Jun 28, 2011

BC’s Regressive Tax Shift


With much of the talk on taxes in BC about the HST, we issued a new report today that looks at the bigger context for BC’s tax system (Vancouver Sun oped here, CTV News story here). Iglika Ivanova, Seth Klein and I compare and contrast BC’s tax system after a decade where tax cuts were touted as the solution to every problem. Those tax cuts came with a promise of prosperity for all, but ten years down that road, too many families are still struggling financially, and the gains of economic growth have been heavily concentrated at the very top of the income distribution (nationally, the top 1% captured one-third of the new income from economic growth, as estimated by my colleague, Armine Yalnizyan).

Our BC analysis draws on Statistics Canada’s Social Policy Simulation Database and Model to look at total BC taxes and key subcategories of personal taxes (income tax, commodity tax, property tax, MSP premiums) as a share of total household income, in 2000 and 2010. Results were broken down into deciles, and because so much of the real action is in the top decile it was further broken down into top 1%, next 4% and next 5%.

Unsurprisingly, total BC taxes as a share of income declined for every income group. This has undermined funding for public services, but has also led to a shift in who pays how much. The average tax cut was 2.3% of income, though there were larger gains as income increased. Tax reductions were only worth about 1% of income for the lower-middle deciles, increase to 1.8% of income for the upper-middle, then rise to 3.6% for the top 10%. However, the top 1% got tax cuts worth 5.1% of their income. In dollar terms, that is a gain of $41,000 for the top 1%, while those in the bottom deciles average a tax cut of a couple hundred bucks.

By contrast, in 2000 BC had a relatively flat tax system, with a modest bump in tax rate for the top 1%. By 2010, the tax system as a whole had shifted to become regressive. Income tax cuts, unsurprisingly, were the principal driver of lower taxes. The value of income tax cuts averaged about 0.2% of income for the bottom decile, rising to 5.2% for the top 1%. The provincial income tax system continues to be progressive, but has flattened out over the course of the decade.

Gains from income tax cuts were somewhat offset by increases in MSP premiums for middle-income groups, as much as half of a percent of income. But as “head tax” MSP premiums inevitably shrink as a share of income as income rises. So much so that for the top 1% the difference between 2000 and 2010 is negligible (and rounds to zero). For the bottom two deciles, exemptions based on income mean that the rate is effectively zero in both years; changes to increase the threshold meant reduced payments to a very small share of income (0.1%) for D2.

Bottom line: we need a fair tax system, and recommend a Fair Tax Commission that would engage a conversation with British Columbians about what public services we need, and how to pay for them fairly. A good tax system must also compensate for the tremendous inequality that arises in market incomes, which reiterates the need for progressive income taxes at a time when CEO, bankers and lawyers are making huge gains while middle class households are getting squeezed.

We were pleased to see a positive response from the Premier, who apparently shares our concern about the declining middle class. Alas, her Finance Minister, Kevin Falcon, simply dismissed the study without reading it. He then comments: “They want to go back to a system — tax the rich. They’re talking about the professionals that we’re trying to attract to B.C., the doctors and the nurses. We want them to come to B.C. and we want them to stay. We don’t want to chase them out with a tax system.”

Just to put that comment in perspective, the cut-off for making the top 1% in 2010 was $358,614 with an average income in that group of $825,000. We are not talking middle-class professionals here, though he’s right about the “tax the rich” part. Given what a great place BC is to live I don’t think a tax system that makes the wealthy pay a fair share is too much to ask.

A final note: we have received some criticism from economists that we include tax credits from GST/HST and carbon tax systems as income, rather than deducting them from taxes paid. We discuss this issue in the paper — technically, they are tax benefits, paid out the year after the tax year filed (you actually get a cheque or direct deposit) and by accounting convention they are considered transfer income in the SPSD/M. In a footnote we do some alt calculations that show the treating them as deductions from taxes lowers the bottom decile rate but still does not change the fundamental conclusion about regressivity. In any event, the key points from the analysis are what is happening at the top, not the bottom, as there are other things going in the bottom decile (we also discuss this if you want to get geeky about it).

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