Tricky Tax Accounting

January 4, 2002

Tricky Tax Accounting
Making a 5 Look Less than a 2

Campbell's tax accounting - making 2 bigger than 5! Is 5 less than 2? It is if you use New Era Tax Accounting, and that's only part of the reason you won't really see a change in your BC Tax deductions in 2002. Read on to see how the New Era government tried to be tricky and ended up outsmarting itself. Instead of saying high income folks got a cut of 5% while the bottom got a cut of 2.35%, the Campbell government said the top got 25.4% compared to 28.0% at the bottom. It then split the cuts in such a way that many people won't notice any new cut in 2002.

The Campbell tax cuts shifted the tax burden onto lower income earners and were phased in so as to try to distort the previous government's accounts. The cuts shifted the burden onto lower income earners because the tax rate, not dollar amount, was cut. The table below is from the original government news release. Columns showing absolute and percentage cuts have been added.

British Columbia Personal Income Tax Brackets and Rates
		Tax rates
		2001		2002
Tax bracket	Taxable income range*	Former	New**	New**	Actual Difference	Percentage Difference
1	$1 to $30,484	8.4%	7.3%	6.05%	2.35	28.0%
2	$30,484 to $60,969	11.9%	10.5%	9.15%	2.75	23.1%
3	$60,969 to $70,000	16.7%	13.7%	11.7%	5.00	29.9%
4	$70,000 to $85,000	18.7%	15.7%	13.7%	5.00	26.7%
5	Over $85,000	19.7%	16.7%	14.7%	5.00	25.4%
Brackets are indexed to provincial inflation. *Rates in effect from January 1 to December 31 of each year.

Incomes over $85,000 had their tax rate cut from 19.7% to 14.7%, a rate reduction of 5% (5%/19.7% = 25.4%). Meanwhile, the bottom tax bracket had its rate cut from 8.4% to 6.05%, a rate reduction of 2.35% (2.35%/8.4% = 28.0%). This is how 5 tax points are made to look like less than 2.35 tax points when the fancy math is done.

That's how Premier Campbell shifted the tax burden to lower tax brackets while claiming to give them a bigger tax cut (actually, contrary to government news releases, tax bracket 3 at $60,000 got the biggest percentage cut). The tax burden was shifted because the top brackets got much bigger absolute dollar cuts (much bigger proportionately and in total), while the bottom brackets got cuts that are less than their cuts in services. Collectively, the top tax brackets are a lower proportion of the total tax bill after the cuts as they were before the cuts.

The Campbell government was elected on May 16 and sworn in on June 5, 2001. On June 6 it announced its foolish tax cuts and made them retroactive to January 1, 2001 with a further reduction affective January 1, 2002. Mathematically it works out the same as making the full tax cut take effect July 1, 2001, so why did they split it and make it retroactive? One possibility is that they wanted to distort the books of the previous government by cutting its revenue for the last four months of its fiscal year (Jan-March, 2001). The Auditor General stepped in and said the tax cut had to be entirely booked for fiscal 2001-2002 making it have the same effect as if it had been one simple cut effective in July 2001.

The BC Government website was updated on December 28, 2001, with a brag about tax cuts in 2002, but don't hold your breath to see those cuts on your pay cheque. The impact in 2002 amounts to just ONE DOLLAR per pay cheque for most folks.

If you are paid twice a month, are in claim zone 1 (your spouse doesn't qualify as a deduction, nor do any children) and you make exactly $72,000 per year, then your provincial tax will actually INCREASE by $1.10 per pay cheque in 2002! There goes a half cup of coffee per month!

If you make $24,000 per year with similar deduction status, you may notice a tax cut of $1.40 per cheque (until the Federal government adjusts CPP and EI). On the other hand, if you make $168,000 per year you might notice a tax cut of $40.40 on each bimonthly pay cheque. How's that for stimulating the economy with a new boost for the new year?

The government appears to have tried to distort the previous government's books rather than honestly making the full cut effective July 1, 2001. Their two staged tax cuts are not visible on most pay cheques because the retroactive portion in 2001 is now eliminated at the same time the last third of the cut kicks in. If you think this is complicated, it is. Check out the comparison of the employer tax deduction tables to see what it means for take home pay.

The friendly tax collector provides employers with new deduction tables at http://www.ccra-adrc.gc.ca/tax/business/payroll/t4032jan02/menu-e.html Here's a comparison of those tables with the tables effective July 1, 2001, for provincial tax deductions:

      Twice Monthly Pay         Jan 2002       July 2001
                                      twice-monthly BC tax deduction
$1,000 ($24,000 per year)      $36.30           $37.70
$1,500 ($36,000 per year)      $69.90           $73.30
$2,000 ($48,000 per year)     $115.45         $119.10
$3,000 ($72,000 per year)     $218.95         $217.85
$4,000 ($96,000 per year)     $358.40         $348.05
$5,000 ($120,000 per year)   $508.35         $487.75
$6,000 ($144,000 per year)   $651.10         $626.85
$7,000 ($168,000 per year)   $799.85         $759.45
$8,000 ($192,000 per year) OOPS, the table stops there so you have to use the formula! But that's where the Campbell government started to give the really DRAMATIC tax breaks.

Unfortunately for the government its popularity plunged in the polls before all of this and there's nothing left to boost it back up. A government that is so deceptive that it tries to distort the books while making a foolish top loaded tax cut probably deserves to drop in popularity.