Prime Minister Justin Trudeau's Liberals made a lot of hay with their election promise of a middle-class tax cut.
But adding a top income tax bracket and reducing the next highest bracket a few percentage points has not done much to make our tax system fairer.
This is because the tax system is riddled with tax loopholes that primarily benefit the rich. With the help of accountants and tax lawyers to help them figure out how they can exploit existing loopholes to maximize their tax savings, many rich families do not pay anything close to the top marginal tax rate on their income. And it doesn't stop there. Corporations are also benefiting from unfair tax loopholes.
"Preferential Treatment," a new report from the Canadian Centre for Policy Alternatives, has found that Canada's richest one per cent reap 42 per cent of the benefit of the 10 costliest tax loopholes. And this problem has been getting worse. This is up from 36 per cent in 1992.
The richest 10 per cent, on average, get a discount of more than $20,000 a year on their taxes from these tax loopholes -- an increase of $6,000 since 1992.
Corporations are also benefiting from unfair tax loopholes. They get a big break on capital gains because they only have to pay taxes on half the income they get from this source. This break has grown by 830 per cent since 1992, from $0.7 billion to a projected $6.4 billion in 2018. The scientific research and experimental development (SR&ED) tax break provides corporations a cool $2.8 billion today, up from $1.2 billion 25 years ago. And there's another loophole called the "non-capital loss carryovers" which gives corporations $6.4 billion a year, up from $4.6 billion in 1992.
These tax loopholes aren't the only gifts to corporations, they are piled on top of the cut in the federal corporate income tax rate from 28 per cent in 1992 to 15 per cent today. Tax loopholes (or tax expenditures as they are also called) cost the government over $200 billion a year of which tax breaks given just to the richest 10 per cent amount to almost $58 billion. Corporate tax loopholes cost another $23 billion. That's over $80 billion that the government is giving to the rich to help make them richer.
While not all of those tax expenditures are unfair or ineffective, and some are worth keeping, the massive giveaway to the top 10 per cent is costing our society and even dragging down our economy with inequality and lost services.
That $80 billion could otherwise be available to provide quality affordable child care, free university tuition, clean water to all First Nations reserves, a pharmacare program, eliminate child and senior poverty, boost international development funding towards 0.7 per cent, invest in affordable housing, fight climate change and invest in clean energy, build long-term and residential care facilities, and much more.
Tax loopholes make the tax system more complicated. It makes it more difficult to file your tax return and many people don't even know about some of the tax credits they could be eligible for unless they can pay for a tax professional to do their taxes.
When the tax system is complicated by hundreds of tax loopholes, it also makes it more difficult for the Canada Revenue Agency to enforce the tax rules. Finally, tax loopholes that deliver way more benefits to the rich contribute to growing income inequality.
The growing concentration of wealth in the hands of a few, and the stagnating incomes of middle- and lower-income Canadians, is at the root of our weak economy. Redistribution of wealth is key to stimulating domestic demand and would not only benefit middle- and lower-income Canadians -- it would boost sales for businesses as well.
Don't let the government's rhetoric about making personal and corporate income taxes more progressive fool you.
Most rich families and corporations don't pay anything close the to the top marginal rates or the full corporate tax rate. The very rich only pay the top marginal rate of 33 per cent on income that is over $202,000. They only pay taxes on half of their income that comes from capital gains. And they have all kinds of other tax loopholes available to them to reduce their taxes that are not available to most Canadians.
Corporations also can reduce their taxes by shifting profits to offshore subsidiaries in tax havens, as well as taking advantage of various tax loopholes. A recent U.S. Congressional Budget Office study found that Canadian corporations, on average, only paid an effective tax rate of 8.5 per cent -- a lot lower than the statutory combined federal and provincial corporate tax rate of 26 per cent.
The federal Liberals promised to review tax loopholes and close those that are unfair or ineffective. They promised to make the tax system fairer. They took a few small steps in the 2016 federal budget by cancelling family income splitting and by adding a top income tax bracket. But their efforts have stalled due, in part, to push back from those who are benefiting generously from these unfair loopholes.
They need to get moving on this promise again. Closing unfair and ineffective tax loopholes would not only make our tax system fairer and simpler, it would raise a lot more revenue that would enable the government to address the many social, economic and environmental challenges we face. And redistributing income would do a lot to boost our economy.