Ten Tax Myths

 T here is no question that poor and low-income Canadians are unfairly taxed, compared to wealthy Canadians and large corporations. But, in examining inequality in Canada, it is not primarily the tax system that impoverishes people. While the income tax structure is far less progressive than it was in the 1960s and 1970s, it still has the effect, along with government transfers, of modestly evening out incomes in Canada (see Table 4.1). Without income taxes and transfers, the gap between the top and bottom 20% of income earners would be four times greater than it is.

Table 4.1 Family Income Shares, Before and After Taxes and Transfers, 1997 Market Income Income After Tax and Transfers Lowest Quintile 2.1 7.4 Second Quintile 10.1 13.2 Middle Quintile 17.7 18.1 Fourth Quintile 25.8 23.9 Highest Quintile 44.3 37.5 Ratio of Highest/Lowest 21:1 5:1 Source: Statistics Canada, Income after tax, distributions by size in Canada, 1997.

The principal source of the decreasing living standards is the decline in personal income, largely as a result of the poor labour market. Average after-inflation personal disposable incomes were no higher in 1997 than they were in 1980. In fact, they declined by over 7% between 1990 and 1997. While this drop is routinely ascribed to higher taxes, Table 4.2 shows that it has been the decline of before-tax incomes that is the principal factor behind the fall in disposable income.

Table 4-2 Household Incomes, Spending, and Saving ($1,992 per capita) Personal Income Personal taxes Consumer Spending Saving Saving Rate 1990 $22,491 $5,107 $15,450 $1,934 11.1% 1997 $21,362 $5,284 $15,816 $262 1.6% Change -$1,129 +$177 +$366 -$1,672 -9.5 pts. Proportion of decline in savings accounted for by: 68% 11% 22%     Source: Jim Stanford, Paper Boom (Ottawa: CCPA/Lorimer), 1999.

Average personal taxes per capita rose by just $177 in real terms between 1990 and 1997 — hardly grounds for a tax revolt. Meanwhile, in the face of growing unemployment, reduced wages, and government cutbacks to UI and income assistance, before-tax income plunged by $1,129.

The lowered standard of living of Canadian workers is actually the result of a deliberate policy of governments to lower the wage and salary rates of Canadians in order to weaken the power of labour vis-à-vis capital. Policies maintaining high levels of unemployment mean that millions of workers compete for an inadequate number of jobs, and they compete by accepting less pay that they would in an economy closer to full employment. Systematically reducing labour costs is also part of the government’s strategy to become “internationally competitive” by restructuring the Canadian economy along the lines of free trade and liberalized investment rules. This strategy has made it easier for capital and goods (and good jobs) to move freely across borders.

This effort to suppress wages and salaries, and to weaken social programs that support working people, goes back to the mid-1970s. Years of strong union organizing and aggressive collective bargaining meant that working people had actually made major gains and shared a bigger slice of the economic pie. That meant there was less for the owners of capital — corporations and their shareholders. Profits slipped and there was a determination by influential corporate leaders to reverse the trend and recapture capital’s historic share of wealth.

The means chosen to reach this goal was the pursuit of what has become known as “labour flexibility.” Corporations began a concerted move away from providing the traditional job — 40 hours a week, 9 to 5, on weekdays — and towards temporary, just-in-time, and part-time jobs, and to sub-contracting by large firms. And they successfully pressured governments to pass legislation and regulations that made such “flexibility” possible.

Free trade and NAFTA have restructured the economy to such an extent that Canada now has the highest proportion of low-paid jobs of any of the 29 industrialized countries. While literally millions try to put together a series of temporary and part-time jobs to survive, others are overworked through forced overtime. The Canadian economy is increasingly characterized by a good job/bad job phenomenon.

The impact is especially dramatic when it comes to young workers, particularly young men. According to a study by the Centre for Social Justice, young men’s earnings are declining relatively and absolutely, regardless of education level, geographic area, or the industry they work in. This trend continued even during the boom period of the 1980s and when the economy came out of recession in the min-1990s.

• The relative market incomes of the top 10% and bottom 10% in Canada have gone through a staggering change in the past 25 years. In 1973, the top 10% of families with children under 18 earned an average income 21 times higher than the those 10% at the bottom ($107,000 compared to $5,200 in 1996 dollars). By 1996, the top 10% made 314 times as much...(an average $136,737 compared to an average market income of less than $435)[7].
• In just seven years, between 1989 and 1996, the number of firms using part-time workers rose from 33% to 50%. Part-timers made up 29% of the average firm’s work force, three times the figure for 1989. In 1997, 20% of workers worked part-time, compared to half that percentage in the mid-1970s[8].
• In 1995, just over half of Canadian workers were employed in traditional 35-hours-perweek jobs, compared to 67% in the mid-1970s.
• Part-time and temporary workers lose out, not only because of lower pay and financial insecurity, but because under current labour standards laws employers are not obliged to pay them fringe benefits such as paid holidays, maternity leave, sick leave, and the other benefits that full-time employees might enjoy, such as health and pension benefits.
• In 1996, 5.4 million Canadians earned less than $10,000 in the private market economy.
• Canada has the second highest incidence of low-paid jobs — 23.7% — among the 29 industrialized nations of the OECD), second only to the 16 Canadian Centre for Policy Alternatives U.S. at 25%. The comparable figure for New Zealand is 16.9%, France and Germany 13.3%, Italy 11.9%, and Sweden 5.2%. (Low-paid is defined as less than two- thirds of the median earnings for all full-time workers.[9])
• Workers in the bottom 20% of income earners saw their average market income drop from $7,817 in 1984 to $5,325 in 1994, an astonishing 31.9% decrease. In the next fifth, incomes declined from $29,276 to $26,291. The third fifth lost some income, as well. If this 60% of the Canadian work force had maintained its 1984 share of national income, they would have had an additional $5.2 billion in 1993[10].

While employers have been putting an evertighter squeeze on employees, governments have aided and abetted this process by not adjusting labour laws to protect this new just-in-time work force. For example, they could pass laws requiring employers to provide benefits on a pro-rated basis to part-time workers, as an incentive to hire full-time workers. They could make overtime voluntary, opening up jobs for the unemployed, and implement a shorter official work week, thus lowering the overtime threshold.

Not only have governments not made these positive changes, but they have actually made life even more insecure for wage-earners by gutting existing laws on welfare, minimum wage and UI, which are intended to give working people a measure of economic security not provided by the unregulated private labour market.

Table 4.3 The Permanent Recession The “Golden Age” The Age of “Permanent Recession” 1950-1960 1981-1997 1990-1997 Real interest rates, short term (%) 0.9 5.6 5.1 Real interest rates, long term (%) 1.6 6.5 6.8 Change in gov’t program spending (as % of GDP) +16.3 +1.1 -2.5 Average annual real GDP growth (%) 4.7 2.4 1.8 Average annual employment growth (%) 2.8 1.1 0.5 Average unemployment rate (%) 5.4 9.8 10.0 Source: Jim Stanford, Paper Boom (Ottawa: CCPA/Lorimer),1999.

• In 1978, the minimum wage levels in every province and in the federal jurisdiction provided an income above the poverty line — up to 118% (in Saskatchewan). By 1994, not a single minimum wage in Canada provided an income above the poverty line. The best was 89% in Ontario; the worst, the federal government, was at 53%[11].
• Welfare rates in Canada have become cruelly low and, despite the image of the U.S. as having worse social programs, Canada has now surpassed the U.S. for punitive welfare rates. Almost one-third of U.S. states are more generous than our most generous provinces[12].
• Unemployment Insurance, a major safety net for people losing market income, has also been slashed to levels below those in many U.S. states. On average, just 36% of those who pay into the fund are now eligible to collect when they lose their jobs, compared to 74% in 1989. The benefit levels for some workers is as low as 25% of lost income, a far cry from the 70% the program was originally designed to pay[13].
• Cuts to medicare, education and municipal services, and sky-rocketing tuition fees for postsecondary education, mean that services that were once almost completely public are becoming increasingly privatized, taking money out of the pockets of working people and their children.

Table 4.4 Average Family Income Before Transfers (Families with Children) ($1996) 1973 1984 1990 1996 % change 1973-90 % change 1990-96 Bottom 5th   Decile 1 5,204 2,062 2,760 435 -47 -84 Decile 2 19,562 14,930 16,599 11,535 -15 -31 Middle 5th   Decile 5 40,343 42,495 46,477 42,829 +15 -8 Decile 6 46,136 49,664 54,561 51,494 +18 -6 Top 5th   Decile 9 71,611 79,628 88,426 86,497 +23 -2 Decile 10 107,253 123,752 134,539 136,737 +25 +2 Source: Centre for Social Justice

Taxes do play a role in the decreased standard of living of low-income Canadians. Families earning $10,000 should not be paying any income tax. Bracket creep, whereby inflation pushes people into a higher tax bracket, even when real income down not go up, has hurt millions of working people. But the general decline in living standards is caused primarily by corporate pressure on wages, Ottawa’s high unemployment policy, massive cuts to social programs and the social safety net, and free trade deals that allow companies to threaten to leave the country if their employees don’t accept management’s demands for wage freezes and rollbacks.

[7] Armine Yalnizyan, “The Growing Gap: A report on the growing inequality between rich and poor in Canada”, The Centre for Social Justice, Toronto, October, 1998, p.45.
[8] Globe and Mail Report on Business, Feb, 1997.
[9] op.cit. Yalnizyan, p. 23.
[10] Clarence Lochhead and Vivian Shalla, “Delivering the Goods: Income Distribution and the Precarious Middle Class”, in Perceptions, Canadian Council on Social Development, spring, 1997.
[11] National Council of Welfare, Province of Manitoba.
[12] The Monitor, the CCPA, Sept, 1996.
[13] Kevin Hayes, “Left Out in the Cold”, Canadian labour Congress, January, 1999.

Ten Tax Myths