Watch your clients get taxed to the bone!

Advisor.ca is proud to congratulate Yves Bonneau, Editor in Chief of our Quebec affiliate Conseiller.ca, on winning the Kenneth R. Wilson (KRW) Award for Best Editorial in 2010. The KRW Awards recognize the best in Canadian business press journalism. Here is his Silver Award winning editorial:

In 1999, Claude Laferrière, professor of tax policy at the University of Quebec at Montreal (UQAM), and Yves Chartrand, a commentator on tax issues for Conseiller magazine and founder of the Centre Québécois de Formation en Fiscalité (CQFF), hit the small, discreet world of taxation in Quebec with a bombshell by publishing the ‘Laferrière-Chartrand curves.’ For the first time, it was finally possible to understand and visualize the perverse effects of the nation’s fiscal measures, and more particularly of our generous provincial government’s tax system.

Laferrière and Chartrand have busied themselves conveying a well known, but never-before-illustrated concept: the marginal tax rate. It’s a little like the first time you see what it’s like under extremely low gravity conditions. Theoretical calculations tell us that a human being can leap 30 meters on the moon, but nothing beats seeing it for yourself. Just ask St. Thomas!

Similarly, we know that the jumble of tax and socio-fiscal measures has a direct impact on the net revenue of an individual taxpayer or family, but thanks to these fastidious tax specialists, it’s possible to see with perfect clarity the often catastrophic effects for a taxpayer of an increase in income generated by overtime pay, a salary increase or a bonus. And it’s a safe bet that taxpayer is one of your clients!

After ten years, has anything changed for taxpayers when it comes to the marginal effective tax rate (METR)? Unfortunately not. Some alterations were made to correct glaring inequities, but in the end we still have the status quo, or close to it. The dynamic at work here proceeds on the model of communicating vessels: what governments give with the right hand, accompanied by lofty speeches and good intentions, they are certain to snatch back with the left, dipping stealthily into the taxpayer’s pocket like a magician, with no one noticing a thing. And you ain’t seen nothin’ yet!

Indeed, Chartrand doesn’t hesitate to use the phrase fiscalité au noir—”taxation in the dark of night”—to describe the phenomenon revealed by his line graphs illustrating the METR.

Fiscalité au noir is a play on the French idiom travail au noir, which refers to the practice of hiding your earnings from the government so as to avoid paying taxes on them. Chartrand’s point is that the METR is really just the inverse what citizens do when they don’t declare their earnings. The METR, in other words, is stealth taxation.

This metaphor provoked an almost furious reaction in 1999 from Quebec’s then Minster of Revenu, Rita Dionne-Marsolais. It will doubtless raise the eyebrows of the current Minster, Robert Dutil.

This year Laferrière and his UQAM colleague Francis Montreuil revealed 37 line graphs representing 37 domestic arrangements. Suffice it to say that you will find the majority of the working hypotheses applicable to your clients in this collection to be of indisputable value. And the beauty of it is that these line graphs are accessible to everyone exclusively on the CQFF website.

You will see that there are two line graphs for each type of household arrangement: the red line indicates the basic marginal tax rate derived by using only tax tables, while the blue line represents the METR (which also includes the effect of additional revenue on multiple tax and socio-fiscal measures). Let’s look at line graph no. 122: a single-parent family with two kids (of which one is at least 6 years of age), and childcare fees of $6,000. If someone in this situation earns somewhere between $30,000 to $35,000 and receives a $5,000 bonus from her employer, she would see close to $4,500 of this amount slashed off by the taxman’s sickle. Absurd! In this scenario, the same type of household would have to have an income of more than $115,000 to see the bonus taxed at the basic tax table rate everyone uses.

This is how it works in the majority of cases reported in Laferrière’s study of the METR for 2009. The line graphs permit us to see all the consequences of an increase in presumed annual income. And note that only 3.2% of Quebec taxpayers declare an annual gross income of over $100,000, which is to say that the perverse effects of these tax measures affect a very large number of taxpayers.

In this group, we must also count the retired persons who for the past two years have gotten hammered by low interest rates. Their interest earnings are lower, which puts them squarely in the range of hyper-taxation revealed by Laferrière’s line graphs. As Chartrand notes, 81.1% of Quebeckers declare a gross revenue of less than $50,000.

This is great tool for advising your clients. The RRSP season is in full swing, so if you have clients who aren’t easily convinced to take out an RRSP because they think the tax savings aren’t so attractive given their salary, tell them to think twice before leaving so much money in the hands of the taxman. We note that the government encourages workers to be more “productive” and asks retirees to remain in the workforce part-time. But all this leads to catastrophic consequences because of this schizophrenic tax regime.

The quest for additional income is so heavily penalized that it confirms, to all intents and purposes, the popular saying that “working more amounts to nothing, because almost all these gains are downright confiscated by the taxman.” Truly scandalous!