FRASER INSTITUTE -- A buck is a buck is a buck, except when it isn’t

Reprinted from the Fraser Forum

The words “tax-free” appear in the Liberal Party’s election platform five times (on pp. 8, 9, 15, 40 and 43). In a society where top marginal tax rates are over 50 per cent, “tax-free” catches a person’s eye.

Liberal Party leader Justin Trudeau

The first instance (accounting for two uses, actually) concerns employment insurance parental and maternity benefits, which will be made tax-free. It’s a little hard to tell how much that will be worth on its own but the platform says that when it’s combined with a proposed increase in the Canada Child Benefit the benefit for a family of two earning $90,000 will be about $2,300.

“Tax-free” also applies to the Child Disability Benefit, a monthly payment that “helps children whose impairment is severe.” At the moment, 150,000 children and their families get it. It will double, to $5664 in total, tax-free.

Tax-free also applies to the Memorial Grant Program for First Responders, which provides up to $300,000 in a lump sum to “family members of first responders who have died as a result of their duties.” The Liberals propose to expand it to cover correctional workers.

Finally, they propose a $2,500 tax-free benefit every time an RCMP officer or member of the Canadian Armed Forces is relocated to a different part of Canada.

Spending for new parents, disabled children, the families of first responders and correctional officers who die in the line of duty, and members of the military or national police required to move, almost certainly is spending most Canadians will approve of (though they might wonder whether military and police pay doesn’t already factor in the probability of moving).

But should such benefits be tax-free?

In terms of public finance, I was raised in the Carter Commission school, which holds, channelling Gertrude Stein, that “a buck is a buck is a buck.”

We’re giving people income. If people get extra income, they should pay tax on it at the rate that is appropriate to their level of well-being, which we usually assume to be in some way proportional to their income. If people have low incomes and we add an amount to their income, they won’t pay much or even any income tax on it because our income tax system is progressive. If they have high income already, then they will pay tax, as we figure they should do on any and all increments to their income.

But another pillar of the Carter view—and of longstanding mainstream tax theory—is that you should only tax people on their discretionary income. You shouldn’t tax them on money they need for purchases that can’t be avoided. If you’ve got a new child, or if you have to move for your police or military job, or if your child has a disability, you almost certainly have higher necessary spending than other Canadians do. So, the extra income the government gives you in recognition of your special circumstance shouldn’t really be regarded as discretionary. And it therefore shouldn’t be subject to tax.

OK, I can see that. And I expect most people will be sympathetic. That will also be true if you’ve lost a loved one in the line of duty. A lump-sum payment is helping you deal with expenditures—and heartache—that we really don’t want to tax, even if your regular income is high.

But then I don’t see why the Liberal platform does tax the non-discretionary income of richer Canadians, for the party promises to raise the Basic Personal Amount (BPA) from its current $12,069 to $15,000—but only for lower-income Canadians.

The BPA is the “tranche” of taxable income that the federal government forgoes taxing because it figures the spending it permits is very likely non-discretionary. Just about all of us, rich and poor alike, extreme ascetics excepted, need $15,000 to live on. In fact, given the length and depth of winter in most parts of this country, we probably need more than that. In spite of that the platform proposes not to raise the BPA for Canadians in the top two income tax brackets. But what are they? Potted plants? They need $15,000 to cover their non-discretionary needs just as much as other Canadians do.

I suspect the reason the platform takes this approach is that a party of at least the centre-left doesn’t want to be seen giving “tax breaks” to “rich people”—even though rich people need tooth paste, toilet paper and minimum calories, too. But of course, if you raise the BPA for a person in the top bracket, you are reducing their taxes by whatever the increase in the BPA is times the top marginal rate, and that means you’re “giving” more to rich people than poor. And that doesn’t look good.

By the same token, however, making various benefits tax-free gives more of an advantage to rich people, too, and yet we seem to be OK with that. Some necessities evidently are more compelling than others. And we do all feel for parents of kids with disabilities or the families of fallen first responders or correctional officers. So, I don’t actually propose making such payments taxable, but I do recommend extending the principle to the unavoidable expenditures we all must make.

As Kenneth Carter or Gertrude Stein might have written ... non-discretionary is non-discretionary is non-discretionary.

ABOUT THE AUTHOR:   

William Watson is a Professor of Economics at McGill and Senior Fellow with the Fraser Institute.  He holds degrees in economics from McGill and Yale Universities.  He has taught at McGill University since 1977 and was Chairman of its Department of Economics from 2005-10.  

He is best known for his regular columns in the National Post and the Ottawa Citizen. From 1998-2002 he edited Policy Options politiques, the magazine of Montreal’s Institute for Research on Public Policy. While on a leave from McGill in 1997-8, he served as editorial pages editor of the Ottawa Citizen. He was the 1989 winner of the National Magazine Awards gold medal for humour for a piece in Saturday Night magazine about a trip to New York. He contributed to the Fraser Institute’s Services Sector Studies with 1988’s National Pastimes: The Economics of Canadian Leisure.

His book Globalization and the Meaning of Canadian Life, published by the University of Toronto Press, was runner-up for the Donner Prize for the best book on Canadian public policy of 1998. His latest book, currently in press with UT Press is The Inequality Trap: Fighting Capitalism instead of Poverty.