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October 5, 2000
Growing Together:
Priorities for the 2001 Federal Budget
Section 3
A truly balanced approach
The size of the current surplus means that the federal government can invest significantly, while still reducing some taxes. Tax measures can be used to promote higher levels of private investment, but across-the-board corporate tax cuts may only lead to higher dividends and capital gains for shareholders. And while personal income tax relief can directly boost after-tax incomes and household well-being, most Canadians will be the losers if tax cuts are financed from cuts to programs and services. Shifting expenditures on health, education and social security from the public to the private realm in order to finance lower taxes will only benefit the very affluent, and they will eventually pay the price of a much more divided and less inclusive society.
The CCSD recognises that the simplistic debate of tax cuts vs. spending ignores the crucially important role of the tax system as an important and growing vehicle for progressive social policy. Some areas of social expenditure (such as EI and social assistance) are counted as transfers (or spending), while others are accounted for as tax expenditures, not public spending (such as the Canada Child Tax Benefit, the GST Credit, and other targeted credits), but in effect they are all vehicles for transferring and redistributing income.
As one part of the tax/transfer system, the tax system remains a powerful instrument for addressing inequities in market incomes. Indeed, the tax/transfer system was largely successful in offsetting market-driven inequalities through the 1980s and early 1990s [10]. Canada differed significantly from the U.S. over this period in that after-tax income inequality was initially somewhat lower, and then remained stable rather than increasing sharply. However, growing market inequality has now widened the gap between affluent and low-income Canadians precisely because the offsetting impact of the tax/transfer system has been undercut. Deep cuts to transfers by both levels of government account for most of this change, but regressive features of the current tax system have also played a role.
Until this year, deindexation of the income tax system (its rate structure and credits) raised the tax burden on low- and middle-income taxpayers, while tax changes in the last budget will lead to some erosion of the personal income tax system's progressivity by reducing the top and middle rates. We believe that further tax relief should be oriented to make the system more progressive by delivering the greatest benefits to those Canadians who have shouldered the largest burden over the deficit-slashing years.
Today, the low threshold of the basic tax exemption means that low-income Canadians often pay quite significant amounts of personal income tax as a proportion of their income. For example, the 2000 Budget showed that a typical taxpayer earning $15,000 would pay $850 in federal taxes, while a taxpayer earning $20,000 would pay $1,646. Considering provincial taxes as well, this means that the average income tax rate for someone earning $15,000 would be 8.5%, and 12.3% for someone earning $20,000. Marginal tax rates for a person in this income range are about 25%, depending on the province, and this is paid on top of CPP/QPP and EI premiums of about 5% of pre-tax income. Even families of very modest means are subject to income tax.
Taking the poor out of the tax system
Data from Statistics Canada show that the average effective income tax rate on the poorest quintile of families was 6.5% in 1998. By contrast, the bottom quintile in the U.S. pay no income tax at all, on average, because of their high income thresholds and the impacts of the Earned Income Tax Credit, while those in the next quintile pay an effective personal income tax rate of less than 1% (Economic Policy Institute. State of Working America, 1998-99, Table 2.11). While we reject the U.S. trade-off of low income taxes for low levels of spending on transfers and services, it is notable nonetheless that the U.S. has used targeted tax relief as a tool for poverty reduction. Few proponents of the U.S. as a tax model for Canada seem to appreciate that fact: under the Clinton Administration, the effective personal income tax rate on affluent Americans has risen in order to finance reductions for the less affluent, thereby increasing the overall progressivity of the U.S. income tax system.
Rather than just "cut taxes," Canada's task should be to create a more progressive tax system by targeting any additional tax relief to those who need it most - low- and modest-income Canadians - and we must do so without eroding the fiscal base we need to sustain social investment. We need to work towards taking the poor out of the tax system.
Specifically, the CCSD recommends:
The federal government should increase the basic tax exemption to $8,000 in 2001 and at least maintain full indexation to inflation thereafter. This would provide relief to all, and proportionally, the greatest beneficiaries would be for low-income households, many of whom would then be exempt from income taxes.
Recent federal budgets have made some strides towards removing the poor from the income tax system. Increases to the Canada Child Tax Benefit have improved the after-tax incomes of low- and modest-income families with children, the reindexation of tax thresholds and credits was welcome, and the basic tax exemption has been increased.
All taxpayers benefit from increases in the basic tax exemption. In the 1998 budget, the exemption was raised by $500 for low-income taxpayers. In 1999, this was extended to all taxpayers and increased by another $175, then by another $100 in the 2000 budget. In the 2000 tax year, the exemption will reach $7,231 and will be increased further to "at least" $8,000 by 2004.
However welcome, the increase in the basic exemption for this year and as planned to 2004 still falls short of what is needed to restore its inflation-eroded value compared to the mid-1980s. (The exemption was introduced in 1988 as a non-refundable credit of $6,000, equivalent to $8,029 in 2000 dollars.) Changes to the basic exemption also fall short of tax reductions planned for middle- and higher-income groups. (The 12% increase in the basic exemption by 2004 compares to the 18% planned increase in the thresholds of the middle and top tax brackets.) Of course, higher-income taxpayers will also benefit from the elimination of the high-income surtax and cuts to the middle tax rate from 26 to 24%.
The 2000 Budget stated that further increasing the basic exemption would be a "priority area for further action should more resources become available." The increase that the CCSD proposes - $769, or $625 over and above an anticipated inflation adjustment of 2% - would provide a tax cut of about $100 over the projected inflation adjustment to virtually all taxpayers.
While modest, this step would restore the basic exemption to its 1988 level, remove more low-income earners from the income tax system entirely, and modestly improve the progressivity of the system as a whole. It would deliver a double benefit to lone-parent families who qualify for the equivalent-to-spousal amount. The revenue cost would be $1.75 billion, based on estimates provided by the Department of Finance in the last Economic and Fiscal Update. This appears to be eminently affordable in terms of the size of the forecast surplus, but the cost could, if deemed necessary, be reduced by phasing in the increase in the basic exemption for higher-income taxpayers, as was done in the 1998 Budget.
The federal government should increase the GST tax credit by $70 per adult and by $30 per child. The GST credit which was introduced to cushion low-income Canadians from price increases brought about by sales tax reform was modest. Because it was not initially indexed to inflation, its value has eroded over time. The decision to reindex the GST credit to inflation that was contained in the 2000 Budget is welcome, and now the CCSD calls on the government to increase the credit by $70 for adults (from $202) and by $30 (from $106) per child, in order to compensate for its loss in value. This would give $200 to a low-income family of four, over and above the projected indexation adjustment. Such a measure is particularly relevant at this time, given that home heating costs for low-income families will sharply escalate this winter.
The highly targeted nature of the GST credit - phased out once family income rises above about $26,000 - means that this measure would have a modest impact on the incidence and, most importantly, the depth of poverty. The increase proposed would cost $920 million, based on estimates in the last Economic and Fiscal Update.
Recognizing the costs of raising children
The federal government should work towards a universal child tax credit that would recognize the costs that all families face in raising children. Most other OECD countries already recognize the societal value and personal costs associated with raising children through their tax structures. In Canada, however, the costs of raising children are recognized only up to moderate-income levels, at which point the CCTB is fully phased out.
For many years now, children's advocates have argued that there should be 'horizontal equity' between families with and without children at all levels of income. A family's ability to pay taxes does not start at the first dollar of income earned; rather, it starts after attaining a minimum level of income necessary to fulfil its basic needs, including the care of dependent children.
There is currently much debate about the form that this recognition should take. A deduction is often proposed, but this would deliver the largest dollar benefit to higher-income families and it raises the issue of how to deal equitably with families with different combinations of earners and earnings. There is a strong case to be made for a return to a flat amount demogrant or Family Allowance directed to mothers, with differing views on how it should be treated as taxable income. Realistically, debate should start from the fact that we already have an evolving program based on family income, the Canada Child Tax Benefit (CCTB), which is now quite well accepted, despite its defects, and it is making a contribution to alleviating poverty and recognizing the costs of raising children.
As currently structured, the CCTB completely or partially excludes modest- to moderate-income families with children and it has high tax-back rates (to minimize total costs) which often result in very high marginal tax rates for many eligible families. It also effectively excludes many poor children on the basis of the source of their parents' income (such as social assistance benefits).
To move towards a more universal program, improvements to the CCTB could include eliminating the clawback altogether, or ending the clawback at a level that guarantees all children access to some minimum level of benefits. The former option is attractive in principle, but it would obviously be much more expensive. Creating a benefit floor would be an important step forward in ensuring that all families receive recognition for their caregiving labour, and it could be combined with measures to lower the effective marginal tax rates of families under the current system [11].
The CCSD believes that the federal government should phase out the combined CCTB benefit at a more gradual rate than that announced in Budget 2000, thereby providing greater economic support to modest- and middle-income families. The federal government should establish a benefit floor for all families that would, in effect, constitute a universal child benefit.
The tax changes that we have proposed here would deliver more after-tax income to those who need it most, and they would improve the progressivity and redistributive nature of the personal income tax system. A higher exemption and increased credits, in combination with the existing rate structure, would leave the federal government with a strong fiscal base from which to finance social investments. The current system is certainly not perfect from a progressive/income redistribution perspective, but it must be acknowledged that Canada relies more on progressive personal income taxes than do most high-social-expenditure countries (which rely more on relatively regressive sales and payroll taxes) and our system is moderately progressive across most of the income distribution.
The major defect of Canada's personal income tax system is that progressivity virtually disappears at high income levels: Conrad Black's marginal tax rate is no higher than that of many middle-class Canadians, and his effective tax rate is likely much lower, given special tax treatment of capital gains and dividend income. One solution would be to introduce a new, higher tax bracket for very high-income taxpayers (for example, for those earning $150,000 or more), perhaps introduced in a revenue neutral fashion by lowering the threshold of the current top rate.
The CCSD also wishes to go on record with our strong opposition to any move towards a "flat tax." While superficially attractive because of the alleged simplicity of a single rate, the design of a flat tax would require a clear specification of the tax base (i.e., taxable income). If deductions and special tax measures which favour the relatively affluent were not eliminated, a "flat" tax would, in fact, amount to lower effective taxes for those with significant property income and the ability to make large deductions (for RRSP contributions, for example).
Further, even if a flat tax had a very broad definition of income and a high tax exemption, it would cease to be progressive at and above middle-income levels. The real impact of a flat tax would not be greater simplicity, but rather a reduced tax burden on the very affluent. It should also be noted that most flat tax proposals being advanced today would erode the fiscal base of the federal government, and thus would result in large cuts to income supports and public programs and services, which would, in turn, eat into any tax benefits for the vast majority of citizens. In short, the concept of a flat tax should be rejected.
An Affordable Housing Agenda
Affordable housing is an increasingly critical issue for many Canadians. Just as we have seen a polarization in incomes through the 1990s, a divide is opening between Canadians who can afford safe and secure housing in decent neighbourhoods and those who cannot. Many groups are highlighting this housing divide, pointing to a series of factors behind the growing housing crisis and its most extreme expression, homelessness.
The overall supply of affordable housing is diminishing. There has been no new co-op or non-profit housing, the supply of new private rental housing is dwindling, the existing rental housing has been lost to demolition and conversion. Between 1995 and 1999, Canada's urban centres lost a minimum of 13,000 rental units [12]. The need for new affordable housing continues to grow. With more people chasing after affordable accommodation, vacancy rates have plummeted in many centres. Rents are rising faster than inflation. From October 1997 to October 1999, the average rent for a two-bedroom apartment rose by 11% in Toronto, 8% in Ottawa, 16% in Calgary, 10% in Edmonton, 7% in Regina, 10% in Hamilton, and 8% in Oshawa [13]. The rental housing costs of families with children are swallowing up an increasing share of the family's often stagnant and falling incomes, significantly contributing to the depth of child poverty. The threat of homelessness has increased substantially. Nationally, more than 830,000 tenant households are at risk of homelessness - defined here as households which pay more than 50% of their income on housing. Housing costs and the failure to invest in social housing are major contributing factors to the increased concentration of low-income Canadians in very low-income neighbourhoods. Such concentrated poverty can create a destructive set of mutually reinforcing disadvantages, as can been seen in many inner-city ghettos in the United States.
Federal and provincial governments have virtually withdrawn from the housing field. Funding cuts to national housing programs have meant that new affordable housing development ground to a halt after 1993. The federal government has transferred the administration of its housing programs to the provinces, who, in turn, have generally cut their housing programs or transferred responsibility to the municipalities - the government level least able to stimulate or maintain affordable housing. In dollar terms, the federal government's subsidy contributions of $1.6 billion per year have been frozen and are expected to decline as operating agreements with the provinces run out. Significant cutbacks in federal-provincial transfers have spurred rollbacks in rent-subsidy programs under provincial social assistance. Canada is alone among other industrialized countries in having completely withdrawn from the social housing field [14].
A roof over our heads
As in other policy areas, governments are placing excessive faith in private markets and "the community" to meet the demand for affordable housing. Following the U.S. example, many provinces are exploring the use of fiscal incentives and leverage tools to promote low-income housing, such as the Low-Income Housing Tax Credit or tax-exempt bonds issued by state financing authorities. These types of initiatives attempt to create incentives for private investment, but typically require many different investors to finance one affordable housing development. The federal government and provinces are similarly interested in fostering these types of partnerships and community-based interventions.
The reality is that private developers have not stepped into the breach. Nor are communities in a position to generate the capital necessary to underwrite major affordable housing initiatives. Partnerships should be a supplement to - rather than a replacement for - a strong public sector presence in housing.
It is untenable that the federal government should continue to sit on the sidelines as increasing numbers of Canadians struggle to find and keep affordable housing. A number of housing groups have put forward concrete suggestions to create a new housing policy for Canada. The Federation of Canadian Municipalities, for example, is developing a promising National Housing Strategy that includes action under four areas:
a flexible capital grant program for housing administered by an arms-length foundation targeting locally designed initiatives. a private rental program to encourage private rental production through tax reform and/or favourable loan programs. the creation of investment pools of money for affordable housing, to be loaned to affordable-housing providers at preferred interest rates. enhanced income supplement programs to make rents affordable to low-income Canadians.
Similarly, the Canadian Housing Renewal Association is promoting the idea of a new National Housing Foundation to support the development and rehabilitation of affordable housing stocks. The National Housing and Homeless Network is calling on governments to double their housing spending.
Budget 2000 set aside $753 million for homelessness initiatives over a three-year term - monies which had been previously announced - and it launched a new infrastructure program which includes funds for affordable housing among a host of other funding priorities, like roads, sewers, "green infrastructure" and the like. The funds may or may not be directed to improving housing accessibility, depending on local priorities. Clearly, the government could and should take much bolder steps to address the housing crisis.
The CCSD recommends that the federal government take a leadership role in developing a national housing strategy in conjunction with the provinces, municipalities and non-government housing associations, under the auspices of the Social Union Framework Agreement. The federal government should develop financial instruments including tax measures and capital pools to assist with the construction, financing and long-term maintenance of affordable housing stocks, in partnership with community and private sector partners, and building upon the many constructive proposals being advanced by municipal, voluntary and academic housing advocates.
Measuring and Monitoring Social Progress
Accurate information and analysis of our social situation is critical as we continue to debate our collective future, in order to identify our collective priorities and take action. Social progress demands that we understand the current realities and the effectiveness of current policies.
Today, the measurement, monitoring and reporting of our progress as a country is dominated by the economic side. Measures of economic progress such as the Gross Domestic Product (GDP) and the TSE 300 Index are reported regularly. Many people believe that if these indicators are headed in the right direction, all is well with the country. However, the data presented above clearly show that this is not the case, and good economists understand that GDP is only a very partial measure of well-being, one which fails to take into account such critical issues as the distribution of income, the extent to which some citizens are marginalized or excluded, the level of insecurity faced by households, the quality of family life, and the health of individuals, families and communities. GDP tells us if we are growing, but not if we are growing together or moving towards the kind of society Canadians want.
Indicators of social progress
Some social indicators are widely available and reported on - including labour force and poverty indicators - but the level of attention and legitimacy accorded to these social indicators remains limited. There is, however, a growing consensus that reliable, ongoing sets of social indicators are needed in order to properly inform public debate and policy.
The CCSD has been doing its part to move this agenda forward by publishing two annual reports on social indicators: The Progress of Canada's Children and the Personal Security Index. Both studies bring together a wide range of data within an overall analytical framework which makes some assessment of broad progress possible. Other notable efforts include reports on the state of Canada's families done by the Vanier Institute of the Family; recent initiatives in the reporting of health outcomes of children done by the Canadian Institute of Child Health; and recent reporting on the health of Canadians by the Canadian Institute for Health Information.
The CCSD is encouraged by the interest in measuring social progress and by new initiatives that are currently underway. The Policy Research Secretariat's work on social cohesion and pan-Canadian social indicators will undoubtedly advance this research agenda. As well, new grant programs such as the Community-University Research Alliances, under the Social Sciences and Humanities Research Council, hold promise. But much more needs to be done to actively expand research on social progress in partnership with the voluntary sector and citizens' groups, particularly in light of the Social Union Framework Agreement (SUFA) and ongoing discussions on the National Children's Agenda.
SUFA provides the immediate impetus and rationale for consolidating efforts to measure social progress in Canada. Accountability and transparency are key themes, reflected in strategies outlined in the Agreement, such as the requirement to measure and monitor outcomes of new and existing social programs, to share information and best practices to support the development of outcome measures, and to use third parties to assist in assessing social program performance. Similarly, the call in SUFA for greater citizen engagement is important. As signatories to SUFA, governments have committed themselves to establishing "effective mechanisms for Canadians to participate in developing social priorities and reviewing outcomes."
Monitoring social well-being in Canada requires a sustained, long-term strategy. It is a key aspect of public accountability, linking policy and program initiatives to outcomes for all stakeholders involved.
The CCSD recommends that the federal government devote $50 million in Budget 2001 for the development and implementation of a national strategy to monitor the health and well-being of Canadians. This would allow the development of a national research agenda, co-ordinated data collection systems, and a national reporting mechanism, building on existing government and NGO initiatives. The federal government should bring together the expertise of government, academics and the voluntary sector to develop and implement social monitoring. Specifically, we propose that the government bring together the Policy Research Secretariat, the Social Sciences and Humanities Research Council (SSHRC) and representatives of community-based non-governmental organizations to initiate and conduct social monitoring. An annual $15 million contribution should be allocated, with the funds to be administered by SSHRC.
Conclusion
Canadian Council on Social Development,
190 O'Connor Street, Suite 100,
Ottawa, Ontario, K2P 2R3
Tel: (613) 236-8977, Fax: (613) 236-2750, Web: www.ccsd.ca, Email: council@ccsd.ca
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