12262 EXTENSIONS OF REMARKS May 2, 1978 EXTENSIONS OF REMARKS INFLATION AND TAX INDEXATION on indexing occurred, because of "the rate due to the static nature of the quantum IN CANADA tremendous rates of inflation we have ex­ of those exemptions. Thus we have one ele­ perienced since the mid-1960's and the ment of the silent tax increase. significant pressures this has placed on A second element is the progressive rate HON. PHILIP M. CRANE Government and Government thinking." structure. An increase in the effective aver­ OF ILLINOIS age rate with unchanged real taxable income Prior to this time personal income taxes yields higher real taxes. The only obvious way IN THE HOUSE OF REPRESENTATIVES were taking a higher and higher propor­ of avoiding this is to index the brackets. As­ Tuesday, May 2, 1978 tion of income from Canadians thus suming a taxpayer's various deductible ex­ placing them in higher tax brackets penses rise at an inflation rate, indexing of • Mr. CRANE. Mr. Speaker, there is a without a corresponding increase in their the brackets should generally mean that real growing concern with the problem of in­ real income. The problem became worse tax liabilities will rise only where total in­ fiation and rising taxes. We read and with the inflation of the 1970's as Ca­ come is rising more rapidly than the inflation hear talk of a "tax revolt" throughout rate. Where total income is rising less rapidly nadians realized the effect of the "silent than that rate, real liabilities will actually the United States. The Carter adminis­ but annual tax increase" because of in­ fall. tration is offering us more inflation and flation. Mr. Steiss states the result: On the evening of February 14, 1973, the more taxes. Indeed, many were clearly beginning to then Minister of Finance, The Honorable I have sponsored a measure which recognize that inflation itself was a form or John Turner proposed the introduction to the would help ease the growing tax burden taxation, that the government was obtaining Canadian tax system of a "major innovation of Americans. The Cost of Living Adjust­ a rising share of personal income coincident in tax philosophy and practice". In comment­ ment Act would amend the Internal with inflation and that such an increase was ing on this proposal, the Minister expressed being achieved in the absence of distasteful concern in respect of the rampant inflation Revenue Code of 1954 to provide for overt increases in nominal tax rates. phenomena in Canada. and the impact such automatic cost-of-living adjustments in inflation has on a tax system based on a. the income tax rates. It would also index Mr. Steiss offers some interesting con­ progressive rate schedule. The proposal, as the amount of the standard, personal clusions on that tax indexing program presented, was subsequently implemented exemption, depreciation deduction, and in Canada. It has been the taxpayers in into law with effect from 1974. Many, myself rate of interest payable on certain obli­ the range of $15,000 who have benefitted included, regard this change to Canada's in­ gations of the United States. The idea of the most from the percentage saving come tax laws as one of the two most impor­ indexing has been gaining more and from indexing with the next greatest tant structural changes to the Canadian i.n­ come tax system since World War II: The more attention. benefit going to taxpayers with income other being the taxation of capital gains and Economist Paul Craig Roberts wrote ranges from $15,000 to $20,000. Since al­ the many other substantive changes imple­ the following in a recent article ("Some most 70 percent of Canadian taxpayers mented by the 1971 tax reform bill. Tax Myths: Who Pays What?" National have assessed income ranging from $10,- Implementation of the proposal introduced Review, April 28, 1978) : 000 to $25,000, we find it is this group, the following basic system of indexation of Indexing the tax structure (adjusting it to not the very wealthy, who have received Canada's individual tax system: offset inflation) wuuld prevent this deteriora­ savings from indexing. It has reduced (a) The annual determination of a so­ tion that is occurring in the living standards Government revenues; it has reduced the called "inflation factor" based upon the in­ o! all Americans. One might think that this rate of growth of direct personal tax crease in Canada's Consumer Price Index in would make indexing an important issue in a defined immediately preceding 12 month revenues to Government from inflation; period. tax reform. Yet, it is not part o! the Admin­ it has aided to restrain some Government istration's proposals. Opponents o! indexa­ (b) Application of this inflation factor to tion have argued that inflation causes gov­ spending; and it has given an extra the various principal exemptions available ernment's costs to rise, so that it also needs measure of control over taxes to the tax­ to individual taxpayers in Canada. Such prin­ more revenues. However, the way it is now, payer and voter. cipal exemptions prior to indexing, and the government's revenues don't simply rise We should remember that indexing in therefore in 1973, included a $1,600 single by the amount of the infiation, they rise by Canada is limited to exemptions and tax status exemption, a $3,000 martial status 1.65 times the rate of inflation. A 10 percent exemption and individual dependency ex­ rate brackets. A fully indexed economy emptions of upwards to $550 per dependant rate of inflation means a 16.5 percent in­ in order to protect its citizens from the crease in reve.nues. and, finally, and very importantly ... "silent tax increases" needs to consider (c) Application of the inflation factor to The Tax Foundation sponsored a con­ indexing other aspects of the economy the marginal tax ra.te brackets of the ference here in Washington, D.C., on such as capital gains. We need to con­ Canadian individual taxpayer. March 30, 1978, with one session devoted sider this important reform in the United The technical calculation of the cumula­ to indexation. One of the papers pre­ States. tive inflation factor is determined as the sented was by Carl Steiss of Price Mr. Steiss raises a number of key issues ratio of the Consumer Price Index for the Waterhouse & Co. of Toronto, Canada, in his perceptive paper and I urge my year ending September 30 of the relevant previous year divided by the Consumer Price and an instructor at the University of colleagues to read and meditate on the Index for the year ending September 30, 1972. Toronto. Mr. Steiss discussed the Cana­ message in "Indexation of Canada's In­ From a practical point of view the Minister dian experience with a limited system of dividual Income Tax System": announces the increase annually and soon indexation-the indexing of the tax I:NDEXATION OF CANADA'S INDIVIDUAL INCOME after the September CPI statistic is avail­ brackets. During a period of inflation, TAX SYSTEM able. The inflation factor is pragmatically ex­ taxable income increases more rapidly (By C. F. Steiss) pressed in terms of an annual adjustment than the inflation rate, because of the to the prevailing exemption levels and tax I have been asked to provide a few observa­ rate brackets of the prior year. static nature of the quantum of those tions on Canada's reaction to what I might exemptions. refer to as the "silent tax increase". Perhaps For example, the legislative adjustment in One interesting fact Mr. Steiss points I should open with a word about what I mean respect of the 1978 personal exemptions and out. In an intensive 4-year study of the by this phraseology. Generally speaking, in­ rate brackets was announced in October of flation causes taxable income to increase 1977 and was determined by dividing the tax system which resulted in a 2, 700- more rapidly than total real income due to average CPI for the 12 months ended Sep­ page, five-volume report, the Carter the fact that taxable income is a calculated tember 30, 1977 by the corresponding average Royal Commission on Taxation in 1966 amount after allowing for certain exclusions for the preceding 12 month period ended recommended against the adoption of a and deductions. While some exclusions and September 30, 1976. Expressed in percentage system of automatically indexing of the deductions may increase at a rate commen­ terms, the major personal income tax exemp­ tax system. Yet on February 14, 1973, the surate wlth inflation, others, and notably the tions and the tax bracket limits for 1978 were then Minister of Finance, John Turner, basic personal exemptions which account for raised by 7.2 percent as compared with those almost 80 % of all exemptions and deductions that prevailed for 1977. proposed a system of indexing which was in Canada from individual income, do not. Why September 30? The selection of Sep­ adopted into law beginning in 1974. Mr. Consequently, in a period of inflation, taxable tember as the extreme of each 12 month Steiss noted that the change in attitude incomes rise more rapidly than the inflation averaging period was based on the factual Statements or insertions which are not spoken by the Member on the floor will be identified by the use of a "bullet" symbol, i.e., • May 2, 1978 EXTENSIONS OF REMARKS 12263 circumstance that the month of September to indexing a. tax system, the Carter Com­ in revenues through indexing. In very early was simply the last possible month in a.