Effective Personal Income Tax Rates Lower than You Think
Brian Murply and Paul Roberts from StatsCan presented an interesting and potentially very useful and important study to this week’s StatsCan Socio-Economic performance.
The effective personal income tax rate is typically computed – across various data sources – as total taxes paid as a ratio of total or taxable personal income. This ratio of two overall averages is accurate enough as a measure of the size of the tax “burden” relative to personal income. But it is more than a little misleading as a measure of the effective tax rate paid by the “average” taxpayer, which is much lower.
Rather than the easily calculated “top down” ratio of total income taxes to total income, Murphy and Roberts develop a “bottom up” methodologyÂ and calculate an average effective tax rate based on the average tax rate for each person or family in the distribution (an average of ratios.)
The key insight here is that rather few taxpayers pay anything like the “top down” average effective rate, and that the average of effective rates is much lower than the usually reported number.
To take one example – 10 taxpayers with a total income of $100 pay a total of $30 in tax, so the average effective tax rate for the group by the first measure is 30%.
However, if taxpayer 1 has an income of $30 and pays $15 in tax (50% effective tax rate); taxpayers 2, 3 and 4 have incomes of $20 each andÂ pay $5 in tax (3 times 25%) and taxpayers 5-10 have incomes amounting to $10 in total and pay no tax – the average effetive tax rateÂ is just 12.5% (the average of 1 person at 50%; 3 persons at 25%, and 6 persons at zero.)
Since the distribution of income is tilted to the high end, with a lot of people paying little or no tax, the actual universe is not all that distant from this example.
The bottom-line finding is that average effective personal income tax rate across a number of different surveys – including CRA and SLID data – is only about 9%, or a little more than half the top down rate of about 17%.
The calculation has some interesting implications.
Most people are paying much less than they are told (or, for that matter, than they think.) Certainly the Fraser Institute will have to move “tax freedom” day to considerably earlier in the year.Â And progressives have a bit more ammunition to argue that lots of folks are better off when we tax personal incomes to pay for social programs and public services.