As Finance Minister Paul Martin puts the finishing touches on his seventh budget to be delivered on February 28th, the pressure is mounting from all quarters for inclusion of various initiatives, from tax relief to debt reduction to health care to education.

But an unprecedented consensus has emerged on one issue. Groups from the political left and right are all calling for an end to bracket creep in next month's budget.

Bracket creep refers to the effect (since 1986) of income tax brackets being 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 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.

That's 10.2 billion, as in dollars. This is the amount of taxes that Ottawa now collects due to the 14-year effects of bracket creep. Almost 14 per cent of its annual personal income tax revenues of $75 billion is due to bracket creep.

As in $2.5 billion, the amount the provinces collected in extra taxes last year due to bracket creep. Even taxpayer-friendly governments in Alberta and Ontario continue to reap a windfall.

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). About 600,000 taxpayers have been pushed into the highest tax bracket (29 per cent).

In December 1997, the House of Commons Finance Committee estimated 840,000 low-income Canadian families -- not individuals, but families -- had been pushed onto the tax rolls between 1986 and 1995 due to bracket creep.

The number of taxpayers who were sucked back onto the tax rolls on January 1, 2000 due to bracket creep.

The real dollar value of at least 18 credits and deductions has been eroded due to bracket creep from the pension income credit to the disability credit right down to the GST credit.
Immediately you say, "Fix this problem!" But the spin doctors at Finance have other ideas. They say if taxpayers don't fully understand bracket creep, why correct it?

What this discounts 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 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. Bottom line: you're making more, but buying less and paying higher taxes.
So what would the consequences be if Martin re-indexes the tax system to inflation? In short, a real win-win-win scenario.

Fiscal Consequences: If annual inflation remains constant at 1.5 per cent, the loss of revenue to the treasury would be $900 million. In 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 in the same period. In addition, Ottawa 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 many dollars in their pockets as possible is fundamental to keeping demand for welfare assistance and entitlement schemes to a minimum.
Political Consequences: Ending bracket creep 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 oppostion sails by neutralizing a key element of their tax platforms.

Only one question remains: Willl Martin end the creep?