Rumour has it federal Finance Minister Paul Martin will soon stand up in Parliament and announce tax cuts, possibly even a multi-year plan for reducing the amounts long-suffering taxpayers hand over to Ottawa. Even if that comes true, taxpayers should hold the applause unless the cuts are accompanied by an end to "bracket creep. " Under the current tax system, any announced tax cuts will be whittled away at by inflation over time. If that policy is not changed in the February budget, taxpayers should give Mr. Martin's budget a failing grade, no matter what tax cut sweeteners are included in the pot.

So what is "bracket creep" and why is it so crucial that it be ended Bracket creep refers to the effect (since 1986) where income tax brackets are only partially indexed to inflation. If inflation is over 3%, the excess amount is what is used to boost the bracket levels at which taxes (or higher taxes) kick in. So if inflation is 4%, the tax brackets are only upped by the difference, i.e., 1 %. That may not seem like much of a big deal, but consider the effect over time, especially when tax brackets are not moved up at all when inflation is under 3% (the case since 1992.)

If the basic personal exemption had been properly indexed for inflation since 1988, that exemption (from paying taxes) would be worth $8,194 this year according to KPMG. Instead, Canadians only have an exemption of $7,131, which means they have to pay federal and provincial tax on that $1,000 difference. It works the same way with the other tax brackets. If the next tax bracket (now at $29,500) had been properly adjusted for inflation, the higher taxes wouldn't kick in until $37,545. That is an $8,000 difference. And it means those taxpayers pay 26% federal tax plus provincial tax on top on that extra $8,000, instead of 17% federal tax plus provincial tax on top. Ditto for the highest income bracket, which would stand at $75,091 instead of $59,180.

So taxpayers have been dragged into higher tax brackets by inflation, even though in real after-inflation dollars - they were not actually earning any more money. The Caledon Institute points out that over 1 million people have been sucked onto the tax rolls because of bracket creep, 1.9 million have moved from the lowest tax bracket into the middle tax bracket, and 600,000 Canadians have been pushed into the highest tax bracket. That's 3.5 million taxpayers paying more tax than they ought, simply due to bracket creep.

And here's what it means for the individual: Someone earning $30,000 will pay $326 more in tax this year alone than they would have had brackets been properly indexed for inflation since 1988. A $40,000 salary will cough up $1,345 extra, and someone earning $75,000 will hand over $2,058 more than they would have, had Ottawa and the provinces properly indexed our tax brackets for inflation since 1988.

It's called bracket creep, and its been playing at a paycheque near you since the 1980s. If you'd like Paul Martin to end it, write Paul Martin at: House of Commons, Ottawa, ON, K1A 0A6, or fax him at 613-992-4291, or e-mail him at [email protected])