The Sneaky Tax Hike Nobody Voted For

Are provincial governments raising your taxes in secret? 

Economist Mike Moffatt and columnist Sabrina Maddeaux expose the hidden mechanism of bracket creep, a stealth tax increase impacting millions of Canadians.

Because fixed-tax brackets in provinces like B.C., Manitoba, and Ontario fail to adjust for inflation, middle-class workers are automatically pushed into higher tax tiers, forcing them to pay taxes as though they are wealthy even though their purchasing power remains flat.

We dive into why this particularly clobbers income-dependent younger Canadians (Millennials and Gen Z) and how Ontario's outdated surtax thresholds, which can be triggered by an income of less than $110,000, are punishing effort and driving out-migration. More than just money, this quiet revenue tool lacks democratic accountability, eroding trust in institutions and revealing a tax code desperately in need of a full rethink.

Key Topics: Bracket Creep, Stealth Taxes, Tax Policy, Inflation, Middle Class, Ontario Surtax, Mike Moffatt, Sabrina Maddeaux, Canadian Politics, Economic Inequality, Tax Reform.

Chapters:

00:00 Bracket Creep and its Impact on Purchasing Power

02:32 The Accountability Issue: Why Stealth Tax Increases Matter

04:06 How Bracket Creep Hits Income Earners and the Generational Divide

06:17 The Problem with Ontario's Outdated Surtax Thresholds

08:36 Political Ramifications and the Erosion of Trust in Institutions

10:10 The Need for a Tax Code Rethink

Research/links:

Sabrina's National Post column (source document): Sabrina Maddeaux: Provinces are profiting from your inflationary pain | National Post

Canadian Taxpayers Federation report on Manitoba bracket freeze: Newsroom

Kelowna Capital News on BC bracket freeze revenue projections: Detailing B.C.’s tax changes in Budget 2026, including income tax increases | Kelowna Capital News

Hosted by Mike Moffatt & Cara Stern & Sabrina Maddeaux

Produced by Meredith Martin

Funded by the Neptis Foundation https://neptis.org/

Transcript

SPEAKER_00 0:00

You're talking about solidly middle class workers, like teachers and so on. They're often renters, but they're being taxed like they're rich.

SPEAKER_01 0:08

I think there's also something particularly gulling about working harder to try to get ahead and finding out the harder you push, the more you get taxed for it. Class Enomics, hosted by Sabrina Maddow and Mike Moffat. Provincial governments are raising your taxes by stealth. These tax increases were never debated in legislatures, never voted on, but have a real impact on your bottom line. They do this through something called bracket creep. This happens when tax brackets don't adjust over time with inflation and are fixed at set income thresholds. When inflation pushes wages up just to keep pace with the cost of living, more of that income tips into a higher tax tier automatically. We call that bracket creep. The result, your purchasing power stays flat, but your tax bill goes up. You're not actually any richer, but the government is collecting more from you as though you are.

SPEAKER_00 0:53

So Sabrina, you had a fantastic piece of this over at the National Post. We'll we'll link to that in the show notes. How widespread is bracket creep?

SPEAKER_01 1:02

Unfortunately, it's becoming a lot more widespread. Bracket creep doesn't happen by accident, as there's a pretty simple fix: index tax brackets to inflation every year. Now, several provinces in the federal government already do this, but now BC, Manitoba, and Ontario have been freezing or failing to adjust their brackets, turning inflation into a quiet revenue tool for politicians. The provinces moving in this direction include British Columbia, which announced plans to freeze brackets from 2027 to 2030 and hike the base tax rate for the first time in 25 years, which is a double hit for the middle class. For example, a professional who earns$75,000 a year faces an immediate$272 hit from the rate hike alone, and then more creep each year from this freeze. Now, freezing tax brackets is projected to rank an additional$60 million for the BC government next year. But then, since the impact compounds every year as more workers are pulled into higher tax brackets, that total goes up really fast. For the 2028-29 fiscal year, the projection balloons to around$590 million in extra taxes. So that's huge. And they're not the only ones who are doing this. Manitoba now has indefinitely frozen all brackets and their basic personal amount. The Canadian Taxpayers Federation estimates this extracted about$82 million in unvoted revenue last year alone. And Ontario, on top of that, has their own version of this around surtax thresholds.

SPEAKER_00 2:27

Yeah, so we add up all of these provinces. You know, we're we're in the billions, but I think the thing that really strikes me is that this isn't just about the money, it's the process. Like as you pointed out in the intro, that these are tax increases by stealth. Normally, if a government wants to raise taxes, they need to put it in a budget bill. We've seen uh provinces introduce their budgets in uh in recent weeks, and that would be a whole public thing. There'd be a whole debate around it. Governments would have to defend their choices, but here that's not happening. So, why does this matter so much?

SPEAKER_01 3:02

That's exactly right. A conventional tax increase means tabling a bill, standing in front of the legislature, defending it in front of the opposition, and ultimately getting it passed. So it's loud, it's public, and often uncomfortable. Uh, but that produces accountability, and that's what our democracy is based on. Now, these bracket freezes produce the exact same outcome of generating more tax revenue and then having taxpayers pay a lot more, but with none of that accountability. So governments are collecting more money without ever having to make the case to voters in public. And now that phrase taxation without representation isn't hyperbole here. It has deep roots in why democratic institutions exist in the first place. And so what makes this entire trend particularly sneaky is how easy it is to miss. Most people aren't tracking their tax bracket thresholds year over year or, you know, paying attention to the minutiae of tax policy when a bracket's frozen, unless there's a headline big rate hike, it can go over their heads. So it just starts to look like your paycheck is a little bit lighter than expected, but it does add up over time. And beyond that accountability piece, there's a real economic question about who this actually lands on, because bracket creep doesn't hit everyone equally, does it?

SPEAKER_00 4:16

No, it doesn't. And but I am disappointed that not everybody has their marginal tax rate Excel sheet like uh me and my cohort uh do. But you know, it really depends on the province here, you know, how those brackets are set. But it tends to hit medium and mid to high income earners the most who earn their income through a paycheck rather than capital gains, because you're generating wealth through assets, a home, investments, a business. Inflation often works in your favor because the asset values climb. And in many cases, you're not taxed on those gains, and you're certainly not taxed on the unrealized gains. And on the realized gains, if the asset is in a tax-sheltered vehicle like a TFSA or your primary residence, or the shares of a qualified small business corporation, you're not going to pay capital gains on that. So that inflation actually helps you rather than harms you, as we see in bracket creep. So you end up with this dynamic where the people who are already most exposed to the cost of living crisis are the same ones who are most exposed to the stealth tax. There's no cushion. And there's a clear generational divide as younger Canadians like you are far more likely to be income dependent and far less likely to hold significant assets like me. So it also hits the middle class particularly hard as high earners have accountants and structures to manage their tax exposure. So there's that as well. The complexity of the system tends to advantage the really high-income earners who can find these vehicles, you know, maybe find that qualified small business corporation to invest into to avoid some of these taxes.

SPEAKER_01 5:56

That is something I feel personally because I'm someone who's still renting, still hasn't been able to afford homeownership. And yet I've been paying Ontario surtax for years now. I know I'm far from alone in that situation. You know, there's this whole category of people earning decent salaries living in expensive cities who the tax code is treating as wealthy, but who are absolutely not. Instead, the surtax is capturing that downwardly mobile middle class. Now, Mike, can you walk us through what's actually going on with that surtax and how we got in this situation?

SPEAKER_00 6:26

Yeah, so Ontario, you you have your marginal tax rates, but once you hit a certain threshold, you have a surtax, which is literally a tax on top of the regular tax. You know, these thresholds were set decades ago and they've barely moved. So when the thresholds were initially written, they were designed to catch genuinely high income earners. And the idea was that, you know, if you're making this much, you can afford a little extra. You know, I think it was originally designed uh to put more money into the healthcare system. But today, an income of less than$110,000 triggers that surf tax or can trigger that surf tax. A salary that in most of Ontario is not enough to qualify for a mortgage on the average home. So you're talking about solidly middle class workers, like teachers and so on. They're often renters, but they're being taxed like they're rich. So the result of that is an effective top marginal tax rate of over 53% uh in Ontario on income above that threshold that that's one of the highest in North America. And that has real consequences for behavior and productivity. At some point, people are going, okay, like why am I staying here and why am I working harder if I'm losing 54 cents on the dollar uh for every extra dollar I earn?

SPEAKER_01 7:40

Right. So at what point does this actually start changing people's behavior? Is there evidence that bracket creep and high marginal rates actually make people think twice about working harder or taking on more?

SPEAKER_00 7:51

I I think it can, absolutely. And I think that harder work, you're going to do that in a way that uh doesn't generate as much taxable gain. So maybe you're going to spend more of your time on uh primary uh real estate uh rather than you know going to work, uh, you know, trying to land a new client or something like that. But I think the biggest impact it has is that it just causes people to move. Like, why stay in Ontario where tax rates are high? It's nearly impossible to buy a home when you can move to Alberta, or as those, as in the TTC said, you know, Alberta is calling. You know, both home prices and taxes have contributed to the record levels of outmigration that Ontario has experienced in recent years. So, Sabrina, you write about politics and policy, and you're also exactly in the income range and the age range that gets clobbered by this. So, what do you think the political consequences are when governments normalize this kind of thing? And in particular, I don't understand why we haven't seen the Ford government address more of this, you know, given their political leanings. It would seem to be right up their alley.

SPEAKER_01 8:57

Yeah, it should be a common sense conservative solution to address bracket creep and save taxpayers money in a way that will also enhance productivity. But the core bargain of democratic taxation is that people understand what they're paying and why, and that they have a say in it. When that breaks down, trust in institutions erodes. And it's not just trust in tax policy specifically for younger Canadians who already feel like the system wasn't built for them and is actually working against them. This is just another entry in that long list of evidence for their views that Canada is not working for them and doesn't care about them. So it reinforces that cynicism and anger. And the bipartisan nature of politicians resorting to bracket creep should be alarming to everyone. When governments of very different political stripes all reach for the same quiet revenue tool, it suggests this is becoming a structural habit. And that becomes harder to reverse than a single bad tax policy. I think there's also something particularly gulling about working harder to try to get ahead and finding out the harder you push, the more you get taxed for it. The system is actually punishing effort. The federal government and many provinces do already index brackets to inflation automatically. So fixing this isn't some radical idea. And yeah, Ontario hasn't updated its surtax thresholds in decades. And now BC and Manitoba are going even further, not just not updating them, but actively choosing to freeze indexing they previously had. They're failing to fix a problem, but we're seeing a scenario where provinces are making it worse. So, other than that obvious fix of indexing brackets and base personal amounts to inflation, what does this say about the broader ways our taxation system is breaking? Is this a symptom of even bigger problems?

SPEAKER_00 10:37

Yeah, I think it is because that political challenge is real. Governments have quietly depended on this revenue because the alternatives are either finding cuts elsewhere or making the honest case for tax increases. And neither of those things are easy. And this whole bracket creep issue reminds me a lot of shrinkflation, that once you become aware of this phenomenon, you see it everywhere. You can't avoid it. You know, in a lot of provinces, this same kind of version of bracket creep applies to things like the minimum wage or disability support payments, that they don't rise with inflation. So the value of these programs diminishes over time, and then it allows the premier of that province to kind of come in like Santa Claus, increase these amounts, and get patted on the back for being so generous. But in reality, you know, they're not really increasing anything. They're just simply having these payments or having the minimum wage keep up with inflation. So at the end of the day, recipients really aren't receiving any more value in real terms. When it comes to the bracket creep issue, the broader fix is a tax code rethink. The whole system was designed around assumptions that made sense a generation ago. You know, stable employment, buying a home in your late 20s, uh, having that uh home price go up and up and up, and then one day you could sell it and not pay capital gains on any of it, a workplace pension, and so on. And that's not the reality for most Canadians now, especially millennials and Gen Z. So, you know, if we are serious about a tax system that treats people fairly, regardless of which generation they were born into, that's a bigger conversation we need to start having.

SPEAKER_01 12:11

100%. Bracket creep is just one element of this. Younger people are being um unfairly burdened by the tax system that just doesn't um recognize their current economic uh circumstances and how Canada has changed over the years. So this is something that I think will continue to bubble up and uh tax fairness will become a bigger issue over the next few years. I expect to see it in a lot of headlines. Thank you everyone for watching and listening and to our amazing producer Meredith Martin and editor Sean Foreman.

SPEAKER_00 12:40

And if you have any thoughts or questions about how Gen X is winning, please send us an email to missingmiddlepodcast at gmail.com.

SPEAKER_01 12:48

And we'll see you next time.