Montréal, 5 août 2000  /  No 65
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David MacRae is a software consultant who works out of his home in St. Laurent, Quebec.
by David MacRae
           There is a fair amount of buzz among media pundits and Liberal party hacks to the effect that the Achilles Heel of the Canadian Alliance is their Single Tax proposal, Solution 17. Canadians, they say, will never accept this giveaway to the rich. Well, boys and girls, I'm about to expose the dirty truth: the flatter the tax system, the higher the percentage of taxes which are paid by the rich.
          That's right: where marginal tax rates are low and flat, the rich pay more taxes. Where marginal tax rates are high and progressive, the tax burden is dumped on the middle class. It is time to confront this lie head-on. « Progressive » tax systems are not a tax on the rich. They are a tax on attempting to get rich.  
Progressing toward poverty 
          In the comparatively flat American system, 60% of federal income taxes are paid by 10% of the population. Furthermore, the proportion paid by the rich has been steadily increasing since Reagan's reforms leveled the system out. Whatever you might think of the justice or fairness of this situation, it is clearly true that the effect is to tax the rich. 
          In Canada, the situation is quite different. Canadian tax policy is to confiscate at least half of all income above subsistence levels. Of course, they get you again if you actually attempt to do something with the other half. But leave that aside for now. 
          Our tax law is deliberately complicated to prevent you from knowing how much they're really taking from you. They have EI (Employment Insurance) and CPP/QPP (Canadian and Quebec Pensions Plans) and federal income tax and provincial income tax. There are tax credits and tax credit claw-backs. There are surcharges. On the other hand, some taxes max out. Some of the money is taken off your pay check and some is taken from your employer before he ever gives to you.(1) 
          Due to the EI and CPP/QPP taxes, they grab a piece of the very first dollar you make. Depending on what exactly happens to EI, this piece will be around 11% in 2003. When you start earning real money, say $ 7000, the rate zooms up to about 38%, depending on your province. Actually, I'm being somewhat unfair. Depending on your family configuration, you could actually be taxed at the 11% rate until the take-at-least-half-of-everything rule kicks in. Or it could be something in between. Depends on the number of tax credits you qualify for. 
          When does the 50% rule take effect? They hide it through their accounting trickery but it kicks in when you start making the princely sum of about $ 22 000. Even the most rabid advocate of the nanny state cannot call this wealthy. 
          I suppose you could call this a progressive tax system. You « progress » from 10% on your first dollar to 38% at some point in the first 20 grand to at least 50% at $ 22 000. It may be progressive but it is clearly not taxing the rich. 
          But wait, there's more. Incredibly, the working poor pay the highest tax rates. Because of the perverse effects of tax credit claw-backs, people making between about $ 22 000 and $ 35 000 face an effective marginal tax rate of between 60 and 80%. In certain cases, this can actually exceed 100%. Yes, that's right. Make another dollar and you are rewarded with a tax bill of one dollar and five cents. 
          When you have finally clawed your way far enough up the ladder to escape this particular trap, they're ready with another one. The 26% federal rate kicks in at about $ 37 000. Add in the rest of their deductions and you are back up over 50%. Again. They twist the screw some more at higher levels. It is possible to get back up to a 70% rate.  
     « With some exceptions every Canadian making more than approximately $ 22 000 has half to three-quarters of his money confiscated. The lucky people who manage to be among these exceptions are "only" taxed at a 40% rate. » 
          The bottom line is this: with some exceptions every Canadian making more than approximately $ 22 000 has half to three-quarters of his money confiscated. The lucky people who manage to be among these exceptions are « only » taxed at a 40% rate. 
Thanks for nothing! 
          It's about time we called this fraud to account. Canada's income tax system is not about taxing the rich; it's about taxing an attempt to become rich. It is a penalty on escaping poverty. It is a penalty on working and investing in your future. Could it be that Canada is falling behind other countries in per capita GDP because of the way we punish people for trying to get ahead in their lives? 
          In their book, Tax Facts 11, the Fraser Institute think tank points out that the 30% of Canadian families earning more than $ 60 000 have 57% of the income and pay 64% of the taxes. The institute seems to take the position that this is unfair to the wealthy. In fact, what is remarkable is how fair this really is. Despite 30 years of draconian efforts to make the rich pay, their ratio of income dollars received to tax dollars paid is only 1.12. This ratio for the middle 40% is not much different: 0.93. Contrast this with the American system where the rich really do pay. 
          The reality is that it is impossible for Canadian governments to make the rich pay because there aren't any left in this country (or so few as to make no difference). The Bronfmans and the Irvings left after making their fortune. But that's old money, pre-Trudeau. New money has learned how to avoid being destroyed by Canadian tax policies. It leaves before striking it rich. 
          Since there aren't any rich left, the state has to live off ordinary Canadians. The upper-middle class pays somewhat more than the lower-middle class but both pay. And pay. And pay. Only the poor escape a bit. The income-to-tax ratio of the bottom 30% of Canadian families is 0.55.  
          But do the poor really escape? To answer this, we have to ask the question which welfare advocates refuse to ask: « Who are these people? » Nanny state enthusiasts sputter on about the homeless, the disabled and abandoned mothers. Aside from the fact that most welfare mothers are not abandoned but rather have chosen their way of life, it is a lie to say that these people are representative of the poor. They are not. 
Meet Jean and Françoise 
          In fact, most poor people do not think of themselves as poor at all, simply because they don't fit this image. I had a long conversation a few of months ago with a man living in poverty. Jean, as we shall call him, is struggling to support his wife Françoise and their two children on a salary of $ 22 000. Jean is quite articulate and is also a firm believer in socialism (and isn't scared to call it by its proper name) so we had a lively discussion covering a wide range of topics. At one point, I asked him what percentage of families with a salary in the bottom quintile can expect to escape this fate within the next ten years. Before reading on, ask yourself the same question: what do you think this percentage is? 
          Unless you already knew the answer, I'll bet you got it wildly wrong. According to American tax returns, about 85% of people move up at least one level and considerably more make it to the top than remain at the bottom. Interestingly there is no comparable data available from Revenue Canada. Or Revenu Québec. 
          Jean thought the answer would be about 5% (in my personal very non-random survey, I have found this to be typical). I then pointed out that his family was in the bottom quintile. Did he think his prospects were 5%? His mouth dropped as he realized that a) he was poor, something he never thought he was, and b) 95% was closer to the truth.  
          Consider his situation. He had just finished his Masters degree and landed his first full-time job. Françoise is still in school for another year. In fact his 22K looked pretty damn good since the four of them had been subsisting on much less than that for the past six years. But their hard work, and their investment in their future, is about to pay off. Between them, Jean and Françoise will probably be making more than $ 50 000 next year and perhaps $ 100 000 ten years from now. 
          But is it really going to pay off? Your turn is coming, Jean. Your turn is coming. The taxman is waiting for you too. Perhaps you are thinking of buying your first car. Maybe you want to save up the down payment for your dream home. Could you simply want to splurge on a trip to Disney World with your kids? Sorry, the taxman will be there to bring you back to reality. 
          Please note that Jean's kids are just two of the millions of children living in poverty in this country. « Something's gotta be done. Something's gotta be done », cries the welfare industry. The crap, it does. Jean and Françoise are doing something about it on their own, just as my own parents did when they were the same age. As for me, I waited until I was 28 before having my first child. If I had had him two years before that, I too would have been contributing to child poverty.  
Give wealth a chance 
          Low income is primarily a question of age, not circumstance. The truly poor, like the truly rich, are largely figments of the socialist imagination. At least 95% of the people in this country fall into one of two categories: those who were always middle class and those who were poor in their twenties and middle class thereafter.  
          Eighty per cent of people in poverty live in families whose head is less than 30 years old. Despite growing up in a family like this, I never thought of myself as being poor. Thanks to my father's hard work, things had changed by the time I was eight years old. I do remember very well how hard things were when I myself was 25, going to school while working full-time. But I was willing to go through this since I knew that it would pay off for me in the long run. Exactly as my father did. Exactly as Jean and Françoise are doing today. Exactly as millions of other Canadians do and have done throughout the history of this country. 
          Like my dad and like me, Jean is about to find out that his effort was, to a frighteningly large extent, in vain. 
          It's time to realize what the Canadian Way truly is: penalizing ordinary people for daring to hope to improve their lives. Americans tax the rich. Canadians tax those who hope to be rich. It's time to stop this. It's time to give those hopes a chance of realization. 
          Flat taxes, yes! As the Left likes to say: Make the rich pay. More important, give ordinary Canadians a chance to get rich. 
          There's one more thing. Jean works somewhere in the bowels of the Archaeology Department of the Quebec government. Did you know we had an Archaeology Department? Yes we do. And it's big enough to have bowels too. Jean's time seems to be split between building One Big Database to manage the millions of Quebec digs, re-doing the department Website and moving his office. This thing about moving his office is no joke; he did it three times in his first month. 
          Sorry, Jean, you're part of the problem, not part of the solution. Get yourself a real job. 
1. Money you never see is taxed at a slightly lower rate than money which you do. But don't fool yourself. You pay the tax, not your employer. Think of it this way: let's say your employer pays 8% payroll taxes on your salary. This is exactly equivalent to him paying you a salary of 108% of what you currently get and then taxing that salary at a rate of 100/108 * 8% = 7.4%  >>
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