There are currently four federal tax rates in Canada – 15, 22, 26 and 29 per cent – each with a taxable income threshold. Generally, these thresholds increase by the rate of inflation year-over-year.
However, in 2009 the government raised the threshold amount on the two lowest personal income tax brackets by 7.5 per cent, about 5 per cent in excess of inflation. In effect, a smaller amount of taxable income would be subject to the highest federal rates paid by most taxpayers.
Financial benefits, when measured as a percentage improvement in after-tax income, also skew to very high income earners.
Those in the 80th to 95th percentile of income earners ($109,197-$198,237) benefit most, with after-tax incomes improving by 0.18 per cent. These groups benefit from personal amount increases by having a larger amount of income exempted from higher income tax rates, (i.e. income in excess of $87,907 subject to the 26 per cent tax rate).
The highest income households accrue the largest dollar gains per household, but these tax savings comprise a smaller relative share of after-tax income than middle-high income groups.
Households with market earnings less than $23,261 have negligible gain, as these households generally owe minimal federal income tax and are not affected by an increase in the personal exemption.
In summary, the increase in federal tax bracket thresholds raises income inequality more than all other measures examined in this report. These measures are estimated to have increased the national Gini coefficient by 0.04 (indicating a reduction in income equality).
The threshold increases have moderately broad benefits relative to other tax measures examined in this report. An estimated 45 per cent of Canadian households benefit from higher tax bracket thresholds on an annual basis. Generally, more broad-based tax measures have a smaller distortionary impact on the economy, thereby improving (or preserving) the efficiency in the tax system.
This affects Boomers because they tend not to fall into the group that benefits the most from the tax cuts made by the current government.