How the rich would benefit from the Liberals’ middle class tax cut

The NDP is right. Higher-income earners will benefit more from the Liberal tax cut plan than the middle class


 
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Canadian-moneyThe income tax side of the Liberals’ recent policy announcement has two features:

  • The tax rate for the second-lowest tax bracket – that is, the tranche of taxable income between $44,401 and $89,401 – would be reduced from 22 per cent to 20.5 per cent.
  • A new tax bracket would be created for taxable income above $200,000. Income above this threshold would be taxed at a rate of 33 per cent, instead of the current top rate of 29 per cent.

The Liberals are presenting this as a tax cut for the middle class, and it is often referred to as a ‘tax cut for those earning between $44,401 and $89,401.’ But here’s the NDP’s response:

Meanwhile, the maximum tax break goes to those who earn between $89,401 and $200,000 – and even some people making more than $200,000 will see their taxes reduced under the Liberal plan.

The election is more than five months away, and I suspect that we’ll be seeing this back-and-forth more than once between now and then. So instead of listening to repeated rounds of he-said-she-said, it’s worth taking some time to work through the mechanics of the proposal.

Here is what the current system looks like, as set out in the 2014 federal tax guide (the thresholds in the Liberal announcement are those in effect for 2015):

 

federal

 

 

And this is what it looks like when you graph taxable income against federal tax paid:

 

existing

 

The Liberals are proposing to reduce the tax rate for the second bracket:

 

federal_1

 

This pivots the red segment down:

 

no_adjustment

 

If nothing else is changed, this shift opens up a gap between the red and green segments: someone with a taxable income at the bottom end of the green segment would pay $670.76 more in taxes than someone at the top end of the red segment whose taxable income is only $1 less. To avoid this sort of inequity, the green segment is shifted down. Similarly, the mauve section is also shifted down, to avoid opening a gap higher up.

So if this rate cut had been in place for 2014, there would have had to be some other changes:

 

federal_2

 

Here you can see what the NDP is getting at: a reduction in the tax rate in the second bracket also induces a reduction in taxes for those with taxable incomes above the second bracket.

The introduction of a new bracket at the top adds a new segment:

lpc_proposal

 

Shifting the green and mauve segments down means that for taxable incomes below $200,000, the proposed schedule lies below the existing one. And even though taxable income above $200,000 is taxed at a higher rate, people just above that threshold actually see a tax cut: the reduction in the tax paid on the $44,701-$89,401 tranche more than offsets the tax increase on the tranche above $200,000.

It’s hard to see much daylight between those two lines, so here’s a graph of the difference, expressed both in dollar terms and as a per cent of taxable income:

 

lpc_changes

 

Those with taxable incomes of $50,000 benefit less than those with taxable incomes of $150,000, both in dollar terms and as a per cent of taxable income.

The question of how much of the tax reduction will go to which segment of the population requires data on the distribution of taxable income that I don’t have handy. But the NDP is quite correct to point out that a reduction of the tax rate for the second-lowest bracket also benefits people with much larger taxable incomes.


 

How the rich would benefit from the Liberals’ middle class tax cut

  1. This is true of course for any income tax cut. Even cutting the bottom rate ($0 – $44k) from 15% to 13% will benefit a person making $100k per year much more than a person earning 25k per year. In fact, the savings for the 120k person will be more than double the savings for the 25k person.

    25k – 11k basic personal amount means 15% tax paid on 14k, or $2100. Reduce the tax rate to 13%, and fedral tax bill is $1820 for a savings of $280. The person earning 120k however, would save that same 2% on 33k of income (44k – 11k), for a total savings of $660k. (All figures rounded for simplicity).

    None of this, however, should dissuade us from cutting income taxes. In fact I commend Trudeau for focusing on precisely the bracket which needs cutting most. However, I do not commend him for hiking the top rate, and certainly not by a whopping 4%.

    • I couldn’t agree more. It seems that the NDP and the author of this article have more of a problem with the progressive nature of the tax system. The only way to avoid the tiers above from also benefiting would be to leave the rate as is and offer a boutique tax credit to those in the second tax bracket. I also commend this liberal plan to reduce the tax burden on the middle class.

    • I’m really not sure what’s to commend. Cutting the bottom bracket would have obviously been the fairest idea, because that’s the one bracket that everybody pays. Trudeau’s plan benefits the middle class and upper class, but does absolutely nothing for the poorest in society. Instead of helping people who can barely afford food, he’s helping people that own houses, multiple cars, and ensuring they can get a new plasma TV. Hardly seems like a good plan to me.

  2. It must be hoped that Mr. Trudeau continues the removal of tax loopholes of the rich, and increases the human resources at Revenue Canada that will more diligently audit the top tax level.

  3. Should have been titled-“How the Harper Government would benefit in the coming election if anyone actually believed Pierre Pierre Poilievre.”

    I’m sure the raving partisans will be pleased with the effort however. Soldier on.

  4. Quote ” question of how much of the tax reduction will go to which segment of the population requires data on the distribution of taxable income that I don’t have handy”..
    .. seriously? ?? you have the time and ability to make graphs and to calculate numbers. .
    but even a guess at distribution of tax brackets is completely beyond your grasp?
    are you kidding me?

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