Recently the Saskatchewan government put out a news release suggesting it protects taxpayers from a backdoor form of taxation known as “bracket creep.” As the government has only gone halfway towards protecting taxpayers from bracket creep, the claim is only partially true.
Here’s why.
In technical speak, bracket creep occurs when a government doesn’t index the tax system for inflation.
Put plainly, imagine back in 1950 that your grandmother handed you 25 cents and said “this is for your birthday, enjoy a movie on me.” Back in 1950 that would have been a nice gift.
However, if she handed you 25 cents in 2011 and said the same thing, you would lose out as grandmother’s gift amount didn’t rise with inflation.
Well, you also lose out when the tax system isn’t adjusted for inflation.
Imagine that the government said to you back in 1950 that it wouldn’t tax your first $5,000 of income. That would mean a whole lot more than telling you it wouldn’t tax your first $5,000 of income in 2011. The same problem occurs if the government doesn’t increase the income levels upon which higher tax rates are applied.
Even with modest wage growth, almost everyone would slowly creep upwards into higher tax brackets as a result of not indexing for inflation; hence the name “bracket creep.”
Thankfully the government partially addressed bracket creep in 2004 when it began indexing the provincial income tax system for inflation. The only problem is that the provincial government indexed the tax system to the national inflation rate, not the provincial rate.
Why is that significant? Because according to the Saskatchewan Bureau of Statistics, the provincial inflation rate has been higher than the national rate seven times in the last nine years.
For example, in 2009, the provincial inflation rate was 1 per cent while the federal rate was only 0.3 per cent. In other words, by indexing to a lower value, you’re getting short changed.
Some might say that we’re quibbling about small numbers, but just like with compound interest, the small numbers add up.
Canadian Taxpayers Federation analysis into how the rates compare reveals a fairly significant difference.
Assume two hypothetical scenarios for a moment. In the first, the government merely adjusts the tax system for the provincial rate of inflation over the past nine years. In the second, the government merely adjusts the tax system for the national rate of inflation.
The results show that someone earning $40,000 this year would have saved $62 under a system adjusted for the provincial rate. At $75,000 of income, someone would have saved $112.
Thankfully, provincial governments have not simply adjusted the tax system for inflation over the past nine years; taxpayers have seen further tax relief. For example, Wall government increased the basic personal exemption by a generous $4,000 in 2008.
However, had the past decade not been so rosy, it’s fair to say tax relief would not have been on the table; leaving taxpayers’ incomes less protected under the national inflation rate.
Clearly indexation is better than no indexation at all, but it’s not accurate for the government to say it is protecting taxpayers entirely from inflation.
A good first step was taken back in 2004 to help taxpayers cope with inflation, now it’s time for the second step to provide full protection.
Colin Craig is the Prairie Director for the Canadian Taxpayers Federation.
