Tax System Can Reduce Poverty and Inequality
Dennis Howlett, Canadians for Tax Fairness
The tax system can be a powerful tool for redistributing wealth and reducing inequality and poverty. We all benefit (including the rich) from a more equal society with better population health, reduced crime, and better education. Recent research also now shows that lower inequality also means better employment opportunities and a more vigorous economy, again, from which we all benefit, rich or poor.
There are a number of ways that the tax system can be changed to address inequality and poverty in Canada.
Inequality needs to be tackled at both ends of the income scale
At the top end, while the federal government and several provincial governments have made the income tax system more progressive by taxing the very rich more, these reforms do not work very well because the tax system is riddled with unfair and ineffective tax loopholes that allow the wealthy to pay far less than the top marginal rate on much of their income. And we don’t have any real tax on wealth (as opposed to income). Unfair and ineffective tax expenditures bleed the government of revenue that could otherwise be used to fund government programs. A recently published study from the Canadian Centre for Policy Alternatives, found that 59 of 64 loopholes benefit mostly the wealthy at a cost of over $100 billion. Canadians for Tax Fairness has identified over $16 billion in the most egregious tax loopholes that should be closed immediately. The worst offenders include the Stock Options Deduction, the Capital Gains Deduction and the Business Entertainment Tax Deduction.
The federal government also needs to get a started on taxing wealth by introducing a minimum inheritance tax of 45% on estates valued above $5 million, similar to the estate tax in the U.S., which would net an estimated $2 billion annually in new revenues (see the Alternative Federal Budget 2017).
The Canadian tax system is also able to transfer benefits to low income Canadians in a very efficient way and was relatively successful in reducing poverty, especially for seniors and more recently for families with children but has been losing ground more recently for seniors. But current inequality and poverty rates clearly indicate that there are changes needed to bolster social programs and ensure adequate distribution of income at this end of the scale.
It is possible to achieve ambitious poverty reduction targets by significantly augmenting many of the efficient and cost effective delivery mechanisms that already exist in the federal tax and social transfer system.
Child and family poverty: The Federal government has taken a very positive step in reducing child poverty by introducing a new and improved Canada Child Benefit. However, Campaign 2000 estimates that even after recent improvements in the child benefit, it would still leave a million children living in poverty.
The government should commit to reducing child poverty by 50% over the next 5 years. While a combination of measures including a national housing strategy and a national child care program could contribute to achieving this goal, annual increases of $1 billion to the CCB could do a lot of the heavy lifting and help us achieve the goal of ending child poverty.
Seniors poverty: Canada has had some success in reducing poverty among Canadian seniors to a low of 3.9 per cent in 1995. However, since then we have been losing ground and poverty rates have risen to about 11 per cent as more Canadians are retiring without adequate company pensions or retirement savings.
The government did increase the Guaranteed Income Supplement top-up benefit by 10% in 2016 at a cost of $670 million which helped remove about 85,000 single seniors out of poverty. But we shouldn’t stop there when we have over 600,000 seniors still living in poverty. There should be annual increases of $670 million with the goal of eliminating poverty among seniors in the next 5 years.
Working Age Poverty: More than 12 per cent of working-age Canadians live in relative poverty. Provincial minimum wages and social assistance rates fall far below the poverty line. While child and senior poverty has been the focus of government anti-poverty initiatives in recent years, very little attention has been given to addressing working age poverty. The federal government has some tools available that could be used to tackle this problem.
A very cost effective and efficient way to deliver benefits to many low income Canadians would be to boost the GST/HST credit. The GST/HST benefit now costs about $4 billion. We recommend doubling this amount for an additional expenditure of $4 billion a year.There is another tax system based program called the Working Income Tax Benefit which was introduced in 2007 which aims to help low income people on social assistance enter the work force. But the benefit levels at $1,015 a year for single persons and about $1,844 per couple, depending on the province, are too low to do an effective job.
The maximum benefits should be doubled over 4 years, and the program should extend its reach higher up the income ladder so that it becomes a major income support for Canadians who work but remain poor. This would cost an additional $250 million a year.
How to Pay for Boosting Poverty Reduction Measures?
The enhancements described above would cost about $6 billion a year. This could easily be funded by closing some of the $16 billion of unfair and ineffective tax loopholes already identified by the Canadians for Tax Fairness. This would effectively begin the process of tackling inequality at both ends of the income scale simultaneously. And there would be funds left over to invest in a national child care program and a national social housing program that would also help reduce poverty while boosting employment and the economy as a whole.
Implementing Fair Tax policies is Easier Than Establishing a Basic Income
There are risks inherent in replacing all existing social assistance programs with a basic income; some people living in poverty could end up in a worst situation. The full savings from replacing other social benefit programs such as welfare and disability benefits could not be realized without federal-provincial agreements. Without replacing many of these existing benefit programs, there would not be sufficient funds to set Basic Income rates at adequate levels. Additionally, without robust minimum wage policies, a basic income can incent companies to offer less than living wages, shifting responsibility for paying their workers onto the taxpayers. For these, and other reasons, it is important to use caution in approaching the concept of a Basic Income as the solution to poverty and income inequality in Canada.
It is possible to achieve ambitious poverty reduction targets by significantly augmenting many of the efficient and cost effective delivery mechanisms that already exist in the federal tax and social transfer system. This would be much easier to implement and could help to augment the inadequate levels of support provided by almost all provincial and territorial welfare programs.