Joe Barbieri
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Should You Care About Taxes Not Linked With Inflation?

One of the biggest takeaways from the latest Ontario budget is that taxes are going up for higher income earners. Along with this is the fact that these new tax brackets will not be tied or indexed to inflation. A higher income earner in this case is someone making $150,000 per year or more. These people will be paying 1% more in income taxes up to the threshold of $250,000, and then 2% more in income taxes up to the threshold of $509,000. (1)(2)(3)(4) Above $509,000 in earnings, the tax burden will be the same as before.

These new tax brackets are not going to be indexed to inflation. This means that over a period of time, assuming there is positive inflation each year and income rises, the tax brackets will not reflect the inflation increase. If income, expenses and taxes all rise at the same percentage each year, the effects will cancel out creating a constant standard of living. If income and expenses keep rising and the tax brackets do not – the tax rate on your income will creep up each year if your income is above $150,000. Most people are not in these tax brackets right now, but is this setting a new precedent? Will all the tax brackets not be indexed at the federal and provincial levels, resulting in higher taxes each year just for earning the same income that you have always had? If inflation rises quickly like in the early 1980’s, these tax brackets will affect more people very quickly including lower income earners. Once the numbers get larger, they rarely ever reverse, which means that the effect of these higher tax brackets will continue indefinitely.

Will this de-indexing be the start of a trend? This pattern has already happened with wages and most retirement plans. What if all of the tax brackets were not tied to inflation in the future? If the government needs money badly enough, it shouldn’t be ruled out.