The finance minister is being urged to ensure tax policies reflect how inflation weakens spending power
The federal government is being urged to consider measures to recognise the impact of inflation on tax policies.
Following up on their recent report, C.D. Howe Institute CEO William Robson and director of research Alexandre Laurin, have written directly to the minster of finance, Chrystia Freeland, stating the case for “some simple changes to lessen the pain.”
The basis for their argument is that a sharp rise in inflation is not accounted for in taxation, with policies typically unchanged despite the reduction in spending power that Canadian consumers and businesses face.
They calculate that by the time the BoC reaches its 2% target for inflation (almost a year from now based on the central bank’s own figures), every Canadian dollar will have lost 15 cents of its value.
With “little transparency or legislative oversight” the effects of some taxation exacerbates the pain caused by this reduction in dollar value, because not all tax thresholds and tax credits are increased in line with inflation.
Personal income tax is a case in point. If prices and incomes rise, people may be pushed over higher tax thresholds and pay a larger share of their income in tax even though their purchasing power has not increased.
Another example given is the GST/HST New Housing Rebate which is phased out between $350,000 and $450,000 and is then unavailable.
Robson and Laurin point out that “these thresholds remain unchanged since the GST was introduced in 1991” and that while just 10% of new single-family homes were priced above $350K in 1991, now fewer than 10% fall below that threshold.
Make it clear
The letter calls on the finance minister to be clear on the “insidious tax effects” of inflation.
“Any decreases in the real value of these thresholds, if made at all by governments, should be explicit and transparent, rather than be inadvertent byproducts of inflationary monetary policy,” they state.
In conclusion, they say that inflation hurts everyone, but tax policies should not make things worse.
