Taxation and the middle class

[taylortbb]

Are we really sugar coating a tax hike on behalf if the City?

Anything less than inflation is effectively a tax cut. 1.1% is less than recent inflation, though 2020 may be lower inflation than average. Either way, it's not really a tax hike, it's pretty much a status quo maintenance of current service and taxation levels.

[ijmorlan]

Are we really sugar coating a tax hike on behalf if the City?

Anything less than inflation is effectively a tax cut. 1.1% is less than recent inflation, though 2020 may be lower inflation than average. Either way, it's not really a tax hike, it's pretty much a status quo maintenance of current service and taxation levels.

That’s more or less what I’m getting at.

Roughly speaking, the federal government can increase spending every year, forever, by the yearly GDP increase without “raising taxes” (adjusting upwards the GST or income tax rates). By contrast, if a municipality wants to avoid tax “increases” they have to spend the same number of dollars every year. In other words, as inflation progresses and the population increases, they have to cut (real, and especially real per capita) spending.

Personally I don’t have an opinion on what a good level of taxation is. What matters is how worthwhile are the programs on which we spend the tax money. I’d be fine paying 90% income tax if it bought enough great stuff for everybody (including myself) that couldn’t be better provided privately; on the other hand I could hypothetically be unhappy with paying even 10% income tax if I was sufficiently unimpressed with the programs funded by it.

[Momo26]

Okay it's a tax hike...regardless if inflation went up by 2 or 20%...home owners will be paying more next year, on the heels of the worst economically performing year in ages. I understand the argument that everything else is going up in price (including services the city pays for that the general public, or segments within, benefit from) so the taxes are "keeping up"...

Does anyone have the breakdown of spending and savings incurred by the City for year to date, which takes into account covid implications?

[Bytor]

This article is a good explanation why a property tax increase of less than inflation is actually a tax cut. https://www.thestar.com/news/gta/2015/03...eenan.html

[dtkvictim]

This article is a good explanation why a property tax increase of less than inflation is actually a tax cut. https://www.thestar.com/news/gta/2015/03...eenan.html

It's a revenue cut for the municipality, but it's a tax increase nonetheless. First of all, as far as I'm concerned, intentional inflation is a form of taxation (yes, I understand why we have inflation). It's a wealth tax that disproportionately targets the non-asset owning classes. On top of that, very few people have wages that keep up with inflation, so even in terms of income a property tax increase in line with inflation is still a greater proportion of a person's paycheck going to taxes.

I don't blame municipalities for this. I'm fundamentally opposed to property taxes, but in the absence of any other consistent form of revenue, what can the cities do?

[danbrotherston]

This article is a good explanation why a property tax increase of less than inflation is actually a tax cut. https://www.thestar.com/news/gta/2015/03...eenan.html

I mean, this article is focused on property taxes, but this is important to remember about money in general. Money is a fake thing, the only real thing about money is it's purchasing power. If you have less or more purchasing power, that's an increase or decrease. The number that represents it is irrelevant.

If the dollar value of taxes goes up by exactly inflation, but you don't get a raise, taxes stayed the same but your purchasing power decreased, talk to your employer about why your labor is worth less this year than last.

Basically any time you are comparing dollar amounts in different time periods, there should be an inflation adjustment.

[ijmorlan]

Okay it's a tax hike...regardless if inflation went up by 2 or 20%...home owners will be paying more next year, on the heels of the worst economically performing year in ages. I understand the argument that everything else is going up in price (including services the city pays for that the general public, or segments within, benefit from) so the taxes are "keeping up"...

Does anyone have the breakdown of spending and savings incurred by the City for year to date, which takes into account covid implications?

Actually even the bolded part isn’t necessarily true. If the total number of homes went up by 1.1%, then the amount paid per home would actually stay the same. While the points about inflation are valid, the core of what I’m pointing out is that property tax “increases” if the total receipts increase, whereas other taxes only “increase” if the taxation rate increases.

[ijmorlan]

I don't blame municipalities for this. I'm fundamentally opposed to property taxes, but in the absence of any other consistent form of revenue, what can the cities do?

Indeed. It’s really up to the provincial and federal governments to fix this.

I would start by moving education entirely off of property taxes and just paying for it via the provincial budget. This of course implies an increase in the various provincial taxes.

Next I would increase the GST/HST and send the increase directly to the various municipalities. So maybe we increase the Ontario HST from 13% (5 federal + 8 provincial) to 15% (5 federal + 8 provincial + 2 municipal).

Finally eliminate the existing federal equalization payment system which is a continuing political nuisance and which nobody understands anyway and probably doesn’t make sense (“probably” only because I don’t understand it; but I’m pretty sure if I did understand it I would just believe more strongly it doesn’t make sense) and replace it with per capita block grants from the federal government to all the provinces, municipalities, and individuals; the last part also being referred to as a guaranteed or basic income.

I don’t know what a revenue neutral level of property tax would be after the above, but for sure it would be much reduced from where it is and much less of an issue.

But I think I just drove this discussion way off the road. Sorry everybody.

[tomh009]

The federal government really cannot fix this. Municipal governments only exist at the pleasure of provincial governments. Yes, the province could fund municipalities out of tax revenue -- but if you really want the taxes to be progressive, and poor people paying less, then you need to fund it using income tax, not HST.

As for block grants, are you proposing that each province/territory should get $x per resident, regardless of its economic situation? If yes, then the rick provinces would love this, but the less well-off ones would suffer. This might be simpler, but it would increase inequality. Transfer payments are designed to reduce inequality, and they have been doing so since 1867.

[danbrotherston]

The federal government really cannot fix this. Municipal governments only exist at the pleasure of provincial governments. Yes, the province could fund municipalities out of tax revenue -- but if you really want the taxes to be progressive, and poor people paying less, then you need to fund it using income tax, not HST.

As for block grants, are you proposing that each province/territory should get $x per resident, regardless of its economic situation? If yes, then the rick provinces would love this, but the less well-off ones would suffer. This might be simpler, but it would increase inequality. Transfer payments are designed to reduce inequality, and they have been doing so since 1867.

You could fund it with a wealth tax...just a better designed one than property taxes...

Honestly, it is down right weird that the province holds such power...the last municipal election should have led to a revolution, if people actually cared about their municipal governments. And yet for some reason, the province feels it necessary to also control municipalities by starving of them of funding, then using grants to influence how they spend their budget.

[ijmorlan]

As for block grants, are you proposing that each province/territory should get $x per resident, regardless of its economic situation? If yes, then the rick provinces would love this, but the less well-off ones would suffer. This might be simpler, but it would increase inequality. Transfer payments are designed to reduce inequality, and they have been doing so since 1867.

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.

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.

Also, as with guaranteed income, OAS, and other payments, it’s important the system be universal in order to avoid perverse incentives where increasing income, for example by getting a better job, doesn’t actually significantly increase ones income due to losing the government payment.

Block grants might not be absolute best way to handle equalization, but definitely and for sure the equalization formula should not mention individual provinces, nor should it have carefully-crafted thresholds and criteria chosen to identify individual provinces without naming them.

[tomh009]

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.

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.

[tomh009]

The federal government really cannot fix this. Municipal governments only exist at the pleasure of provincial governments. Yes, the province could fund municipalities out of tax revenue -- but if you really want the taxes to be progressive, and poor people paying less, then you need to fund it using income tax, not HST.

As for block grants, are you proposing that each province/territory should get $x per resident, regardless of its economic situation? If yes, then the rick provinces would love this, but the less well-off ones would suffer. This might be simpler, but it would increase inequality. Transfer payments are designed to reduce inequality, and they have been doing so since 1867.

You could fund it with a wealth tax...just a better designed one than property taxes...

Yes, absolutely. Or you could give the municipal governments more power and flexibility in how to do taxation.

[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.

[tomh009]

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's exactly how it works. There is no determination of "rich" or "poor" up front: the formula determines how much is paid to each province. And then the media and politicians make up terms like "have" and "have not" which are not part of the calculation at all.

And the formula doesn't take into consideration the spending habits of provinces (your comparison to gambling vs gardening), only their income. From the link I posted above:

Whatever the number of sources, the essential
calculation of a provincial government’s equalization entitlement is conceptually
straightforward. At the core of the calculation is the difference between two numbers. Letting E
denote a provincial government’s equalization entitlement per capita, it is calculated as:

E = S - F

where

S (the standard) is the estimated potential revenue a group of reference provinces could
raise if they applied a set of given (or “standard”) tax rates to specified revenue sources
within provincial jurisdiction; and

F (the province’s fiscal capacity) is the estimated potential revenue the provincial
government could raise if it imposed the same set of standard tax rates to the same
specified revenue sources within its jurisdiction