Income Tax Act
Bill to Amend—Third Reading—Debate Continued
December 8, 2016
The Honourable Senator Yuen Pau Woo :
Honourable senators, I rise to speak on Bill C-2, a bill which has been causing me some grief. I have listened closely to the remarks of colleagues in this chamber and, in particular, to admonishments directed at newly arrived senators such as myself, imploring us to study the documents, examine our conscience and to assert our independence.
Senator Tkachuk, you challenged us yesterday to consider what our grandchildren would think of this bill. I had a lot of trouble sleeping last night, because I was thinking about my yet-to-be- conceived grandchildren. Parenthetically, let me say that if any of my grandchildren were to develop an interest in fiscal policy, I would be a very happy grandfather.
Well, if my grandchildren did ask about Bill C-2, I would give them a simple math lesson. I would tell them about the way percentages work. A percentage change in a large number will yield a larger result than the same percentage change on a smaller number. Now, all of you know this because you learned it in elementary school, but the point is yet to be made in this chamber. Ten per cent of 1,000 is 100; 10 per cent of 100 is 10. This same percentage applied to different numbers yields different results.
From a tax perspective, and using Bill C-2 as a specific example, this means a 1.5 percentage point reduction in the income bracket $45,000 to $90,000 will result in larger savings for the person at the $90,000 end of the bracket, compared to the person at the $45,000 end.
What is more, since marginal tax rates cumulate as you move from one bracket to another, someone earning between $90,000 and $200,000 will gain even more in absolute terms, or dollar value terms, from the reduction in taxes in the $45,000 to $90,000 bracket, even if there is no additional tax reduction in the higher bracket which they occupy.
Which is why the point that has been repeated over and over again — Canadians earning over $90,000 are benefiting more from the ‘‘middle class tax cut’’ than the middle class — is not the full story.
The fact is, honourable senators, any tax cut to the middle class tax bracket of $45,000 to $90,000 will result in higher savings for those who earn more than $90,000 than for those who are actually in the bracket. This is arithmetic. It's not some diabolical scheme to short change low income earners.
Tax experts, and I'm not one of them, understand this point very well, which is why there are other ways of describing the tax burden on different classes of taxpayers, for example, the concept of the average tax rate or the marginal tax rate, both of which increase as you move from one income bracket to another.
By my own simple calculations, the average tax paid by Canadians at the bottom end of the so-called "middle class bracket," under Bill C-2, would be 16 per cent. By contrast, the average tax paid by someone earning $200,000 would be 33 per cent, twice as high as so-called "middle class Canadians."
The point, honourable senators, is that Canada already operates a progressive tax system, which takes more from higher earning Canadians in both absolute and relative terms. For example, the dollar value of taxes paid by a person earning $45,282 — or the absolute value — would be around $7,041, whereas the person earning $90,500 at the top end of bracket will pay $20,236 — which is three times higher.
The converse is also true. A reduction in the tax rate will lead to a larger dollar savings for higher income earners compared to lower income earners. As they say, what goes around comes around.
The way we should think about Bill C-2, therefore, is not that it is introducing progressivity into our tax system for the very first time but rather that it is a modest effort to build on the existing progressivity of the tax system without, I hope, damaging economic growth and job creation.
I accept for some colleagues, including Senator Lankin, that the existing tax system is not sufficiently progressive, and Bill C-2 does not go far enough.
It would seem that many Conservative senators are also now champions of more progressive taxation, which I welcome. In fact, Senator Smith's very well-intentioned amendment would have introduced even more progressivity into the tax system. His amendment, however, has been ruled out of order by the Speaker and hence is a non-option for this chamber.
I would point out, though, that part of his proposed amendment — clause 1(a)(i) and (ii) — which would presumably be an appropriate action by the Senate since it does not increase taxes, does not solve the very problem he has raised. In fact, by further reducing the tax rate between $45,000 and $53,000, that first part of the proposed amendment would actually exacerbate the discrepancy between the benefits accruing to higher income earners compared to the target group of middle-income earners.
Again, I submit there is no ill intent here; it is simply a function of arithmetic. Much as we may not like this result, I regret to say that no amount of sober second thought can change the laws of mathematics.
In one very important respect, I am encouraged by the debate around Bill C-2 and the interventions of senators who spoke against it because of the attention they have drawn to the challenge of income and wealth inequality in Canada. I hope the Senate, led by perhaps by the Standing Senate Committee on National Finance, which I hope to be a member of, will conduct detailed investigations into the causes and consequences of inequality in Canada and possible remedies, including, perhaps, a more progressive tax system that does not inhibit personal initiative and economic growth.
But that is for another day. On Bill C-2, I want to assure colleagues that I have read the documents, considered the arguments, examined my conscience, interrogated my independence and even consulted my imaginary grandchildren. I am very comfortable supporting the bill, and I hope you will support it as well.