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Reality Check

Taxing inquiries By Robert Sheppard, CBC.ca Reality Check Team | January 17, 2006 | More Reality Check

So what�s best for you? Stephen Harper�s promised one percentage point reduction in the GST, probably the most hated tax in Canadian history. Or Paul Martin�s one percentage point cut to the, ho-hum, basic income tax rate, from 16 to 15 per cent, something that benefits every taxpayer in the land.

Not surprisingly, perhaps, Canadians seem happily enamoured of the bird-in-hand aspect of the Conservative�s proposed GST cut. And if you�re someone who just can�t wait to lay down your hard-earned cash on a new car or big screen plasma TV, then this is the tax cut for you. For those in the low- to middle-income brackets, the Liberal income tax plan is much the better deal. And it�s all because of the way you apply the one per cent solution.

Some examples

Simply put, if you earn less than $10,000, where you pay no income tax, or over $100,000, then Harper�s GST cut can work for you. But if you�re single and earning something in between those two figures, then you look to be better off with the income tax cut and its corresponding increase in the basic personal deduction and federal refundable credits. Otherwise, you�d have to spend close to your entire income on consumer items to come out ahead.

For someone earning $40,000, for example, the projected income tax relief this year under the Liberals is $359. That same person would have to buy $35,900 worth of consumer goods or services to generate a similar $359 GST savings. And as one tax economist contacted by Reality Check put it, that kind of spending doesn�t leave much left over for rent and groceries.

The GST advantage realistically really doesn�t kick in until you hit the $100,000 bracket. Because then you would only have to spend a little over 40 per cent of your total earnings to get a larger return from the GST break.

Two income families generally do much better under the income tax cuts because both earners benefit from the increased deductions. But kids, of course, can skew the entire equation.

Deciding factors

If you are thinking of voting your pocketbook this election, it also matters whether you have kids and how old they are. In lieu of money to the provinces for day care, Harper is offering a kind of family allowance directly to parents: $1,200 a year for those with children five and under. For a future family with two children, that�s a neat $12,000 gift over five years to pay for child care, RESPs or, dare we say it, beer and popcorn.

The Liberals have countered with a plan to split tuition for two years, the freshman and graduate years – up to $6,000 a student for those entering university in 2008. For those with two university-bound kids currently in high school, this is clearly their better deal. They will have to pay the full GST on the textbooks, mind you.

Neat deflection

Martin is right, then, when he says the GST is a regressive tax, and that cutting it benefits the well-off more than the poor because the rich have more to spend and so can enjoy greater savings. Harper, however, neatly parried that attack by pointing out in the recent debates that the poor spend a greater proportion of their income on taxable goods and services and that reducing the GST is the only way to help the poorest of the poor, those who don�t pay any tax but the GST.

It�s an argument the Liberals themselves used to throw at the Mulroney government when it introduced the GST in 1991. And it�s often trotted out by left-wing think tanks, not normally embraced, as they have been so heartily this election, by the Conservative party. These same think tanks, of course, are not enamoured of widespread tax cuts per se; they�d rather see government redirect its revenues toward such projects as low-income housing and day care, to help the working poor.

Sad to say

But you can�t have both: a Harper government will cancel the Liberal income tax breaks that came in on Jan. 1, after this tax year, to pay for its planned cut to the GST. For the Harperites, cutting the GST comes, can we say, out of the blue. At the party convention last March, delegates decided income tax cuts were the fairest way to deal with inequities in the system and the growing federal surplus. That was also their platform in the 2004 campaign when they promised to cut income taxes by 25 per cent for middle earners.

Now, of course, they have the bug. The Conservatives are promising to make a second one percentage point cut to the GST, bringing it down to five per cent, by the end of their first mandate. For their part, the Liberals are also promising more income tax cuts by 2010, a one percentage point reduction in the two higher tax brackets. This means those earning $40,000 would see a $475 reduction in their income taxes that year. If Harper is elected, they�d only have to spend $23,750 – 59 per cent of their income – to get the equivalent GST break.

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