPA three years ago that looked at working parents whose wages rose from $8.50 and $10 an hour to $10 and $12 an hour — which ought to make a significant difference for people living so close to the line.

But they wound up with higher deductions for federal and provincial income tax, EI and CPP. They hung on to their GST credit, but they lost their Medicare Premium Assistance, plus a big chunk of National Child Benefit Supplement and their provincial child care subsidy. And they wound up with $213.02 less to spend than if they’d never got the raises.

It’s hard to come up with a hard-and-fast prediction of who will lose money by earning more as there are so many individual variables in every family’s case. But working poor and low-income seniors, whether single or married, are often hit with punitive tax/clawback combinations as they try to get ahead.

The B.C. government went a little way to address this kind of perversity on Monday when Premier Christy Clark announced the restoration of earning exemptions for people on welfare. But the amounts are very modest — the total cost of allowing welfare recipients to earn a little money they can keep will add up to only $5 million a year. And the policy change does nothing for working poor or pensioners.

So I agree with the Howe study that it’s a bad idea to hit rich people with significant, arbitrary jumps in their tax load. But it’s just as bad an idea to do it to poor people.