Fiscal Cliff Deal

[August1991]

Well, a large part of the revenue increase is actually coming from raising the payroll tax on employees from 4.2% to 6.2%.

Key point.

For Americans, it's a broad based tax increase, about 1% or so across the board - assuming that you are working.

Paul Martin did something similar in Canada in 1990s when he raised the CPP rates to almost 10%. The Democrats, too, are tax and spend.

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In the US though, critically, this doesn't solve the US federal budget deficit. The US federal government has just taken about 1% of US GDP - that's about $150 billion annually ($0.15 trillion) of a $15 trillion GDP.

Unfortunately, the annual US federal government deficit is now around $1.1 trillion. The $150 billion (annual) is at most the monthly requirement on the debt.

The US federal government is like an ex-wife adding $11,000 every year to your joint credit card. She just decided to take more money from your bank account and pay the credit card debt down (annually) by $1500.

Or as Paul Krugman would say, ever the Obama optimist, the US potential GDP is well below trend; once the US is a civilized society like Europe, it will be able to pay for its government social services.

Edited January 3, 2013 by August1991

[kimmy]

Thanks for the charts, Bonam. They really illustrate that all the media banter about who "won" and "lost" this negotiation is just a bunch of hot air.

-k

[bud]

good times for nascar, disney, goldman sachs and other corporations:

Throughout the months of November and December, a steady stream of corporate CEOs flowed in and out of the White House to discuss the impending fiscal cliff. Many of them, such as Lloyd Blankfein of Goldman Sachs, would then publicly come out and talk about how modest increases of tax rates on the wealthy were reasonable in order to deal with the deficit problem. What wasn’t mentioned is what these leaders wanted, which is what’s known as“tax extenders”, or roughly $205B of tax breaks for corporations.

link

[Smallc]

Paul Martin did something similar in Canada in 1990s when he raised the CPP rates to almost 10%. The Democrats, too, are tax and spend.

Are you seriously trying to call Paul Martin tax and spend?

Edited January 3, 2013 by Smallc

[Pliny]

What a ridiculous way to run things!

The Senate hasn't passed a budget for 4 years, every fiscal bill has to be a crisis, and every solution is a stop gap measure that resolves nothing.

[punked]

What a ridiculous way to run things!

The Senate hasn't passed a budget for 4 years, every fiscal bill has to be a crisis, and every solution is a stop gap measure that resolves nothing.

And Republicans passed a budget which Mitt Romney ran on and lost by 5 million votes so....... Apparently the people approve or do you hate democracy to?

Edited January 3, 2013 by punked

[Argus]

I'm not sure I see it that way. Obama got a good chunk of the tax increases he wanted, while Republicans got none of the cuts they wanted, and any cuts will be decided in future negotiations. How did he "bow" to Republican demands?

The increases were going to happen automatically. What Obama had within his control was how many of those cuts to cancel. He could have let them all come in and then just proposed cuts to middle income people and let the Republicans vote those tax cuts down.

Edited January 4, 2013 by Argus

[Argus]

It goes beyond that. The money you or I invest has already been taxed when we earned it. Then we put it to work for the broader economy in exchange for a return.

So if I save up my money from my job -- having already been taxed, and I open a business, all the profits from my business should be free and clear? No extra taxes on them?

You should also note that this return is taxed already at the corporate level..

That was a strong argument before the corporate lobbyists got the tax codes changed so many of them pay little or no taxes.

. Then its taxed again.

At 15% or less, depending on how good your accountant is.

Those that tend to suggest higher capital gains or dividend tax rates (or claiming that they should be taxed at marginal rates) are those with a defined benefit pension or haven't put their personal capital at risk in a substantial way.

My personal capital is at risk in a substantial way as I have a lot of money in the market.

And as I said earlier, people should be taxed at their full rate on investment income above, say, $100k (in recognition that people need to build up private pensions)

[TimG]

And as I said earlier, people should be taxed at their full rate on investment income above, say, $100k (in recognition that people need to build up private pensions)

You need about 2 million in a private pension to support a lifestyle equivalent to the average family wage after retirement. Edited January 4, 2013 by TimG

[Argus]

You need about 2 million in a private pension to support a lifestyle equivalent to the average family wage after retirement.

Yes, but to get $100,000 in taxable investment income in a year you'd probably have to have more than $2 million invested.

Especially when you consider that money in your RRSP and TFSA aren't taxed. Not to mention that capital gains in stocks don't get taxed unless you sell them.

[August1991]

Are you seriously trying to call Paul Martin tax and spend?

Yes.

[Smallc]

Yes.

He cut government and taxes like no Canadian politician ever. The same can be said of Chretien.

[August1991]

He cut government and taxes like no Canadian politician ever. The same can be said of Chretien.

On the contrary, Martin raised the CPP payroll tax (to almost 10%) and raided the EI fund.

Smallc, government purchases (F-35s etc) and government transfers (Maher Arar, GST refunds etc) are generally getting larger over time. Government is a behemoth. Paul Martin did not really cut either. He "balanced" the budget by raising payroll taxes. Obama apparently did the same.

The difference is that Martin made Canada's government borrowing sustainable. With Obama's rise in the social security contribution, the US federal government budget is still unsustainable, a Ponzi scheme.

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IMV, both Obama and Martin are "tax-and-spend". Neither talked of seriously cutting government spending. IMV, the better question is to ask why both chose to raise payroll taxes?

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If Obama wants to make America a "civilized European State", he should impose European/Quebec taxes on Americans: a 15%-35% VAT for example, no mortgage deduction, and a 50% marginal income tax rate.

[sarcasm]And Obama should also hire more nurses/teachers, and retire all those Marines.

Edited January 5, 2013 by August1991

[Smallc]

On the contrary, Martin raised the CPP payroll tax (to almost 10%) and raided the EI fund.

That's pretty revisionist of you.

Paul Martin did not really cut either.

That's more than revisionist. That's outright dishonest. Government spending was cut across the board. CPP and EI did go up, yes (CPP is not a tax), but the increases in those were followed by the indexing of the federal tax rates to inflation and massive corporate tax cuts.

[August1991]

That's pretty revisionist of you.

http://www.serviceca...shtml#years8504

The current CPP employee rate is 4.95%. In 1993, it was 2.3%. Double those numbers since, in effect, workers pay the employer contribution through lower wages.

In Canada, employees pay now 4.95% of their salary to the CPP (employers pay another 4.95%) but this contribution stops at about $45,000 annual - IOW, it's a head tax of $4,500 on every "officially" working Canadian.

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Why does a politician such as Paul Martin or Barack Obama agree to such a tax increase?

I reckon that they're advised that it's a smart tax move, they're quick studies and they're paternalistic. IOW, it's about control.

Edited January 5, 2013 by August1991

[Smallc]

Again, the CPP is not a tax.

[August1991]

Again, the CPP is not a tax.

Really?

I, and millions of other Canadians, see it as an automatic deduction from a pay cheque. (In Quebec, it's a RRQ contribution to the Caisse but it's still a "payroll deduction".) If you are self-employed, you must still make the CPP/RRQ contribution.

As politicians such as Paul Martin (and Barack Obama) smartly understand, people like Smallc don't view it as "tax": for Smallc, this higher contribution ensures that the State pension scheme is viable.

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There is a poster here (an accountant, apparently - search the forum) who will advise you how to avoid paying this "CPP contribution". Good luck!

Edited January 5, 2013 by August1991

[Bonam]

Again, the CPP is not a tax.

In the world of semantics you may be correct. In reality, however, it is very much a tax.

[Smallc]

In the world of semantics you may be correct. In reality, however, it is very much a tax.

Ummm, no, it's a mandatory pension plan that doesn't go into government revenue. It's not a tax. EI isn't a tax anymore either for the same reason. It's a mandatory insurance program that doesn't go into government revenue.

[August1991]

Ummm, no, it's a mandatory pension plan that doesn't go into government revenue. It's not a tax. EI isn't a tax anymore either for the same reason. It's a mandatory insurance program that doesn't go into government revenue.

Smallc, in bizarre fashion, you explain why politicians such as Paul Martin and Barack Obama can impose a head tax, while politicians such as Margaret Thatcher cannot.

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BTW, EI revenues do in fact go in to the government budget, as Gilles Duceppe repeatedly noted.

As to the CPP, who do you think guarantees Canada's State pensions? More pointedly, like a tax, Paul Martin arbitrarily raised CPP contributions. Similarly, a future minister of finance could just as easily reduce the benefits; heck, I think Flaherty did just that when he changed the eligible age of OAP to 67.

Edited January 5, 2013 by August1991

[msj]

On the contrary, Martin raised the CPP payroll tax (to almost 10%) and raided the EI fund.

Smallc, government purchases (F-35s etc) and government transfers (Maher Arar, GST refunds etc) are generally getting larger over time. Government is a behemoth. Paul Martin did not really cut either. He "balanced" the budget by raising payroll taxes. Obama apparently did the same.

And here is Augusts' great lie exposed: the CPP "payroll tax" was increased to 9.9% but it is the EI fund that was raided.

Anyone notice this?

Switch and bait is still a lie.

IMV, both Obama and Martin are "tax-and-spend". Neither talked of seriously cutting government spending. IMV, the better question is to ask why both chose to raise payroll taxes?

Once again notice the bait and switch going on here - that somehow the rise in the CPP has anything to do with any increase (which has not been demonstrated at all) in spending?

No, none whatsoever.

That's pretty revisionist of you.

Not revisionist - it is an outright lie that August likes to perpetuate.

That's more than revisionist. That's outright dishonest. Government spending was cut across the board. CPP and EI did go up, yes (CPP is not a tax), but the increases in those were followed by the indexing of the federal tax rates to inflation and massive corporate tax cuts.

That's better - yes, August is being dishonest here.

The CPP fund was not raided like the EI fund.

What is also forgotten is that income taxes were decreased drastically starting with the 2000 budget and even EI premiums started to come down under Martin.

Anyone else remember the 17% lowest tax rate? It's 15% now after a brief period of 15.5% thanks to Harper increasing it after he cut the GST.

Anyone else remember the tax brackets of 17/26/29% versus the 15/22/26/29%?

Once again, thanks to Chretien/Martin.

Anyone else remember 75% of capital gains being taxed? Well this went down to 2/3 and then 1/2 in 2000.

Anyone else remember dividends being taxed at "double tax rates?" Well, the eligible dividend rules were brought in by Martin to fully integrate corporate tax reductions with proper dividend tax rates to virtually eliminate this "double taxation."

As for the CPP fund?

Well, it continues to grow and was about $170 billion as of September 30, 2012.

Given that subsequent governments have not changed the CPP rate (although as of 2012 Harper/Flaherty have managed to find a way to tax people who choose to take CPP early and continue to work to at least 65) I think Martin's legacy on this is going to be safe.

[msj]

In the world of semantics you may be correct. In reality, however, it is very much a tax.

It may be a "tax" but since the increase has not been spent yet the idea that Martin was a "tax and spender" is a lie.

More like a "tax and saver and, eventually many many years into the future, a spender."

[msj]

There is a poster here (an accountant, apparently - search the forum) who will advise you how to avoid paying this "CPP contribution". Good luck!

It's still easy to do it by being self employed and operating a small business Canadian controlled private corporation.

The company earns income, it pays tax at the small business rates (currently 13.5% in BC) and the company pays out a dividend to the shareholders at those individual tax rates.

The system is pretty well integrated but it allows that person to not pay both portions of the CPP since if the shareholder takes a wage then he/she could pay as much as $4,712 for CPP.

So on a cash flow basis this can work well.

The downside is one does not earn RRSP room. But with TFSA's and using the corporation as a saving vehicle RRSP's are not necessary for 98% of the population.

The other method to avoid CPP, use of profit sharing plans, is becoming more difficult and bureaucratic and likely not worth the trouble anymore.

One other method (the use of family trusts, lots of issued shares, and effectively "surplus stripping" from the company by the redeeming of shares - therefore earning/distributing capital gains through the family trust) has now been closed (although conveniently not going to be cracked down on under avoidance rules - likely because so many doctors and dentists have been doing this for years and even Flaherty wouldn't want to anger the man who keeps his teeth so pearly white).

[August1991]

And here is Augusts' great lie exposed: the CPP "payroll tax" was increased to 9.9% but it is the EI fund that was raided.

Anyone notice this?

Switch and bait is still a lie.

msj, you're back!

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1. Obama, like Martin, raised CPP/Social Security contributions. These are head taxes. In Canada, they now amount to a $4,500 tax on a working person regardless of income.

2. Martin, unlike Obama, made the federal government budget sustainable.

3. Both Martin and Obama are tax-and-spend politicians. To solve a government budget deficit problem, both chose raising (head) taxes rather than cutting spending.

It's still easy to do it by being self employed and operating a small business Canadian controlled private corporation.

The msj/Barack Obama/Paul Martin route to social wealth: tax avoidance/evasion schemes.

The other method to avoid CPP, use of profit sharing plans, is becoming more difficult and bureaucratic and likely not worth the trouble anymore.

Good news.

One other method (the use of family trusts, lots of issued shares, and effectively "surplus stripping" from the company by the redeeming of shares - therefore earning/distributing capital gains through the family trust) has now been closed (although conveniently not going to be cracked down on under avoidance rules - likely because so many doctors and dentists have been doing this for years and even Flaherty wouldn't want to anger the man who keeps his teeth so pearly white).

Good news.

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msj, is Harper/Flaherty responsible for your loss in billings?

Edited January 5, 2013 by August1991

[Bonam]

It may be a "tax" but since the increase has not been spent yet the idea that Martin was a "tax and spender" is a lie.

More like a "tax and saver and, eventually many many years into the future, a spender."

Oh, I have no stake or position in the whole Martin legacy thing. Don't care at all really. I was just opposing the statement that it is not a tax.