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December 12, 2012

Response to the CCPA on Tax Policy

The Canadian Centre for Policy Alternatives (CCPA) recently published a paper by Shannon Daub and Randy Galawan in which they interpreted the results of an online opinion poll and nine group interviews. I published a column in which I argued that they misinterpreted their results. I Tweeted regarding my disagreement with her assertions concerning the willingness of British Columbians to pay higher taxes, following an interview by Sean Leslie with Daub on CKNW.

The CCPA has published a reply by Daub to my column. Mark Lee, her colleague at the CCPA, Tweeted a link to her paper saying her paper is "in response to weak and infantile critique of tax poll" by me. I'll let readers of both papers decide the merits of my critique.

Here I examine Daub's response and point to what I consider errors in her facts and logic. Daub wrote: "The reality is that the vast majority of us pay less than 4% of our income in provincial income tax." This reminds me of the old joke about someone standing with one foot in a bucket of ice water and the other in a bucket of boiling water. An economist observes that on average the victim's feet are at an ideal temperature.

There are three primary sources for income tax data that are important for discussing Daub's comment. The provincial Income Tax Act, Canada Revenue Agency's (CRA)employers' guide for pay roll tax deductions and CRA's income tax statistics (here I used final statistics, 2009 tax year).

The employer's guide is useful because it shows tax rates in a more readable form than in the Act. For the 2012 tax year, BC's personal income tax rates are:

2012 BC Personal Income Tax Rates
Annual Taxable Income
Provincial Tax Rate
0.00 - 37,013
5.06%
37,013.01 - 74,028
7.70%
74,028.01 - 84,933
10.50%
84,933.01 - 103,205
12.29%
103,205.01 and over
14.70%


You will notice that the lowest personal income tax rate is 5.06%. How does that allow Daub to claim that "the vast majority of us pay less than 4% of our income in provincial income tax"? The trick is in the words "taxable income". Everyone gets to deduct a personal deduction from gross income earned and many get to deduct other things from disability credits to RRSP contributions, from support payments to moving expenses. People with the same number of dependents and same gross income can have substantially different taxable incomes. Of 3,414,510 personal income tax returned filed by British Columbians in 2009, no provincial or federal income tax was payable on 1,185,740 (35%). The statistics do not reveal how many tax filers paid federal tax but didn't pay provincial tax; however, the payroll deduction tables for 2012 show that for a person with one dependent federal taxes start to be withheld at $1,052 per month while provincial taxes start to be withheld at $1,624 per month. In other words, over 35% of British Columbians pay no personal income tax.

Questions in the CCPA survey were worded in terms of willingness to pay 0.5% to 3.0% of one's income. People living beneath the poverty level could have interpreted the poll as meaning they were being asked to pay 0.5% to 3.0% of their meagre incomes in tax. It is not possible to know how those sampled in the survey interpreted the questions. Unclear wording on the very complex matter of changes to personal income tax, can produce results of questionable value.

Daub asserted that my criticism contained a contradiction because I both argued that 0.5% of income is large and small. That's not a contradiction if the people being surveyed didn't understand what they were asked. A number that looks small as a percentage of income can look large as a percentage income tax increase. Despite accusing me of a contradiction, Daub wrote: "A 25% increase in the provincial tax rate sounds huge - but would amount to 1% of income or less for most people. And 1% of income for most people isn't a huge dollar figure." There you have it. Something can be both large and small depending on how you phrase it. I simply don't agree that any politician can sell a 25% tax increase by telling voters it's only 1% of income.

The CCPA report included a table showing from 44% to 69% of those surveyed were willing to pay more for various policy options. I argued that one gets a better idea by separating those who were only willing to pay 0.5% and by also looking at the combination of those who were not willing to pay anything and those willing to pay the lowest option. I called that combination those willing to pay little or nothing. That changed the CCPA's table to one which showed 71% to 84% of those surveyed reluctant to pay very much for any of the options. Daub believes that overstates resistance to tax increases when they are motivated by association with specific programs. I believe it accurately reflects the political challenge of convincing voters to support any of the options.

In her response Daub wrote: "Indeed, a 20% increase in provincial income tax rates - again, sounds huge, but for most people, we're still talking a few hundred dollars per year or less would raise almost $1.8 billion in new provincial revenues." The Second Quarterly Report from the Ministry of Finance. It shows that provincial income taxes are expected to yield $6.9 billion this year; 20% of $6.9 billion is $1.38 billion and many would argue that a 20% increase would yield less due to increased tax avoidance by those who pay the most. That is an error in excess of $400 million.

Daub wrote that it's not entirely clear what I think the HST lesson is before she added "unless perhaps it's simply that everyone should shut up about tax policy, period". In the first paragraph of my column I wrote: "One lesson out of that failure is that the public needs to be told the details of any major policy changes, including tax changes, before an election." I am concerned that puts future BC governments in a very difficult position but I see no other way to interpret the incredibly successful petition campaign that was the first successful use of the initiative provisions in BC's unique law.

Rejection of taxes by referendum started in California with disastrous results. Its proposition 13 in 1978 amended the state's constitution so as to limit property taxes. That had horrible consequences for California's schools. It was consideration of that referendum that led BC to make its initiative law very difficult with a 10% signature requirement in every provincial constituency. Those opposing the HST got those signatures in every corner of the province. This year California offered another example of setting tax policy by referendum with its proposition 30 which increases the state's sales tax from 7.25% to 7.50% and places an additional income tax on those with the top 3% of incomes. Setting tax policy by referendum is dangerous and a concept foreign to Canada. With BC's unique law we might see future reactions against taxes but it is unlikely we would ever see anything like proposition 30. For BC to increase personal taxes it requires politicians to say what they would do before an election. I agree with the CCPA that people are open to that discussion if they know tax increases will lead to improvements they support. Where we differ is that I think the challenge is far more difficult than suggested by Daub's interpretation of the CCPA poll.