Is Income Averaging “Tax Fairness for Artists”?

Over at Praxis, Michael Wheeler has written a column criticizing the Harper government for not supporting an NDP private member’s bill that would amend the tax code to allow artists to average their income over five-year periods in order to reduce the tax burden that is ‘exaggerated’ by volatile incomes. I appreciate Wheeler’s concerns, but I think there’s a lot more to unpack in the proposal than “Harper Government says no to tax fairness for artists” suggests as a title.

Income averaging for artists has been an NDP policy for a while now, so it’s worth discussing whether this is actually good policy for artists and for Canadians as a whole, since there’s a good chance that despite this setback, they’ll be writing a budget in next several years.  It’s also been a long-standing demand of some artist groups and activists.

Essentially, our progressive tax system presents a problem to people who have volatile incomes – essentially, if your income is relatively consistent from year to year like most Canadians, your tax bill over several years will likely be lower than the tax bill for someone total income over that period is the same, but concentrated largely in a single year.

This is often the case with artists, who frequently struggle for years, only to find themselves having a successful year where they’re suddenly hit with a massive tax bill.

Kevin Milligan explains this well at The Globe and Mail:

A simple example makes this clear. Imagine we had two tax brackets. Income up to $10,000 pays zero tax, and income over $10,000 pays 20 per cent. Someone with $30,000 of income split evenly over three years would pay no tax, as the $10,000 would fall entirely in the first bracket each year. However, someone who earned $0 in the first two years but $30,000 in the third would pay $4,000 of tax ($30,000 less $10,000, times 20 percent). In this way, more volatile income leads to higher tax burdens.

Of course, volatile incomes are hardly unique to artists. Entrepreneurs and the self-employed of all sorts face this problem. (I have volatile income as a journalist, but the NDP bill wouldn’t have helped me out there, if I’ve read it correctly. More on that later.)

Milligan’s article eventually goes on to list a bunch of other reasons why income averaging is bad policy – complicating the tax code, raising administrative costs, and the fact that the tax system has become flatter and with fewer brackets (ie less progressive) since we abolished income averaging in the 1980s which mitigates the problems associated with volatile incomes.

Wheeler isn’t convinced – after all, in his view, Milligan is essentially using “it’s too complicated” and “it’s not really that bad” to justify injustice to artists.

But I don’t think the private member’s bill actually achieves tax fairness. What it does is establishes a class of individuals who get to have breaks on their taxes because their work is “special.” That’s – quite obviously – the opposite of “tax fairness.”

But, you say, what about the problem of what happens when an artist suddenly earns $200,000 off a hit record after struggling for four years to write a song, during which period she earned no income? If she got to average that out over five years, she’d only have to pay 15 percent instead of the top marginal tax rate of 29 percent.

Well, yes. So? Call me old fashioned, but I think someone who earns $200,000 in a single year can probably afford to pay the same rate that anyone else makes. (Although, if she’s smart, she’ll put as much of it as possible into registered savings accounts to avoid tax, and invest some of it back into her business in deductable expenses).

After all, when she was struggling all those years, she was probably enjoying many government services, possibly even arts grants. Don’t you think she should pay her success forward? Even in the unlikely event of her income going right back down to zero next year – when she’ll presumably be taking advantage of more government services and grants?

There are also some other bizarre features of the NDP bill.

For example, the first part of the bill exempts the first $10,000 an artist makes from their artistic work from income tax entirely! That’s on top of the basic personal exemption and any other personal exemptions an artist claims! Why? Is this income somehow different from anyone else’s income? That’s an immediate saving of at least $1,500 for anyone who’s an artist and claiming that much income from their art.

Yes, artists are special and important. So are teachers, doctors, police officers, soldiers, engineers, scientists… should they all get bigger exemptions too?

Then there’s the definition of an artist:

117.01 (1) For the purposes of this section, “artist” means an individual
(a) who

(i) is an author of an artistic, dramatic, literary or musical work within the meaning of section 2 of the Copyright Act, or a director responsible for the overall direction of audiovisual works,
(ii) performs, sings, recites, directs or acts, in any manner, in a musical, literary or dramatic work, or in a circus, variety, mime or puppet show, or
(iii) contributes to the creation of any production in the performing arts, music, dance and variety entertainment, film, radio and television, video, sound-recording, dubbing or the recording of commercials, arts and crafts, or visual arts, and falls within a professional category prescribed by regulation under the Status of the Artist Act; and

(b) who

(i) is paid for the display or presentation of his or her work before an audience, and is recognized to be an artist by other artists,
(ii) is in the process of becoming an artist according to the practice of the artistic community, or
(iii) is a member of an artists’ association.

There are head scratchers here. For example, the Copyright Act’s definition of a “literary work” doesn’t include journalism (as far as I understand it – but I’m a layman and would appreciate a correction), but does include computer programming.

Another odd exclusion: producers. If the goal is to encourage investment in the development of the arts in Canada, it seems odd that the people who take financial risks (the investors) in the arts are excluded from the benefits of this tax adjustment.

And there’s another question: when does one stop being an artist? How much of your activities have to be artistic in order to qualify for this lucrative tax break?

Most artists I know – especially the ones who are struggling – also earn income from non-artistic endeavours (bartending, serving, teaching, producing, temping, etc.). At what point does one stop being an artist and simply becomes a teacher? Should one temp worker benefit from lower taxes than another temp worker simply because he acted in a play last year? How do you justify that to his coworker who gets to pay more tax for the same work?

(If it makes this problem easier to picture, imagine it the other way: where an artist suddenly makes more money one year because he’s sold out and taken a higher paying teaching job; he gets to pay less tax than the other teachers because he’s averaging out his new income over past years when he was just an artist. But why is this teaching income worth a special tax deduction?)

Also troubling to frame this debate is the absence of any estimate of what this tax measure is going to cost – both in foregone revenue and in extra administrative costs to the government. Yes, we’ve also cut corporate taxes in the last decade (we also cut personal and consumption taxes which artists pay, but it’s less shocking to point that out). But it doesn’t follow that because we cut taxes before, we can continue to afford cutting them (actually, the opposite is generally true). Nor is there an estimate of how many people will benefit from averaging and by how much.

I think there are better ways for the government to support the arts – increasing funding to our granting bodies, investing in touring support to get our art seen across Canada and (especially) outside of Canada, and investing in artistic infrastructure (renovate or build a mid-sized theatre in Toronto please!). And no, the Conservatives are not great on these points, though they did increase the endowment of the Canada Council in their first term, to be fair.

But tinkering with the tax code to give artists special status under the guise of fairness is not the way, and good on the Conservatives for shooting this proposal down.

ADDENDUM: After publishing this post, I had a brief Twitter conversation with Michael Wheeler, who adds that enriching the grant system is not going to help artists as much as income averaging would, since the grant system is fatally skewed toward established artists. I couldn’t agree more, and the flaws of the granting system may make the subject of a future post here. I think the granting system needs to be reformed, but I doubt you’ll ever see politicians campaigning on it. Why?

I think the arts community is emerging as a core NDP constituency for a few reasons — artists are generally attracted to left-leaning and social justice issues, the NDP caucus has several arts workers in it (including the guy who sponsored this bill, and second-place leadership candidate Brian Topp), and because someone has recognized that artists are key influencers of public opinion who often have a lot of time on their hands (so keeping them happy will attract others to the NDP while also creating a steady volunteer pool).

Income averaging is something that sounds like a pretty straightforward benefit to the arts (even though it’s rather complicated and I think its benefits are dubious to most artists) so it’s all upside when you pitch it to this community.

However, “reforming the grant system” is anything but straightforward. How would you reform it? Would less money be available? Who would the winners and losers be, because there have to be losers? This won’t be explained easily in a paragraph, let alone a slogan. Moreover, it doesn’t sound like it’s putting money in my pocket the way that income averaging does (even if I think the grant system presents better opportunities to encourage real employment to put money in artists’ pockets). It’s unclear who the constituency is that would organize around this concept (other than, potentially, the readers of Praxis’ blog). Meanwhile, many arts organizations (particularly the ones receiving operating funds and who employ people whose entire job is to apply for grants) would scream bloody murder that their privileged positions in the system are being threatened. These people are  just as, if not more, influential than the arts community writ large. So there’s little upside to campaigning on this issue.

That said, I think there’s a danger in campaigning on “income averaging for artists,” which is the very simple “tax breaks for special interests” argument that could be levied against its defenders. Other parties could hive off and mobilize sections of labour against it. I think the big unions that currently favour the NDP would also have a hard time defending this policy to their workers. If it was “income averaging for everyone,” it would be bad policy, but better politics.

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4 thoughts on “Is Income Averaging “Tax Fairness for Artists”?

  1. Hi Rob,

    I just finished leaving a comment on praxistheatre.com encouraging our readers to check out this piece. I am not swayed, but because it is good writing and makes some valid points. More than anything we’re hoping our website will encourage this sort of discussion, and the adults that read it can use their brains to make up their own minds after encountering differing points of view.

    I disagree that the people who take the biggest financial risks are the investors. I think people who choose in most disciplines to have an uncertain future unable to know how they will pay down student debt or provide for a family without having access to EI or CPP are taking a WAY bigger risk than someone bankrolling a gallery, production or what have you.

    “Yes, artists are special and important. So are teachers, doctors, police officers, soldiers, engineers, scientists… should they all get bigger exemptions too?”

    Every one of these professions can rely on a stable income, receives benefits and can save for retirement. Artists possess none of these things. This legislation was intended to mitigate the effect of this

    None of the artists I know are rich. I know a lot of them. To be honest, I don’t think any of them have ever had a $200,000 year. So that whole example (which I recognize comes from the NDP website) seems a bit crazy to me.

    What we’re talking about are people who are pursuing their craft across the country – often at something that does not even create a profit but that we would like to be part of our society. In this context allowing the tax that person pays to represent what they have made over several years, rather than the single year that would make more sense for a regularly employed person, makes sense to me from a financial and cultural policy perspective.

  2. Sorry, I’m new to wordpress. Only just realised you’d left a comment. You raise some good points in this rebuttal. The $200,000 figure raised my eyebrows too, mostly because you’d think the NDP would want to pick a number that was more relatable an sympathetic.

    I agree that most artists are below this level of income; of course, most are below the threshold for the second tax bracket too (~$42,000) — which is the lowest spot at which the break would kick in.

    I still think tax incentives for producers, publishers, and galleries (etc) to invest in art would have a better long-term effect in stimulating the production of art in this country, because it would lower the risk and encourage investment/hiring. Look at what it’s done for the film/television industry in Canada! (Ok, it’s hard to find Canadian films in theatres, but we certainly punch abover our weight relative to our size in the world).

  3. One more thing, we both know that “producer” is a big and multifacetted title, and doesn’t just apply to the David Mirvishes of the world.

    We both “produce” theatre as do a lot of other artists — although we often take other roles in an individual production, like playwright, actor, director, etc. Those other roles confer the status of “artist.” But producer doesn’t. If I were to step back from one of Ten Foot Pole’s and simply be the person who fronts the money and manages the production, then I’m not considered an artist and I don’t get this tax benefit (although, again, it’s not clear if my past artistic work lasts all my life or if my “artist” title has an expiration date).

    If I had a year where I didn’t create any original shows, but kept up Ten Foot Pole’s production services business, would we still count as artists? It doesn’t seem so, according to the guidelines, even though we’re still doing vital work in the arts community and subsisting on marginal and volatile incomes.

    Would the people at STAF count as artists? Would the fact that they receive operating funding from TAC and OAC — despite the fact that they produce no art themselves (which I think is itself highly problematic) — be something to count them in? Or does just joining TAPA allow you to call yourself an artist? And if so, does everyone who works for STAF automatically become an artist?

  4. Pingback: A Case for Public Funding for the Arts | ROB SALERNO

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