Taxation and the middle class

[ijmorlan]

Keep in mind that the present system isn’t really a system. I keep seeing articles about provinces complaining that they used to be a have province but now are a need province and can we please re-negotiate the formula? And I’ve never seen an article that actually explained the formula. As far as I can tell there is no formula, just a bunch of province-specific rules that need to be re-negotiated every time the status of various provinces changes.

Oh, it is a system, and it's not renegotiated each year. You can find the details here, for example:
https://www.policyschool.ca/wp-content/u...zation.pdf

It's a fairly long and detailed read, but it's very much a formula, it's not just the federal government arbitrary picking who should get money and who should not. A province's status may change, but it's only because that province is now financially better off than before.

I didn’t suggest that it is renegotiated every year. But I do keep hearing about renegotiation related to change of a province’s status. A proper system would not require renegotiation unless the fundamental purpose or organization of the system was changed. Also the whole concept of a “status” is questionable; there is a smooth continuum between poor and rich.

Imagine if the income tax system worked by establishing for each person whether they were “rich” or not; this would determine their tax rate. Every 10 years each person would lobby to be classified as “poor”; the wealthier of them would be laughed at and classified as “rich”. Some people who saved well and had gardening as a hobby would be classified as “rich” because their house was gorgeous even though they had no more income than the people down the block while others who blew all their money on gambling would manage to be classified as “poor”.

So a proper system of the same general nature as the existing one would just take some economic numbers as inputs, run them through a smooth function, and output numbers which would determine the payments, in such a way that wealthier provinces would tend to fund poor ones.

That being said, thanks for the link; I have not read it yet but have bookmarked it and will take a closer look soon.

Remember that well-off provinces are that way because they have well-off people with big incomes in them. Those people pay a much higher fraction of their income to the federal government in income tax. Same for corporations. So, on net (income tax minus block grants), rich provinces will pay into the system while poor provinces will receive.

The way equalization works today is similar to OAS (or welfare): the money is collected mostly from well-off people (progressive income tax) and distributed to those in need (OAS is income-tested and poor people receive more). A fixed per-capita block grant would give everyone the same, reducing the amount of income redistribution and thus increasing inequality.

I happen to think the OAS clawback is a pointless added complexity to the system. If we want to raise taxes on higher income earners, we should just raise the top tax bracket rather than fiddling around with clawing back a de minimus (for them) amount.

Similarly I am opposed to the arbitrary exclusion of many food items from the GST/HST. If simply ending the exclusion would increase hardship for people of limited means, that can be fixed by creating/increasing the guaranteed annual income and/or child benefit (and/or GST tax credit), rather than by introducing utterly pointless complexity into the GST system by requiring every item to be classified as to whether it is a necessity (no tax) or a luxury (tax). This has also led to absurdities like I think a single doughnut is taxable but a half dozen or more are not. Also the absolutely insane Ontario policy that restaurant meals under I think it is $4 are tax free (well, provincial tax free; there is still GST, but now with the HST it’s all called HST but the rate at which it is charged changes).

Also remember that income is taxed progressively. At the top bracket a person pays 33% in federal tax and between 11.5% and 25.75% in provincial/territorial tax. So somebody in that class receiving a payment (say OAS, or guaranteed income, or whatever) already only nets between 42% and 56% of what somebody in the bottom “no tax” bracket receives. So the supposed benefit of the clawback is even smaller.