As Finance Minister Paul Martin prepares to deliver the federal budget Monday, one thing is abundantly clear: he cannot satisfy every demand place upon him and his colleagues. From tax relief to debt reduction to health care to education, there is no shortage of groups lining up to give advice to the finance minister.
But an unprecedented consensus has emerged around one issue. Groups from the left and right - more than 20 national organizations -- have called for an end to bracket creep. Bracket creep refers to the effect (since 1986) where income tax brackets are only partially indexed to inflation. If inflation rises above three per cent, the excess amount becomes the indexing factor which increases the basic personal exemption (BPE) and the tax brackets for the next year.
But inflation has not exceeded three per cent since 1993; so tax brackets haven't moved and the federal and provincial governments have reaped a windfall of billions. Take a look at the impact.
10.2 billion:
The amount of taxes the federal government collects due to the 14-year effects of bracket creep. Almost 14 per cent of the government's annual personal income tax revenue of $75 billion is due to bracket creep.
2.5 billion:
The amount provinces collected in extra taxes last year due to bracket creep. Even taxpayer friendly governments in Alberta and Ontario continue to reap a windfall.
3.5 million:
The Caledon Institute estimates more than one million Canadians have been sucked onto the tax rolls (read: very poor people) due to bracket creep. And 1.9 million have moved from the lowest tax bracket (17 per cent) to the middle bracket (26 per cent). Another 600,000 taxpayers have been pushed into the highest tax bracket (from 26 per cent to 29 per cent).
840,000:
In 1997, the Commons finance committee estimated 840,000 low-income Canadian families had been pushed onto the tax rolls between 1986 and 1995 due to bracket creep.
85,000:
Taxpayers sucked back onto the tax rolls on January 1, 2000 due to bracket creep.
18:
The real dollar value of at least 18 separate credits and deductions has been eroded due to bracket creep. Everything from the pension income credit to the disability credit right down to the GST credit has been affected.
Strategists at the finance department say that if taxpayers don't understand the effects of bracket creep, why correct it?
What this approach dismisses is the fact that bracket creep has crept into the political lexicon in newspapers, television and talk radio.
It's not hard to figure out. You get a raise to keep pace with inflation year after year but your tax hit basically cancels out the raise. The price of goods and services continues to rise but you're left with the same income you always had.
It's too bad that ending bracket creep probably won't be in Monday's budget, because there are many compelling reasons to end it.
Fiscal Consequences: If inflation remains constant at 1.5 per cent, the loss of revenue to the treasury would be $900 million, by year two $1.8 billion, year three, $2.7 billion, etc. This is trivial when you consider that the government plans to record surpluses of $5.5 billion, $8.5 billion and $12.5 billion over the same three-year period.
In addition, the government already plans to index future program spending to inflation. It is only fair to do the same for taxpayers.
Social Consequences: It's great social policy. Ensuring that low income Canadians are allowed to keep as much of their hard-earned dollars in their pockets as possible is fundamental to keeping demand for welfare assistance and entitlement schemes to a minimum.
Political Consequences: It moves the debate from tax cuts to fundamental tax reform. It would be a legacy initiative credited to Mr. Martin.
In addition, the ruling Liberals would knock the wind out of the sails of all opposition parties by neutralizing a key component of their respective tax platforms. From a messaging point of view, Mr. Martin can also sell the cumulative effects of this measure as a multi-year plan of tax reform.
But given all the budget leaks, it seems Paul Martin will not end bracket creep. His reported $45 billion in tax cuts over five years is impressive, but the Bank of Montreal has already calculated that bracket creep will eat up one-third or $15 billion of this so-called tax relief?
If leaks are provent true, we'll only have one question for Mr. Martin: Why did he listen to his strategists instead of groups representing millions of Canadians?