The Not-So-Mini-Budget

The Not-So-Mini-Budget

In the midst of the worst-kept secret in Canada, that an early election call was pending, and in what can only be seen as reaction to regressive proposals for tax cuts proposed by the Canadian Alliance Party, Paul Martin introduced Canada’s economic statement and budget update on October 18, 2001. In its particular measures, the mini-budget contained some bad news and some good news for women; however, to the extent that this document might be used as an indication of the direction of the federal government’s policy agenda, the mini-budget provides some clear warning signals for gender equality in Canada.

Rates and Brackets

The government tinkered with Canada’s tax rates and brackets. The lowest tax rate will drop effective January 1, 2001 from 17% to 16%, and the middle rate will drop from 25% to 22%. An additional tax rate was introduced. Without the changes proposed in the mini-budget, Canadians earning in excess of $61,509 would be taxed on income earned above that level at a rate of 29%. After January 1, 2001, Canadians earning between $61,509 and $100,000 will be taxed at a rate of 26% on that income, and will be taxed at a rate of 29% on income in excess of$100,000. In short, the rates have all been slightly reduced, and the highest tax rate will not until an earner hits the $100,000 income mark.

Prior to the February 2000 Budget, a 5% high-income surtax was imposed on taxpayers with basic federal tax over $12,500. A surtax is a tax imposed on the tax paid by income earners whose basic tax exceeds $12,500. With a top federal marginal tax rate of 29%, the 5% surtax resulted in an increase in the tax rate of high-income earners of approximately 1.5%. The February 2000 Budget announced the elimination of this surtax by 2004. The mini-budget accelerated the removal of the surtax by proposing its elimination effective January 1, 2001.

The following table compares the tax brackets and rates set to apply in January 1, 2001 before and after the tabling of the economic statement and budget update:

Bracket
Tax Rate on Interest & Ordinary Income
Pre-October 18 Post-October 18

$86,137-$100,000
30.16%* 29%
Pre-October 18 Post-October 18

$61,509-$61,509
29% 26%
Pre-October 18 Post-October 18

$30,754-$30,754
24% 22%
Pre-October 18 Post-October 18

$7,361-$7,412
17% 16%

Pre-October 18 Post-October 18

*the difference here is the effect of the elimination of the 5% surtax on high-income earners

The mini-budget proposals continue the federal government’s reduction in Canada’s tax progressivity (although admittedly these changes are relatively minor erosions to the progressivity of Canada’s income tax system). Reductions in progressivity, even minor ones, always effect women’s equality dramatically because women make up the vast majority of low-income earners.

The elimination of the 5% surtax provides a good example of how reductions in progressivity affect women. Although unfortunately, the available figures don’t break down perfectly, in 1996, 1,914,010 men earned income in excess of $50,000 and their taxable income was $143,288,111,000. In contrast, 618,220 women earned income in excess of $50,000 and their taxable income was $39,643,517,000.

What do those figures mean? Basically, women made up a little less than 24% of the highest income earners in Canada, and had a little less than 22% of the income earned by that category of taxpayers. Therefore, of the gains to be obtained by the removal of the high-income surtax, women stand to receive less than a quarter of the taxes saved.

The point that there are fewer high-income women than men who might gain from the elimination of the 5% surtax is a trite one. The more significant point is that the failure to collect those additional taxes will directly affect the amount of revenue that the government has to reinvest in Canada’s social programs. The government has predicted that the elimination of the surplus will cost approximately $650 million per year.

Capital Gains Inclusion Rate

The federal government proposes to reduce the capital gains inclusion rate from the 662/3% rate set in the February budget to 50%. The reduction in the capital gains inclusion rate results in a dramatic decrease in the progressivity of Canada’s income tax system.

Individuals realize capital gains (to put it simply) when they sell capital property. The most common form of capital property is shares in a company. When shares are sold, the seller is required to pay tax, but only on a portion of that gain. Prior to the 2000 budget, a person who sold capital property was required to include 75% of the gain in their income, and then pay tax at their marginal tax rate on that gain. The February 2000 budget reduced the capital gains inclusion rate from 75% to 66%, and (as noted above) the mini-budget proposes to reduce this inclusion rate further to 50%.

Another way to think about the capital gains inclusion rate is to think of it as an”exclusion” rate. From this vantage point, before the 2000 Budget taxpayers could exclude from tax 25% of any income received from capital gains, after the 2000 Budget they could exclude 33% and after the mini-budget they will be able to exclude a full 50%.

As greater amounts of income in the form of capital gains are generally received by high income earners, this reduction in the inclusion rate for capital gains makes the income tax system significantly less progressive. Again, it is clear from the numbers that men will disproportionately benefit from this change. In 1996, 796,720 men reported taxable capital gains in the amount of $6,593,146,000. In contrast, 707,630 women reported taxable capital gains in the substantially lesser amount of $3,241,021,000. In other words, women earn about half as much income in the form of capital gains as men do.

This reduction will also dramatically affect the revenues the government collects from capital gains. In addition to reducing the amount that will be collected from capital gains realized by persons who already hold capital property, the reduced rate of tax that is applied to capital gains will encourage more high-income earners to invest in instruments that will result in capital gains rather than other forms of income. In other words, as capital gains will now be taxed at a lower rate than dividends or ordinary income, more Canadians will invest in shares, for example, rather than bonds or other income investments. This switch in investment strategy will result in additional erosion to the government’s tax revenues.

Support for Caregiving Activities

There was some good news in the mini-budget. The government proposes to provide additional funding to the Canada Child Tax Benefit and National Child Benefit. The federal government proposes to increase the National Child Benefit by $100, to a total of $300 per child. The income level at which the National Child Benefit is phased out has also been raised, and the government proposes to reduce the rate at which the benefit is phased out. Of course, the effectiveness of this transfer will depend on how the provinces claw back the payments made under these programs.

The mini-budget also proposes an increase in the tax credits for persons with severe and prolonged disabilities from $730 to $960, and an increase in the tax credits to caregivers from$406 to $560.
General Trends and the Consultative Process

As noted at the beginning, there was bad news and good news for women on October 18th. The reduction in the progressivity of Canada’s tax system is bad news for women – both because men will largely be the beneficiaries of the governments “largesse” but also because the government will raise less revenue through taxes that can be redistributed through Canada’s social programs. Increased spending to support caregiving activities is welcomed, although the effectiveness of spending programs delivered through the tax system should be questioned.

In addition to these general reflections, it is also important to note that the government’s decision to introduce a “mini-budget” in October without a consultative process is alarming. Unlike the annual February budget, where the federal government has at least implemented consultative process (however flawed), this October budget afforded no time for consultation and reflection.

NAWL continues to advocate for direct discussions between the Minister of Finance and women’s equality-seeking advocates and organizations with expertise in economic policy issues. We also believe that women’s equality seeking advocates and organizations would benefit from receiving resources to formulate collective recommendations that could be provided to the government as part of the consultative process.

NAWL’s Finance Working Group

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In the midst of the worst-kept secret in Canada, that an early election call was pending, and in what can only be seen as reaction to regressive proposals for tax cuts proposed by the Canadian Alliance Party, Paul Martin introduced Canada’s economic statement and budget update on October 18, 2001. In its particular measures, the mini-budget contained some bad news and some good news for women; however, to the extent that this document might be used as an indication of the direction of the federal government’s policy agenda, the mini-budget provides some clear warning signals for gender equality in Canada.

Rates and Brackets

The government tinkered with Canada’s tax rates and brackets. The lowest tax rate will drop effective January 1, 2001 from 17% to 16%, and the middle rate will drop from 25% to 22%. An additional tax rate was introduced. Without the changes proposed in the mini-budget, Canadians earning in excess of $61,509 would be taxed on income earned above that level at a rate of 29%. After January 1, 2001, Canadians earning between $61,509 and $100,000 will be taxed at a rate of 26% on that income, and will be taxed at a rate of 29% on income in excess of$100,000. In short, the rates have all been slightly reduced, and the highest tax rate will not until an earner hits the $100,000 income mark.

Prior to the February 2000 Budget, a 5% high-income surtax was imposed on taxpayers with basic federal tax over $12,500. A surtax is a tax imposed on the tax paid by income earners whose basic tax exceeds $12,500. With a top federal marginal tax rate of 29%, the 5% surtax resulted in an increase in the tax rate of high-income earners of approximately 1.5%. The February 2000 Budget announced the elimination of this surtax by 2004. The mini-budget accelerated the removal of the surtax by proposing its elimination effective January 1, 2001.

The following table compares the tax brackets and rates set to apply in January 1, 2001 before and after the tabling of the economic statement and budget update:

Bracket
Tax Rate on Interest & Ordinary Income
Pre-October 18 Post-October 18

$86,137-$100,000
30.16%* 29%
Pre-October 18 Post-October 18

$61,509-$61,509
29% 26%
Pre-October 18 Post-October 18

$30,754-$30,754
24% 22%
Pre-October 18 Post-October 18

$7,361-$7,412
17% 16%

Pre-October 18 Post-October 18

*the difference here is the effect of the elimination of the 5% surtax on high-income earners

The mini-budget proposals continue the federal government’s reduction in Canada’s tax progressivity (although admittedly these changes are relatively minor erosions to the progressivity of Canada’s income tax system). Reductions in progressivity, even minor ones, always effect women’s equality dramatically because women make up the vast majority of low-income earners.

The elimination of the 5% surtax provides a good example of how reductions in progressivity affect women. Although unfortunately, the available figures don’t break down perfectly, in 1996, 1,914,010 men earned income in excess of $50,000 and their taxable income was $143,288,111,000. In contrast, 618,220 women earned income in excess of $50,000 and their taxable income was $39,643,517,000.

What do those figures mean? Basically, women made up a little less than 24% of the highest income earners in Canada, and had a little less than 22% of the income earned by that category of taxpayers. Therefore, of the gains to be obtained by the removal of the high-income surtax, women stand to receive less than a quarter of the taxes saved.

The point that there are fewer high-income women than men who might gain from the elimination of the 5% surtax is a trite one. The more significant point is that the failure to collect those additional taxes will directly affect the amount of revenue that the government has to reinvest in Canada’s social programs. The government has predicted that the elimination of the surplus will cost approximately $650 million per year.

Capital Gains Inclusion Rate

The federal government proposes to reduce the capital gains inclusion rate from the 662/3% rate set in the February budget to 50%. The reduction in the capital gains inclusion rate results in a dramatic decrease in the progressivity of Canada’s income tax system.

Individuals realize capital gains (to put it simply) when they sell capital property. The most common form of capital property is shares in a company. When shares are sold, the seller is required to pay tax, but only on a portion of that gain. Prior to the 2000 budget, a person who sold capital property was required to include 75% of the gain in their income, and then pay tax at their marginal tax rate on that gain. The February 2000 budget reduced the capital gains inclusion rate from 75% to 66%, and (as noted above) the mini-budget proposes to reduce this inclusion rate further to 50%.

Another way to think about the capital gains inclusion rate is to think of it as an”exclusion” rate. From this vantage point, before the 2000 Budget taxpayers could exclude from tax 25% of any income received from capital gains, after the 2000 Budget they could exclude 33% and after the mini-budget they will be able to exclude a full 50%.

As greater amounts of income in the form of capital gains are generally received by high income earners, this reduction in the inclusion rate for capital gains makes the income tax system significantly less progressive. Again, it is clear from the numbers that men will disproportionately benefit from this change. In 1996, 796,720 men reported taxable capital gains in the amount of $6,593,146,000. In contrast, 707,630 women reported taxable capital gains in the substantially lesser amount of $3,241,021,000. In other words, women earn about half as much income in the form of capital gains as men do.

This reduction will also dramatically affect the revenues the government collects from capital gains. In addition to reducing the amount that will be collected from capital gains realized by persons who already hold capital property, the reduced rate of tax that is applied to capital gains will encourage more high-income earners to invest in instruments that will result in capital gains rather than other forms of income. In other words, as capital gains will now be taxed at a lower rate than dividends or ordinary income, more Canadians will invest in shares, for example, rather than bonds or other income investments. This switch in investment strategy will result in additional erosion to the government’s tax revenues.

Support for Caregiving Activities

There was some good news in the mini-budget. The government proposes to provide additional funding to the Canada Child Tax Benefit and National Child Benefit. The federal government proposes to increase the National Child Benefit by $100, to a total of $300 per child. The income level at which the National Child Benefit is phased out has also been raised, and the government proposes to reduce the rate at which the benefit is phased out. Of course, the effectiveness of this transfer will depend on how the provinces claw back the payments made under these programs.

The mini-budget also proposes an increase in the tax credits for persons with severe and prolonged disabilities from $730 to $960, and an increase in the tax credits to caregivers from$406 to $560.
General Trends and the Consultative Process

As noted at the beginning, there was bad news and good news for women on October 18th. The reduction in the progressivity of Canada’s tax system is bad news for women – both because men will largely be the beneficiaries of the governments “largesse” but also because the government will raise less revenue through taxes that can be redistributed through Canada’s social programs. Increased spending to support caregiving activities is welcomed, although the effectiveness of spending programs delivered through the tax system should be questioned.

In addition to these general reflections, it is also important to note that the government’s decision to introduce a “mini-budget” in October without a consultative process is alarming. Unlike the annual February budget, where the federal government has at least implemented consultative process (however flawed), this October budget afforded no time for consultation and reflection.

NAWL continues to advocate for direct discussions between the Minister of Finance and women’s equality-seeking advocates and organizations with expertise in economic policy issues. We also believe that women’s equality seeking advocates and organizations would benefit from receiving resources to formulate collective recommendations that could be provided to the government as part of the consultative process.

NAWL’s Finance Working Group