Canada-US Income Tax
This blogâ€™s readers will not be surprised at me questioning Neil Reynolds (although my last post on him was somewhat complimentary.) However, his latest Globe and Mail column was organized around an especially odd claim:
The average Canadian household, for example, spends $14,800 (Canadian) a year on personal income taxes, the most expensive purchase – 20 per cent of income – that it ever makes. The average American household spends $1,789 (U.S.). (Forty-seven per cent of American households, after all, make no such purchase whatsoever.)
Few would deny that personal income taxes are generally higher in Canada than in the US. But one has to ask whether Reynolds really believes his numeric comparison. Does he actually think that Canadians pay eight times more than Americans in personal income tax?
In fact, both numbers are problematic. According to Statistics Canadaâ€™s latest Survey of Household Spending, the average household paid $14,599 of personal income tax in 2008. That figure rounds off to $14,600 rather than $14,800.
Either way, it overstates the tax payments of a typical Canadian household. The average (mean) is pulled up by a small minority of households with very high incomes that pay the top tax rate. By comparison, the median Canadian household pays $8,850Â of income tax, about 15% of its total expenditures and not its â€œmost expensive purchase.â€
The American figure is from the Bureau of Labor Statisticsâ€™ Consumer Expenditure Survey. It equals federal, state and local income tax minus â€œ2008 Tax stimulusâ€ (the famous rebate cheques.)
By contrast, Statistics Canada does not subtract rebates like the child tax benefit or GST credit from its tax figures. Instead, it adds these amounts to pre-tax income.
There are other differences between the Canadian and American surveys. For example, Statistics Canada counts everyone occupying a dwelling as a single â€œhousehold.â€ The Bureau of Labor Statistics counts some individuals in the same dwelling as separate â€œconsumer units.â€
In comparing tax levels, there is no reason to use households as the unit of analysis. From Statistics Canada, we know that Canadian governments collected $192 billion of personal income tax from a population of 33 million in 2008. From the US Bureau of Economic Analysis, we know that American governments collected $1,432 billion of personal income tax from a population of 304 million that year.
So, revenues per capita were $5,800 in Canada and $4,700 in the US. Even if the Canadian and American dollars trade at parity on financial markets, a Canadian dollar still buys less in Canada than an American dollar in the US. Taking account ofÂ purchasing powerÂ would further narrow the tax difference.
I had the following letter printed in yesterdayâ€™s Globe:
Apples and oranges
Neil Reynolds says personal income taxes are $14,800 for the average Canadian household and only $1,789 for the average American household (Cross-Border Shopping, Government-Style – Report on Business, April 14). These figures imply that income tax is more than eight times higher in Canada than in the United States.
Mr. Reynolds is comparing apples and oranges. The U.S. figure refers to 2008 personal taxes minus the one-time tax rebates paid out through that yearâ€™s Economic Stimulus Act. But Canadian tax credits were not subtracted from the Canadian figure. Also, households are defined differently in the two countries.
A more appropriate comparison is personal income tax revenue per capita. In 2008, this figure was $5,800 in Canada and $4,700 in the U.S.
Erin Weir, economist, United Steelworkers, Toronto
Reynoldsâ€™ parenthetical point, which was beyond my letterâ€™s scope, is that nearly half of American households pay no income tax at all. But the 47% figure is inflated by one-time rebates and credits from stimulus packages.
Reynolds also neglects to mention that it is specific to US federal income tax. Some of the 47% do pay state income tax.
Still, it is true that many low-income Americans pay no income tax at all (although they do pay other taxes). The US income tax system is quite progressive, with generous Earned Income Tax Credits (EITC) at the bottom and relatively high marginal rates at the top. Indeed, as Andrew has pointed out, the top marginal rate is higher on Wall Street than on Bay Street.
However, exempting low incomes from tax is hardly unique to the US. Because Canadaâ€™s income tax system is also progressive, many low-income Canadians pay no income tax (although they do pay other taxes).
Of 24.2 million returns received by the Canada Revenue Agency in 2008, 16.5 million were taxable. Therefore, 32% of Canadians who filed tax returns owed no federal or provincial income tax. Of course, some of them would have lived in households with tax-paying members.
Going back to Statistics Canadaâ€™s Survey of Household Spending, the bottom two quintiles paid income taxes worth 3% and 9% of total expenditures. These averages are small enough to suggest that many households in that lowest 40% paid no income tax at all. Again, the difference between the Canadian and American systems is much less than Reynolds implies.
That said, I would support making Canadian income taxes more progressive on the American model by expanding the Working Income Tax Benefit (Canadaâ€™s answer to the EITC) and raising the top marginal rate. I somehow doubt that Reynolds supports that kind of redistributive tax reform.
PS – Thanks to Charles Campbell for the links to progressive American analysis of the 47% figure.