The vast majority of middle-income families are paying higher personal income taxes due to tax changes made by the Liberal government, according to a new study by the Fraser Institute.
The study finds that 86 percent of families with combined incomes between $84,625 and $118,007—what the authors defines as middle-income—are paying $800 more on average.
Defining families as couples or single parents with children under the age of 18, the study adds that “for the subset of middle-income families consisting of couples with children, an even greater share (89 percent) pays higher income taxes ($902 on average).”
While the Liberals noted in their first budget, in March 2016, that “the government cut taxes for middle-class Canadians everywhere,” the study says “the reality of federal personal income tax changes for middle-income families is more complicated than [what] the government suggests.
“The federal government has repeatedly asserted that it lowered personal income taxes for the middle class when in fact it increased the personal income tax burden on most middle-class families,” said study co-author Jake Fuss, senior economist at the Fraser Institute, in a Jan. 20 media release.
The study noted that, although the Liberals reduced the second-lowest federal personal income tax rate from 22 percent to 20.5 percent when they took office in October 2015, they also scrapped several tax credits that more than offset the savings from the tax rate reduction.
One of those tax credits, whose elimination caused most of the increase in overall income taxes, was income splitting. The so-called “Family Tax Cut,” introduced by the Conservatives in 2014, allowed couples with children under age 18 to split their income to reduce their tax bill, potentially saving up to $2,000 in taxes each year.
The rest included the children’s fitness tax credit, children’s arts tax credit, education tax credit, textbook tax credit, and public transit tax credit.
The study, however, excluded a number of other reforms, such as higher payroll taxes to fund expansion of the Canada Pension Plan, which is beyond the scope of the analysis, the authors said.
To illustrate the effects of the various tax changes on middle-income families, the study presented a breakdown of the $800 average increase in their federal personal income taxes.
The breakdown shows an increase of $989 due to elimination of income splitting and another $81 due to removal of the tax credits. These increases, amounting to $1,070, more than offset the reductions totalling $270, which consist of $243 resulting from the lowered tax rate and another $27 resulting from “indirect effects.”
The indirect effects include effects from other tax credits as well as the Quebec Abatement. The latter reduces the amount of federal tax that Quebecers pay and is the main driver of the indirect effects.
Fuss said that while the federal government’s tax-cutting claim focuses on middle-class families, many details are not clearly spelled out to them.
“By promoting one income tax change and downplaying others, Ottawa paints an incomplete picture of the overall impact of their tax changes, which have imposed a higher personal income tax bill on the vast majority of middle-class families,” he said.
The study compared federal personal income taxes for families with children in 2015 versus 2019. It uses a Statistics Canada modelling tool and includes information for more than 1 million Canadians in over 300,000 households with about 600 variables for each individual.
The COVID-19 pandemic was the reason 2019 was used as the year for comparison instead of 2020.
“Simply put, the effects of COVID and governments’ responses to it in 2020 introduce a host of anomalies that make any comparison using 2020 very difficult to interpret,” the authors said.
“Moreover, sufficient data for 2021 is not yet available and there remain some anomalies from the ongoing responses to COVID.”