Ch 18: The Personal Income Tax

Front 1

Tax on tax vs. tax on income.

Back 1

TONI - increased complexity and differences among provinces

Front 2

What’s the difference between an exemption and a deduction?

Back 2

Both reduce taxable income.
Exemptions are set amounts based on self, spouse and dependents.
Deductions are expenses that reduce your taxeble income such as alimony, capitall loss, moving expense.

Front 3

What is Haig-Simons income?

Back 3

Money value of net increase in individual's power to consume during a period.

Front 4

What problems are there with Haig-Simons income?

Back 4

Income must be measured net of expenses earning it.
Unrealized capital gains are not easily gauged
Imputer income from durable goods not directly observable
Difficult to measure value of in-kind receipts.

Front 5

When are expenses consumption?

Back 5

When not related to earning taxable income.

Front 6

Should employer contributions to pension funds be taxed?

Back 6

Within clearly specified limites, not subject to tax. According to H-S since pension is income + interest accrued but this is politically unfeasible.

Front 7

What should be the tax treatment of expenses to earn income? Of interest? What is “tax arbitrage”?

Back 7

MOst tax deductions are for expenses incurred in order to earn income.

Tax arbitrage occurs when rate of return realized on investment is greater than the effective borrowing rate.

Front 8

Is H-S efficient? (What would Ramsay say?)

Back 8

Efficient and appeals to a sense of justice, has virtue of neturality in that it treats all forms of income the same, does not distort behavior.
But equal tax rates on all income not necessarily most efficient. (ex with regards to inelastic goods).

Front 9

What is the “lock-in” effect? Do we have insufficient capital mobility within Canada?

Back 9

Tax system locks ppl into their current portfolios. Realized capital gains subjected to tax when considering switching selling capital assets must take into account that it will create a tax liability.

Front 10

What effect does tax deductibility have on relative prices? (Do prices move as a result? How about hockey tickets?)

Back 10

Deductibility changes relative price, therefore changes Quantity demanded.
The higher the indiv's value of t, greather the value to the individual of a given dollar amount of deduction and the lower the effective price of good.

Front 11

Should inheritances be taxed? Should they be taxed at 100 per cent?

Back 11

In Canada no such tax exists.
Referred to death tax, opponents to the tax argued that it is immoral to place a financial burden on someone who has just lost a loved one. H-S: still income.

Front 12

Do RRSPs increase overall savings rates?

Back 12

Not clear.
Motivation for introduction of RRSPs is to stumulate savings but not clear if this is actually so.

Front 13

What is the difference between a tax credit and a tax deduction? Are credits always better?

Back 13

Both alter relative prices.
Higher marginal tax rate = greater value of a deduction of a given dollar amount.
Tax credit is subtraction from tax liability, value is independent of indiv's marginal tax rate.

Ex: Tax credit of $100 reduces tax liability by 100 regardless, a deduction of $200 = $100 (t = 50%) and $60 (t= 30%)

Front 14

What is the difference between a refundable and a non-refundable tax credit?

Back 14

Refundable = negative tax = tax credit > tax payable = gov't makes payment.
non refundable - government makes no payment even if tax credit > tax payable.

Front 15

What did the recent budget change about the medical expenses deduction?

Back 15

2010 Federal Budget proposes to change wording of income of ITA - expenses for purely cosmetic purposes - not elibile medical expenses unless medical or reconstructive (effective 4th March 10)

Front 16

Why do charitable deductions take the form of credits rather than deductions? What is the elasticity of “demand” for charitable giving?

Back 16

Estimates indicate price elasticity may be less than unity.

Front 17

What is a “clawback”? Why would you claw back family allowance payments?

Back 17

For every dollar, one's income exceeded a certain level - family allowance payment reduced by a fraction of a dollar, the more income increases, tax credit would disappear completely.
For high income households = presence of children is irrelevant to household's ability to pay tax.

Front 18

Are children discretionary durable goods? Should the tax system “subsidize” them?

Back 18

Considered non discretionary but can be argued as otherwise, given wide availability of contraceptive methods. Raising children = conscious choice.
Tax system should subsidize if raising children associaded with postive externalities like supporting aging economy,

Front 19

Can the tax system be simplified?

Back 19

Current system criticised, complex and compliance burden, accountants and lawyers full employment act, law is complex and will remain so, simple reules are often inadequate when situations differ greatly in a complex world unlikely that system will be simplified but room for improvement.

Front 20

What are “surtaxes”?

Back 20

Additional to given rate

Front 21

What is the top marginal rate of payroll tax?

Back 21

around 30%

Front 22

Why do we claw back EI benefits when net income exceeds $48,750?

Back 22

The view is that they assume you have a plan B. Savings, able to be re-employed.

Front 23

What is the rate of clawback on Old Age Security (OAS) payments?

Back 23

Benefits withheld if income is over 63,511
at a 15% until entre amount clawed back at income level 103 101

Front 24

What is the purpose of the “Alternative Minimum Tax”? Is it fair?

Back 24

Payable if it exceeds taxs calculated in the normal way.
Includes all capital gains rather tahn only half and does not allow for various tax incentives or for deductions for contributions to retirement plans.

Essentially a shadow system with its own rules for computing the tax base.