Monday, December 31, 2012

Canada's Rising Tax Burden - 2013 Edition

The Canadian Taxpayers Federation recently released a report showing us what tax changes Canadians can expect in 2013 and how much more the provincial and federal governments will be "pilfering" from our wallets and purses.  Here is a summary of the damage.

On the federal side, all Canadians will be paying more in both Canada Pension Plan and Employment Insurance premiums.  Here is a graph showing how the amount that Ottawa has been collecting for both of these taxes from both employees and employers has been rising in recent years:

Since it is the bite of these payroll taxes that impacts employee's bottom lines the most, let's take a quick look at how much Ottawa took from individual Canadians who were at the maximum insurable and pensionable earnings over a sampling of years:

1995 - $2021
1997 - $2100
2000 - $2266
2003 - $2621
2005 - $2622
2008 - $2670
2010 - $2911
2012 - $3147
2013 - $3247

In one year from 2011 to 2012, these two payroll taxes rose by 5.35 percent and by 3.19 percent in the year from 2012 to 2013.  You will note that in both cases, the increase in Canadian payroll taxes well exceeded the rise in the Consumer Price Index as shown here:

In its worst year of 2002, Canadian payroll taxes rose by a rather stiff 6.63 percent while inflation hovered between 1.5 and 3 percent.

Since Canadian wage earners currently contribute only 47 percent of these payroll taxes to Ottawa, it's up to employers to pony up the rest.  When the employee and employer contributions to EI and CPP are summed, in 2013, Ottawa will receive $6850 from every Canadian who is at the maximum insurable and pensionable earning level ($47,400 for EI and $51,100 for CPP for 2013).

Now, on to the provincial side.  Here is a bar graph showing the average net tax change in inflation-adjusted dollars for 2013 for each of the provinces:

Quebeckers come off the worst with an average tax increase of $1082 with Nova Scotians seeing their average net taxes rise by $860 and PEI residents seeing their taxes rise by $795 as the Ghiz government desperately tries to achieve some resemblance of fiscal balance.  The overall winners with the lowest net tax increase are residents of Alberta who will see their taxes rise by only $448.  In most cases, these increased taxes can be attributed to bracket creep as tax bracket changes do not keep up with wage increases related to inflation, increases in health taxes and other tax increases.

Here is a chart showing how the taxes for a Canadian family with two children and both parents working making $80,000 per year will rise from 2012 to 2013 including both provincial and federal tax changes:

In this scenario, Nova Scotia residents are worst off, seeing their taxes rise by $621 in 2013, followed  by residents of Prince Edward Island who will see their family taxes rise by $570 in 2013 when natural growth from wage increases is included.  In both cases, the lion's share of the actual increase in taxes is  due to bracket creep as their respective governments look to any means to raise taxes on income without actually raising the marginal tax rates.  By far, these two provinces and Manitoba are the worst offenders when it comes to readjusting their tax brackets to account for inflation; 2012 inflation in Nova Scotia was 2.4 percent and 2.3 percent in PEI yet, both governments chose to adjust their respective brackets by 0 percent.   Residents of Alberta will see their taxes rise by only $414, none of which is related to bracket creep since the Alberta government adjusts its brackets to account for inflation.

On top of these changes are a myriad of user fee increases.  In my jurisdiction, some fees have gone up by well over 30 percent for such things as electrical inspections, driver's licences and registrations and just about every other service that the government offers.

While most of us know that taxes rarely go down and that one has to deal with the tax hand that is dealt, it wouldn't seem so bad on a personal level if governments didn't lever our tax dollars into additional debt by running deficit after deficit with no regard for the future.  If there was some attempt at achieving a semblance of fiscal balance, we would probably feel a whole lot better about seeing more of our money head toward Ottawa and the provincial capitals.  But, on the upside, at least the tax increases facing average Canadian households are a tiny fraction of the increases that Americans are facing on January 1, 2013!  Consider it a belated Christmas gift.

Happy New Year.

Friday, December 28, 2012

How The Treasury Copes With The Debt Ceiling

Now that the United States debt ceiling is once again making the news, I thought that I'd take another look at this looming issue, one that is of particular concern when viewed in conjunction with the fiscal cliff/slope, particularly the mechanisms that are available to the United States Treasury as it attempts to keep the country and its currency afloat.

Here is a graph showing the history of the United States debt limit since 1940:

For your edification, here is an curve showing exponential growth in the size of a population (or for that matter, the size of the debt ceiling in dollars):

You'll notice on this curve that the growth in population increases as time passes until, eventually, the population (or debt in this case) grows by ever increasing amounts over ever decreasing periods of time, eventually growing by an infinitely large amount in an infinitely small amount of time.  Now, looking back at the graph showing the debt ceiling growth, are we not starting to see the same thing, albeit in steps?

If America's highly partisan Congress does not act to increase the debt limit by the end of December, the U.S. Treasury will have approximately $197 billion in Extraordinary Measures that it can use to continue to meet Washington's financial obligations.  This "spare tire" and the Treasury's cash on hand along with the government's daily revenue will "run flat" sometime in February 2013 if the current $16.394 trillion debt ceiling is not raised.

From a publication by the Bipartisan Policy Center, here is a graphic showing the very basic steps that the Treasury can use once the debt ceiling is reached:

Keep in mind that the government owes itself substantial interest on intra-governmental debt including the Social Security and Medicare Trust Funds on December 31, 2012, a payment that will hasten the advent of the debt ceiling breach.

As I noted above, the Treasury has the option of using Extraordinary Measures, a series of legal financial maneuvers, to meet the gap between the breaching of the debt ceiling and the date that Congress sees fit to stop acting like children and raise the debt ceiling yet again.  Once the debt ceiling is reached, the Secretary of the Treasury will declare a Debt Issuance Suspension Period (or DISP) meaning that the Treasury Department can no longer issue Treasuries to meet government spending obligations.  Certain Extraordinary Measures can only be used once a DISP has been declared by the Treasury.  These Extraordinary Measures include:

1.) Not reinvesting the Exchange Stabilization Fund (saves $23 billion).

2.) Not reinvesting maturing securities in the Civil Service and Postal Funds (does not apply in 2012).

3.) Not reinvesting interest payments and cash receipts to the Civil Service and Postal Funds (saves $21 billion).

4.) Not reinvesting the Federal Employees' Retirement System G-Fund (saves $154 billion).

Using these options will allow the Treasury to continue to issue additional debt securities (i.e. Treasuries) to the public and thereby raise cash to continue to pay federal government obligations....but only to a total of $197 billion.  And, in the end, the Funds must be fully reimbursed once the debt ceiling is raised as it certainly will be.

How long will these Extraordinary Measures last?  In 2011, they lasted from May 16th to August 1st, a total of just under 80 days.  This time, Washington won't be so lucky, largely because February tends to be a very expensive month for the federal government.  In February 2012, taxpayers who filed their returns early received $112 billion in refunds.  On top of that, expenses in that month for Medicare and Medicaid, Social Security, interest on the debt and Defense vendor payments totalled another $177 billion.  Here is a chart showing the revenues and outflows for the month of February 2012 showing that there was a monthly cash deficit of $261 billion for that month alone, well more than the $197 billion in Extraordinary Measures:

With all of this data in mind, the Bipartisan Policy Center estimates that the Treasury will be completely out of fiscal ammunition sometime in February 2013.

How much will Congress have to raise the debt ceiling to get the United States through to the end of 2013 and 2014?  Here is a bar graph showing the Bipartisan Policy Center's estimates:

To get through just one additional year from now, the debt ceiling will have to be raised by between $730 billion and $1250 billion, pushing the debt ceiling up to between $17.124 trillion and $17.644 trillion.  To get through to the end of 2014, the debt ceiling will have to be raised by between $1300 billion and $2200 billion, pushing the debt ceiling up to between $17.694 trillion and $18.594 trillion.  This will mean that, in a two year period, the debt ceiling will have increased by up to 13.4 percent, well above even the most optimistic GDP growth levels.  This will push the debt-to-GDP ratio well above 103 percent where it lies today.

If, in the unlikely event that the Treasury is unable to issue new debt over a period of time that exceeds the timeframe that Extraordinary Measures are in effect, the government would be forced to default on some of its financial commitments, delay or limit payments to creditors and could cut payments to the military, cut benefits to Social Security recipients and cut payments to millions of unemployed Americans. Talk about a fiscal cliff!

What makes absolutely no sense in this "reality" is the fact that Congress is permitted to vote for huge cuts in the level of taxation and increases in spending yet, it has the power to tell the Treasury that it is not permitted to sell additional bonds to cover the Congressionally created deficits.  Is it any wonder that fewer than 20 percent of executives surveyed by McKinsey Global Institute in 2010 expected the United States dollar to be the world's dominant global reserve currency by 2025?  The system is broken and, unfortunately, today's poisonous partisan atmosphere is doing little to fix the problem.

Wednesday, December 26, 2012

Who is Bearing the Burden of the Fiscal Cliff?

An analysis by the Tax Policy Center gives us a good idea of which American households will be hit the hardest by the expiry of nearly every tax cut enacted since 2001.  Almost 90 percent of Americans would see their tax burden rise if Congress and the President can't come to some sort of agreement that solves the issues that will arise on January 1, 2013.  On the upside, provided that politicians show some degree of prudence, these changes will have the positive effect of reducing America's sovereign debt growth rate and debt-to-GDP ratio.  Federal tax collection in 2013 would rise by more than $536 billion in 2013, up 21 percent from their status quo level if all tax provisions were extended.

Here is a summary of the expiring Bush-era tax provisions:

Here is a summary of the expiring Obama-era tax provisions:

If all of the tax increases scheduled for January 1, 2013 and if the Alternative Minimum Tax patch is not extended through 2013, the average federal tax rated including individual, payroll and corporate taxes would increase from 19 percent to 24.3 percent.  The average tax burden would increase by $3,500, roughly 5 percent of pretax income.  On average, after-tax income would drop by 6.2 percent.

Here is a table showing how each income quintile (each one-fifth grouping of taxpayers by cash income) will be affected by the fiscal cliff:

Middle income Americans will see their average federal tax rate rise by 3.8 percentage points, costing them an additional $1,984 in federal taxes in 2013.  The top 20 percent of earners will see their federal tax rate rise by 5.8 percentage points, costing them an additional $14,173 in federal taxes in 2013.  The much ballyhooed one percenters (all 1,147,000 of them) will see their tax burden rise by 7.2 percentage points, costing them an additional $120,537 in federal taxes in 2013.

Here is a bar graph showing the average federal tax rate by cash income percentile for 2013 under both scenarios:

Note that the average effective marginal tax rate for all American taxpayers will rise by 4.9 percentage points on wages, salaries and by 5.1 percentage points on interest income.  Rates for capital gains will rise by 7.2 percentage points and for qualified dividends, rates will rise by 20.3 percentage points on average.  As shown here, these changes vary widely depending on the level of cash income:

Again, the top one percent of American earners will see the rates on capital gains rise by a hefty 8.1 percentage points (compared to an average of 7.2 percentage points for all cash income groups) to 22.7 percent with the rates on dividends rising by 25.8 percentage points to 41.1 percent.  Tax rate increases for lower income Americans on these three sources of income are not as substantial, however, lower income Americans generally have very little income from capital gains and dividends so the point is rather moot.

When all of this is said and done, if Congress and the President are unable (or unwilling) to achieve a compromise on the expiring tax provisions, it is Washington that will benefit, at least until the economy slows.  Here is a table showing the estimated increase in federal tax revenues by type for 2013:

Notice that the lion's share of the problem will fall on workers who will see their paycheques drop by $115 billion as the two percentage point payroll tax cut expires; this expiry will affect 77 percent of all households.  Americans who work for a living will bear at least 21 percent of the 2013 increased tax burden based on increases in payroll taxes alone.  The top 60 percent of American taxpayers will see their taxes increase with only one-third of taxpayers in the bottom 20 percent of earners seeing their taxes drop.  

Perhaps it's just me, but there may be a reason why a deal in Washington is proving so elusive.  Could it be that Washington is just as happy to let everyday working Americans bear the burden of reducing the deficit and controlling debt growth since those that sit in Congress seem incapable of reining in spending?  After all, if the tax provisions expire, it is practically a certainty that the federal government will see their revenues rise by over 20 percent while the spectre of a related recession is less somewhat less certain.  Maybe the President and John Boehner are willing to roll the dice and take their chances.