How can I cut taxes? Let me count the ways
Election courtship, Harper style
BY Ellen Russell
Photography by Reuters: Tom Hanson
Stephen Harper faces a tricky dilemma. Leading up to another election, the Conservatives need to make nice with some of their antsy allies. Income-trust investors are still seething over Harper’s retreat from his promise to keep income trusts tax-free. Harper’s social conservative base is irked that he has sacrificed its interests with the hope of mainstreaming the Conservative image.
The trick now is for Harper is to keep the faith of his allies without alarming voters by visibly favouring his buddies. Last fall the finance minister was floating further tax cuts for the rich. Although federal cash may be running low (thanks to all of those other expensive tax cuts), Harper has several options for tax cuts that will funnel money to his electoral base while appearing beneficial to all.
One likely option is an outstanding promise from the 2006 Conservative election platform: cutting the capital-gains tax. For the uninitiated, a capital gain is profit from the sale of an asset that has gone up in value. If you own stocks or properties that appreciate, the profit you make when you sell is a capital gain, and it is taxed lightly. (You pay a lot less tax on capital gains than you do on money earned from working.) The catch, of course, is that you must own assets to benefit from a cut to the capitalgains tax. If you aren’t flipping real estate or securities, this tax cut means nothing to you. But those disappointed income-trust investors are likely to benefit.
This olive branch to the propertied would be expensive, although no one knows how high the real price tag could be. But it’s easy to imagine this move could cost more than the $500 million per year the government estimated it was losing from the income-trust loophole. Ironically, Harper might appease irate income-trust investors by offering a new tax cut that is potentially even more extravagant.
Another possibility is that Harper will turn to “income splitting” in an effort to buff up his credentials as a champion of the family. Income splitting allows couples to divide their income between both partners for tax purposes. If one person earns much more than the other, income splitting reduces the couple’s total taxes. Single people and couples with comparable incomes, however, get zippo from this tax cut.
Income splitting is adored by social conservatives with fantasies of 1950s-style nuclear families in which Daddy earns lots of money and Mommy stays home. Tax-law expert Lisa Phillips of Osgoode Hall Law School says that, “The biggest winners from income splitting would be higher-income male breadwinners, and the kicker is they can shift their tax liability to the primary caregiver in the family without any legal obligation to give her the actual income.” The distressing gender implications of income splitting don’t stop there: for a government that is supposedly worried about skill shortages and an aging population, it is a strange choice to reward families where the woman stays home.
Though tax cuts for the wealthy come in different shapes and sizes like these ones, the idea is hardly new. Favouring the relatively privileged via politically motivated tax cuts is already having perverse effects on our tax system. A recent study by Marc Lee at the Canadian Centre for Policy Alternatives found that more than a decade of these tax cuts has produced vastly disproportionate benefits for the affluent. His study finds that, in 2005, the highest-income families actually paid a lower total tax rate than low- and middle-income families. This directly contradicts the basic principle of fairness in taxation: those with higher incomes should pay a larger percentage of their income as tax.
We already know where this obsession with tax cuts for the affluent is headed. In the United States, pro-rich tax measures have created a grossly unfair tax system. Billionaire Warren Buffett—reportedly the second-wealthiest American—estimates he pays about 18 percent of his income in federal taxes while his employees pay about 33 percent.
Buffett has issued a challenge to other billionaires: he will donate $1 million to charity if any other Forbes 400 members can prove that they pay a higher average federal tax rate than their secretaries, not to gloat, but because he thinks this scenario is wrong. So far no one has accepted the challenge.
A blatantly unfair tax system is the predictable result of using tax cuts to seduce voters. Don’t let Harper buy a majority by shredding what remains of fairness in our tax system.
