“Why does Canada have child benefits for modest income families and a child care deduction that favours the well-to-do?”
Many of us fantasize what it would be like to brief an intelligent Martian on an earthbound topic.
Recently a colleague and I got the chance. A spaceship landed in Scarborough Ontario and a female Martian (pronouns pho and dei) indicated through a telepathic translation machine that she wanted to understand our income security and personal tax systems in Canada.
We set up a convenient time and began our conversation in Rouge Park. It proved too difficult to explain what coffee is, so we decided to get refreshments later.
We started to explain to her (she has ten ears) that we have a tax and benefit system with key components:
- Entitlements (e.g. OAS, GIS, EI, CPP) and Veterans benefits that we pay for through payroll taxes and income taxes (we explain the difference) and refundable credits we pay through the income tax system
- We explain that all benefits have histories – OAS: 1927 and 1951; GIS 1969; EI 1940; CPP 1966; Veterans 1944 and refundable credits 1978 – and we note that every time we brought in a new thing, we kept the old ones
We then say that,
“Our income tax system pays money – refundable credits – and also has non refundable tax credits to reduce taxes and deductions to reduce income”.
We note that,
“Income taxes came along in 1917 with exemptions and after that we put in deductions but changed most of them to non-refundable credits (1986) so we just have two big deductions left – RRSPs and child care – but most others are non-refundable credits.”
She has studied this closely so understands all the technical points.
We analogize refundable credits to gift cards (that they also have on Mars) and non-refundable credits to tax coupons and deductions to income coupons.
We then tell her that we also charge taxes on goods and services (GST and HST) but have gift cards (GST credits and Trillium in Ontario) to help lower-income families pay their HST.
Our Martian says that this sounds complicated but we tell her that we had the Carter Commission in 1966 and made some changes to Taxation and the MacDonald commission in the early 1980’s but little came of that so we muddled along adding to entitlements and boutique (single purpose) credits while getting rid of others (e.g. child fitness).
We tell her that we don’t amend our Constitution anymore but we would only need an amendment to put in another program that had a payroll tax like EI or CPP and we are not intending to do that.
We tell her about provinces and cities and how they also have taxes (provinces with income taxes and cities with low level property taxes).
We go deeper into our world history and note that the UK put in income taxes instead of property taxes in 1909 (Winston Churchill) and the US passed a Constitutional amendment in 1913 (Woodrow Wilson) to usher in income taxes – so that’s part of why we followed suit in 1917.
Our Martian notes that,
“If your system is progressive (higher taxes on the rich), why do you pay child benefits that are income tested so the poor get more but then have a deduction for child care where rich parents get more than the poor?”
She wonders if the rich need more to help with child care than the poor but the poor need more money to raise their kids.
We tell her that,
“There are some questions we just can’t answer. We just have these programs that we brought in and there they are.”
She then asks why we have this big array of credits, some of which are tax coupons, others are income coupons and others are gift cards and many seem to cover the same things like caregiving or getting medical help.
We just tell her that,
“They came in when they came in (itches that government’s scratch) and they are more historical than rational.”
She asks why we don’t simplify all this when it’s so ripe for simplification.
“Aha!” we answer,
“There are many people who make their living advising people how to navigate all this and our various levels of governments can’t agree on what should get changed and they worry about who would benefit, so it all stays the same. “
She gets back into her space ship and thanks us.
She closes by saying that she found all this fascinating but she doesn’t know whether her space agency will agree that it was worth the trip!
Just as she was climbing the stairs of the space ship, she turns around and said,
“Just one more thing.”
And slithers down the stairs of the ship.
“All this stuff you have told me about – do your people who are affected by this understand this?”
We explain that they actually do not.
“People are very murky about all these things – they don’t understand what they get at all – they think they don’t get things that they do get and believe they get things that they actually don’t.
It’s hard to know why – perhaps the human condition, perhaps complexity, politics – it’s an elixir of things. Behavioural economics explains that taxes are often seen as all about losses and humans are more worried about loss aversion than gain attainment. It’s just who we are.
Part of it is the incapacity to deconstruct – which is easy for you as a Martian – and easier for us because we have been charged to explain it to you.
For example, they hear about tax credits but a tax credit could be a gift card or a coupon for money off their taxes or their incomes – all are extremely different as anyone walking into a store understands – but people don’t seem to question or understand what a tax credit can be.”
She stops us and says,
“Yes we have tried to look that up – from Mars – and we asked your new Chatbot GPT that told us the following when we asked: ‘Why do taxpayers not understand how taxes actually work?‘”
ChatGPT:
The understanding of how taxes work can vary widely among taxpayers, and several factors contribute to why some individuals may not fully grasp the complexities of the tax system. Here are some reasons why taxpayers may not have a complete understanding of taxes:
- Complexity of the Tax Code: Tax laws and regulations can be highly complex and subject to frequent changes. The sheer volume of rules and provisions in tax codes can make it challenging for individuals to navigate and understand the tax system fully.
- Lack of Education: Many people have not received formal education or training in tax matters. Taxation is a specialized field, and individuals may not have had the opportunity to learn about it in-depth.
- Changing Life Circumstances: Tax situations can vary significantly depending on an individual’s life circumstances, such as employment status, income level, marital status, and investments. Understanding how these factors affect taxes can be complex and may change over time.
- Perceived Bureaucracy: Some taxpayers may view the tax system as bureaucratic and opaque, which can discourage them from trying to understand it fully. They may feel overwhelmed by the paperwork and procedures involved.
- Misinformation: Misconceptions and misinformation about taxes are common. People often hear inaccurate information from friends, family, or online sources, which can lead to misunderstandings about how taxes work.
- Fear of Making Mistakes: The fear of making a mistake on tax returns and potentially facing penalties or audits can deter individuals from delving deeper into tax matters. This fear can lead to a surface-level understanding of taxes to avoid perceived risks.
- Specialized Knowledge Required: Taxation involves specialized terminology and concepts that may not be intuitive to everyone. Some individuals may find it challenging to grasp these concepts without guidance.
- Individual Focus: People tend to focus on their immediate financial concerns and may not prioritize understanding taxes comprehensively. They may rely on tax professionals to handle their tax matters.
- Cultural and Language Barriers: Cultural and language differences can pose additional challenges in understanding tax concepts and requirements, particularly for individuals from diverse backgrounds.
- Perceived Irrelevance: Some individuals may perceive taxes as irrelevant to their daily lives or as something beyond their control, leading them to pay minimal attention to tax matters.
To address these challenges and improve taxpayers’ understanding of taxes, governments and organizations often provide educational resources, tax preparation assistance, and outreach programs. Additionally, seeking guidance from tax professionals or financial advisors can help individuals navigate the tax system effectively and make informed decisions regarding their finances.
“Yes,” we tell her,
“These ideas have a lot to do with it and people also have aspirations about what they want the system to do. The don’t understand that rich people get all their refunds through non-refundable credits and deductions and almost nothing from refundable credits.
The poor get nothing from deductions and non-refundable credits and all their refunds through refundable credits.
Still just like the term ‘tax credits’, what they get and how they get it is just a mush.”
She then asks if this is why everything is a muddle and taxation never seems to get reformed.
We tell her that she is really onto something but she likely got all the right reasons from Chatbot GPT
We tell her that as strange as this all may seem, Chatbot GPT got it right. She says it’s so hard to understand but she just had to check with us one more time.
We tell her to feel free to visit again and to remember to bring a coat if it’s winter because our coats are not sewn with 14 sleeves.
Why does income taxation in Canada never seem to get reformed?
We also got curious and asked Chatbot GPT why Canadian taxes don’t seem to undergo real reform.
Chat GPT:
The issue of income taxation reform in Canada, like in many other countries, can be complex and contentious, and it often faces challenges when it comes to significant changes or reforms. Several factors contribute to the difficulty in achieving substantial income taxation reform:
- Political Factors: Taxation is a highly political issue. Any major reform that involves changing tax rates, structures, or deductions can lead to both support and opposition from various interest groups, political parties, and individuals. Politicians may be hesitant to make changes that could be unpopular or controversial, especially in the run-up to elections.
- Revenue Dependence: Income taxes are a significant source of revenue for the Canadian government. Any changes to the tax system must be carefully considered to ensure that they do not lead to revenue shortfalls that could affect essential government programs and services.
- Complexity: Canada’s tax system is complex, with numerous tax credits, deductions, and exemptions. Simplifying the tax code or making major changes can be challenging due to the intricacies involved.
- Economic Considerations: Taxation policies can have a direct impact on the economy. Changes to tax rates or structures can influence business investments, consumer spending, and overall economic growth. Policymakers need to consider the potential economic consequences of any reforms.
- Interest Groups: Various interest groups, including businesses, advocacy organizations, and individuals, have a vested interest in the current tax system. These groups may lobby to maintain the status quo or protect specific tax benefits that benefit them.
- Public Perception: Public perception of taxation matters. Reforms may face resistance if they are perceived as unfair or if they disproportionately affect certain groups of taxpayers.
- Partisan Politics: Achieving consensus on taxation reform can be challenging in a multi-party-political system like Canada’s. Different political parties may have contrasting views on tax policy, making it difficult to find common ground.
- Lobbying and Advocacy: Lobbying efforts from various organizations and industries can influence tax policy decisions. Well-funded lobbying campaigns can sway public opinion and influence policymakers.
- Long-Term Planning: Tax reforms often require a long-term perspective and careful planning. Policymakers may need to consider the impact of reforms over several years or even decades, which can be challenging in a political environment focused on short-term goals.
- Global Economic Trends: Canada may also be influenced by global economic trends and international tax agreements, which can limit the extent to which the country can make unilateral tax reforms.
While substantial income taxation reform may be challenging, the Canadian government does periodically make adjustments to the tax system to address specific issues or priorities. These adjustments may include changes to tax rates, credits, or deductions. The process of reform typically involves consultation with experts, stakeholders, and the public to ensure that any changes align with the country’s economic and social goals.
Postscript
She had just pulled away on her spaceship when we got a call on my cellphone.
It was her.
She said,
“I forgot to ask what you would do to change the system. Which of the reports that called for change do you most favour and why – I want to ask since you were the ones my master chose to give me an orientation to best explain the systems.”
We then said that we need to have criteria and the criteria are here in a deck.
“Do you have decks on Mars like PowerPoint?”
“No. We just telecommunicate in a big room where everyone nods.”
Ok, well, here is the deck.
And we would start by making the child care deduction into a non-refundable credit and then make part of it refundable through an income test.
She said,
“I don’t even have to understand inequality or human or Martian need to get that. I don’t need to at all. I’ll get back to you for more if that’s OK.“
We said,
“We’re good with that.”
Js yy Sept 24/23