Financial security Food security Governance Poverty Taxation

Why taxing food staples should not be considered a policy option in Canada

Charge GST on food, economists say
The Canadian Press Posted: Feb 24, 2012 11:11 AM ET

Low-income households can’t buy food today with a larger HST rebate they hope to get sometime in the future.  A key objective of the social safety net, welfare, disability, unemployment, child tax, old age, guaranteed income and other benefits, is income smoothing.  It is why these payments are made bi-weekly or monthly.  Telling households already struggling to meet their basic needs that they will have to pay more at the point of sale, but that in turn they may receive a larger annual HST rebate undermines this key objective.  As it stands many of these social benefit programs have already seen significant real cuts as they have not been indexed to the cost of living.  Also, Canada does not have a  Supplemental Nutrition Assistance Program (aka ‘food stamps’) like the U.S. does.  Low-income Canadian households who won’t be able to make their weekly grocery budgets stretch a little further due to higher food staple prices will end up either at food banks, at soup kitchens or malnourished.

And that’s assuming an HST rebate will fully compensate the increased cost low-income households would bear. The current GST rebate does not fully offset its cost to lower-income households nor has it had an effect on the redistribution of income.  While tax hikes intended to more equitably distribute income should be zero-sum, like all tax schemes the HST on food will be designed to offset implementation costs  (admin, enforcement)  and limit benefits to net federal government income.

The argument that not taxing food staples adds to income disparity by needlessly subsidising the rich (high-income and/or wealth) is intellectually dishonest on at least two fronts. Food staples, which is what is at the heart of this argument since prepared foods and restaurant meals are already taxed, comprise a much smaller proportion of rich households’ budgets. The relative disbenefit of this ‘subsidy’ to the rich is negligible when contrasted to the food affordability benefit to lower-income households. See Text table 2 – Average expenditures by income level, 2009 (PDF file) on food as percentage of total expenditure by quintile from SHS, Adjusted market, total and after-tax income, by adjusted income quintiles, annual from SLID.

If the objective is to offset an unfair subsidy to the rich through the federal tax-and-transfer system, the goal would be more easily and efficiently achieved by taxing premium luxury goods consumed by rich households and their estates inheritance. High-end luxury goods also have a low demand elasticity: a potential exotic car or luxury home buyer will unlikely reconsider their purchase decision because they have to pay an extra 5-10% tax. And apparently the market for these goods remains exceptionally strong, fuelled by rising income/wealth disparity.  Likewise, an estate tax on the relatively few inheritances over say $1M would be more efficient, not to mention altruistic, than a tax that could affect relatively many low-income households’ food security.

Neither the estate tax idea nor the $1M amount are novel; they are from the Estate Tax administered by the IRS in the U.S.  The current Canadian tax code treats inherited assets as capital assets deemed disposed (for capital gains/losses/cost allowances) since  Canada’s estate tax was repealed back in 1972.  Nor is the luxury tax novel; see the Luxury Car Tax administered by the ATO in Australia or the 10% luxury car tax proposed by the U.S. EPA.  B.C used to have a provincial luxury car tax that was eliminated with introduction of the HST. Ontario has in place the means to  implement a luxury home tax through the HST on new property, although it may wish to reconsider extending it to resale homes and adjusting/varying the thresholds ($400K in Toronto today is average, not ‘luxury’).

In addition to inheritance and luxury consumption taxes, there are the popular arguments for raising Canada’s capital gains tax (and/or applying it all gains), reversing previous corporate income tax (CIT) rate cuts and eliminating tax-free savings accounts (TFSA).  While lower tax rates applied to investment income than those applied to salaries and wages do inherently benefit the rich, there are a number of issues that make these proposals more challenging to implement.  These include the need to keep the capital gains and CIT in line with prevailing U.S. rates and policies.  That said, the U.S. federal capital gains tax rate is higher (15-20% v 14.5%) and CIT rate significantly higher (35% v 15%) than Canada’s.

In addition to championing the idea of taxing food staples, Mr. Mintz is also known to expound the benefits of cutting federal CIT rates because they theoretically increase capital investment and create jobs. There is little real-world evidence to support the theory (see here). Mr. Mintz was asked if the objective of the continuous federal CIT rate cut (Excel file) was to increase capital investment and employment, whether it would not be more efficient to provide a ‘tax-cum-subsidy’ that would reward only those companies that invested and hired. This did not sit well with Mr. Mintz. While he looks favourably on giving low-income households an HST rebate after they have had to make sacrifices at the grocery store, he draws the line at rewarding rather profitable corporations with tax benefits after they have invested and hired in Canada. It is a rather peculiar double-standard. In any event, Mr. Mintz danced around the question by incoherently going on about capital flight in today’s more open international financial market system (given the amount of FDI going into Canada’s resource sector, one could argue capital controls would not be a bad idea).

To the point, the arguments in support of applying HST to food staples are as intellectually dishonest as those put forward in support of cutting taxes on profitable corporations.

Governance Poverty Transparency

Inaccurate measures of poverty: A brief Canadian history

Low income cut-off (LICO)

For several decades, Statistics Canada used LICO as its primary measure of relative poverty in Canada.  Although it was not formally referred to as the ‘poverty line’, that is the purpose it served for many.   It was a general measure that took the average family’s expenditure on food, shelter and clothing (adjusted for family and community size), added a margin of 20% to it, and that was it.  If a family’s income fell below its respective LICO threshold, it was counted as low-income.  The LICOs were occasionally updated to account for increases in average family expenditure on the three basics.  What the LICO lacked in precision, it compensated for as a historical index:  LICO could be traced as far back as 1968 and it allowed for the creation of historical maps such as the ones published with the 2006 Census income release.

Low income before tax cut-offs, 2005 

Low income cut-off, after tax (LICO-AT)

The LICO was changed in the early 1990′s.  In 1991, LICOs based on after-tax income were published for the first time.  It seemed reasonable at first glance:  Canada supposedly had a progressive taxation system with tax rates that rose relative to income bracket, and the LICOs should reflect that.  Problem?  The Census (and SLID) income data was the basis for the denominator. The Family Expenditure Survey (FAMEX) and later Survey of Household spending (SHS) would be the basis for the numerator.  The Census (and SLID) income tax data was notoriously unreliable, where it was available at all.  If reliable income tax data was not available, then what were the after-tax LICOs based on?

There is no simple relationship, such as the average amount of taxes payable, to distinguish the two types of cut-offs.  Although both sets of low income cut-offs and rates continue to be available, Statistics Canada prefers the use of the after-tax measure…  The number of people falling below the cut-offs has been consistently lower on an after-tax basis than on a before-tax basis.

Basically, the amount of income tax paid was assumed using the tax brackets and aggregated Canada Revenue Agency T1 data, irrespective of how much actual tax a person or family actually paid.  That’s inaccurate, as many high-income and/or wealthy families could defer, offset or reduce a significant share of their earnings through various registered investment plans, capital gains and other tax shelters.  Lower-income families’ earnings on the other hand largely consist of wages and salaries, from which personal income taxes are usually already deducted.  The lowest personal income tax rate is higher than the effective capital gains tax rate on the highest personal income tax bracket in Canada. Even if they do qualify for tax rebates, lower-income families are less likely to apply for or receive them as they  don’t  generally benefit from professional tax preparation services. Some families with little income do not file returns at all.

While it was no more accurate than it’s newly-dubbed ‘before-tax’ counterpart, the after-tax LICO did have one notable effect: by lowering the cut-offs across the board,  it also lowered the number of Canadians falling below them, effectively reducing low-income incidence.

Low income after-tax cut-offs, 2005

Low-income measure (LIM)

Also introduced in 1991, the LIM is a fixed percentage (50%) of median adjusted family income based on family size.  Canadians would only be considered low-income if their total family income was less than half the median same-size family’s income.  Community size was not taken into account .

The LIMs are based on the Survey of Labour and Income Dynamic (SLID), a voluntary survey of a small number of households sampled from the LFS (in turn sampled from the Census).

Oh, and in many cases the more general LIMs also happened to further lower the income thresholds, effectively reducing low-income incidence.

LIM after-tax thresholds, 2006


Introduced in 2000, unlike the LICO and LIM, which were relative measures of low-income based on average family income and/or  consumption, the MBM measure was normative:

The MBM and the MBM disposable income were designed by a working group of Federal, Provincial and Territorial officials, led by Human Resources Development Canada (HRSDC) between 1997 and 1999. 

Bureaucrats got together to figure out what/how poor people should live and created a basket of goods based on these assumptions, which, not surprisingly, were rather questionable.  Probably the most questionable of these was:

The MBM thresholds are calculated as the cost of purchasing the following items: …Transportation costs, using public transit where available or costs associated with owning and operating a modest vehicle where public transit is not available.

A low-income family of four (two adults,  two children) living in a major urban area  (CA/CMA) where transit is available gets a couple of transit passes added to its basket for transportation costs.  Because the working poor in areas where transit is available presumably needn’t drive – not the Molly Maids, the delivery drivers, the general labour contractors, etc.  This assumption was plainly wrong and was easily demonstrated to be so by a simple calculation (using Q47 of the 2006 20% sample Census).  Nevertheless, it remained.

In addition to being an inaccurate measure, in many cases the MBMs further lowered income thresholds, effectively reducing low-income incidence.

MBM thresholds for reference family, 2007


The historical ‘progress’ of low-income measurement in Canada can be demonstrated with an example.  A family of four (two adults, two children) living in Montréal:

LICO-BT (2005)       38,610
LICO-AT (2005)       32,556
LIM-AT (2006)         30,358
MBM (2007)            26,560

With each subsequent new measure, the income cut-off was lowered, cut by nearly a third overall for that family of four living in Montréal. It seems ‘progress’ in Canadian poverty reduction is simply a matter of changing metrics.


…and on the personal debt side,1990-2008


…and on the expenditure side,1990-2008

Gross domestic product, expenditure-based


Canadian workers’ wages declined as corporations’ profits rose,1990-2008

Gross domestic product, income-based