Why Broad Base Tax Cuts Are Bad Policy

It sounds good. Knock a few percent off the taxes I pay every paycheque, and I wind up with a few more pennies in my pocket, right?

According to a comment in my last post this should be absolutely true:

Actually, tax cuts - even those which do not directly advantage lower income earners - significantly improve the welfare of all citizens of a nation, whether they are wealthy or poor.

Well, let's take a look at this for a second.

Let's assume I take 1% off income taxes across the board. I'm not going to fiddle with the brackets, but just take the 1% off the taxation rate. I'll use the calculation on the CRA website to do a quick calculation for 3 different cases:

1) Taxable Income = $30,000
2) Taxable Income = $50,000
3) Taxable Income = $100,000

(Taxable income being your income less deductions for RRSPs and similar tax shelters and non-taxable "business costs")

Case #1: Taxable income = $30,000 (Lots of people earn less than this in total income)
((30,000 - 0) x 15.25%) + 0 = $4,575.00 taxes
After a 1% cut:
((30,000 - 0) x 14.25%) + 0 = $4,275.00 taxes - a total of $300 less in taxes.

Case #2: Taxable income = $50,000 (A modest professional salary)
((50,000 - 36,378) x 22%) + 5548 = $8544.84 taxes
After a 1% cut:
((50,000 - 36,378) x 21%) + 5183.87 = $8044.49 taxes - a total of $500.35

Case #3: Taxable income = $100,000 (nobody I know)
((100,000 - 72,756) x 26%) + 13,551 = 20634.44 taxes
After a 1% cut:
((100,000 - 72,756) x 25%) + 12,823.25 = 19634.25 taxes - a total of $1000.19

* note: The base tax amounts added to each are simply the sum of the maximum tax levied for the previous income bracket.

Remember, that those amounts are spread over the entire year, and appear fractionally on each paycheque. Since most people are paid either biweekly or semi-monthly, I worked it out based on either 24 or 26 pay periods.

Scenario #1: Savings = $300
$300 / 24 = $12.50
$300 / 26 = $11.54

Scenario #2: Savings = $500.35
$500.35 / 24 = $20.85
$500.35 / 26 = $19.24

Scenario #3: Savings = $1000.19
$1000.19 / 24 = $41.68
$1000.19 / 26 = $38.47

Now, let's consider the economic realities behind these numbers. First of all, the ability of people in the higher income brackets to save money - and thus realize the total value of such a tax cut increases dramatically as you go up the income scale. In the lower brackets, just about every penny of take home pay is used for survival - paying rent, transportation and food.

While $12 each paycheque will no doubt be appreciated, $12 doesn't go that far these days. (It doesn't even cover the fresh produce needs of one person for a week!) Worse, while that money might be "in my pocket", and therefore I "have choice" about what happens with it, the fact is that a dental checkup is $300 these days, a trip to the physiotherapist is between $75 and $100 {an important point, since the lower paying jobs are often labour jobs with a higher probability of injury that requires treatment that is not covered by medicare}

With a taxable income that is approaching $100,000, unless you are really a spendthrift, your cost of living should still permit you to save quite a bit, and that thousand dollars is likely to be available for further investment at year's end. (My taxable income is nowhere near that, and I manage to save a fair bit each month even after paying my bills, and treating myself reasonably well)

In essence, we wind up doing little that actually helps the lower income people {as commenter JN pointed out, McJobs don't exactly pay a living wage}. We put a few nickels in their hand and think that we've "helped" - do we not gain far more as a society by making education more affordable, or health care more broadly accessible with those dollars? Especially when those dollars are brought in proportionately across the entire population?

Sadly, the commenter I mentioned first, also made the following assertion about the "benefits" of tax cuts:

The increase in domestic spending generated by tax cuts - even just a 1% GST cut - greatly assists in creating jobs. The more that wealthy people spend in the economy, the more likely that others will be able to find employment in the first place.

It is far from clear that Reagan-style Supply-side Economics (also often referred to as Reaganomics) actually have any such effect. First off, the wealthy spend a much smaller percentage of their available income; second, there is no clear relationship between the taxes of the wealthy and jobs.

The job growth under the Reagan administration was an average of 2.1% per year, which is in the middle of the pack of twentieth-century Presidents.

This is hardly a stellar recommendation for the notion that tax cuts of this form are actually a good thing from an economic stimulus point of view. (BTW - a 1% GST cut only makes a measurable difference on large purchases - such as cars - something most of us only do every 7-10 years)

Since the Harper government has made it quite clear that tax cuts will come at the expense of social programs that benefit Canadians on low incomes, while increasing spending and commitments to wars. Since Harper seems to feel that the $13 billion surplus absolutely must be used to pay off debt (and we are a long ways from paying it all off yet), I would have to imagine that simply cutting taxes only prolongs the payoff period for the debt.

Frankly, I'd rather have the taxes stay where they are, and the monies folded into such eminently useful areas as education and health care. (Which the provinces have screamed for years the Federal Government is underfunding - with some justification), and have a hope of being able to get medical treatment when I need it - regardless of what my income is.