A vast majority of middle-income families are paying higher personal income taxes due to tax changes made by the Liberal government, a new study by the Fraser Institute finds.
The study, which focuses on couples or single parents with children under the age of 18, finds that 86 percent of families with combined incomes between $84,625 and $118,007, which the authors defined as middle-income families, are paying $800 more on average.
“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),” the study said.
The authors argued—contrary to what the Liberals proclaimed in their first budget in 2016 that “the government has cut taxes for middle class Canadians everywhere”—the “reality” of the changes made to the income tax is “more complicated” than it seems.
“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 Jake Fuss, senior economist at the Fraser Institute and co-author of the study, in a 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 ever since they became government in October 2015, they also scrapped several tax credits that more than offset the savings from the tax rate reduction.
One of these tax credits, whose elimination caused most of the increase in overall income taxes, is income splitting—a so-called “Family Tax Cut” introduced by the Conservatives in 2014 that allowed couples with children under the age of 18 to split part of their income to reduce their tax bill, saving up to $2,000 in taxes each year.
The rest include the children’s fitness tax credit, children’s arts tax credit, education tax credit, textbook tax credit, and the public transit tax credit.
The study, however, excluded a number of other reforms, such as higher payroll taxes to fund the expansion of the Canada Pension Plan, which is beyond the scope of the analysis, according to the authors.
A breakdown of the $800 shows that the lowered tax rate resulted in a $243 reduction, but the elimination of income splitting increased the average income taxes by $989. The removal of other tax credits added another $81, while “indirect effects,” of which the Quebec Abatement is the main driver, reduced the amount by $27.
Fuss said 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 modeling tool by Statistic Canada that includes information for more than 1 million Canadians in over 300,000 households and about 600 variables for each individual.
The reason why 2019 was chosen as the year for comparison instead of 2020 is due to the COVID-19 pandemic.
“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.”