Canada-US Income Tax

This blog’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 Canada’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 $8,850 of income tax, about 15% of its total expenditures and not its “most expensive purchase.”

The American figure is from the Bureau of Labor Statistics’ Consumer Expenditure Survey. It equals federal, state and local income tax minus “2008 Tax stimulus” (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 “household.” The Bureau of Labor Statistics counts some individuals in the same dwelling as separate “consumer units.”

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 of purchasing power would further narrow the tax difference.

I had the following letter printed in yesterday’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 year’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

Reynolds’ parenthetical point, which was beyond my letter’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 Canada’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 Canada’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 (Canada’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.

8 comments

  • Great work as always. Anyone who makes a moments reflection on the size of the US military and the fact that US spends more per capita on health care would know that Reynolds postulate that Americans could pay 1/8th the amount of PITs Canadians pay is absurd.

    So now we have to spend our time defending against a native t-bag crowd. What a circus. I swear it is a campaign of ungovernability. These never end well.

  • The difference between Erin’s higher Canadian figure, and the lower U.S. figure? We have universal public health insurance.

  • Yah but we spend less per capita so the net runs in which direction. Military + SS + Medicade. That is where the bulk of taxes goes. Once you throw in private health care spending my gut says we do a little better. But of course we are not allowed to include private expenditures because those are voluntary.

  • Travis, I assume that “SS” is Social Security, which is indeed a huge government program and more generous than the Canada Pension Plan (CPP). However, it is funded not by personal income taxes, but by a payroll tax.

    The basic Social Security premium is 6.2% up to $102,000 of employment income (in 2008). There is an additional 1.45% premium to fund US Medicare. By comparison, CPP premiums are 4.95% up to $45,000 (in 2008). All of these amounts are paid by the employee and matched by the employer.

    Although the payroll taxes to fund US unemployment benefits are lower than Canada’s Employment Insurance premiums, total payroll taxes are still appreciably higher in the US. In 2008, “contributions for government social insurance” amounted to $3,300 per American.

    The corresponding Canadian figure was $2,200. So, higher American payroll taxes (+$1,100 per capita) offset lower American personal income taxes (-$1,100 per capita).

  • Hi Erin,

    Just want to send my thanks for all of the work you and your fellow PEF writers have done!

    I am in the process of skimming through all posts, beginning in 2007, for a master’s course at Concordia University this summer.

    The course broadly deals with Canada and the most recent recession.

    I am certain I will be quoting from PEF.

    To everyone at PEF, thank you for all of this brilliant work.

    Sincerely, Matt Brett

    Montreal

  • I like the kind of argument where how much you pay becomes what do you get in return. For instance:
    http://www.guardian.co.uk/commentisfree/cifamerica/2010/apr/15/tax-day-us-europe
    You can never win an argument saying we need to pay more. Taxes are a bad ground to walk politically, even when people believe they get something worthwhile in return.
    While the U.S. gets lots of military, so increasingly do we. I wonder what rates of change in per capita military spending would show for instance.

  • For ease of comparison, I will define military spending narrowly as current defence outlays, excluding transfers to veterans and capital investments. According to Statistics Canada, military spending jumped from $12 billion in 2004 to $18 billion in 2009. That’s about twice the growth rate of overall federal spending. In 2008, military spending per capita was $500 in Canada and $2,100 in the US.

  • The numbers that need more highlighting are at the high end of the scale to wit: In Canada the top marginal tax rate (46% in OnTAXio) kicks in at approximately $126,000 (taxable income) whereas in the US it kicks in at around $275,000 (taxable income) and only at a rate of around 39%. Of course we have to add in the tax-deductability of one’s mortgage in the US in calculating where that top marginal rate will commence so, the larger your mortgage the less in income tax one pays. Do the math!
    Turning to the ‘disposable’ side of the equation, Ontarians are hit with (nowadays) the 13% HST on everything purchased and the higher taxes on liquor and tobacco compared to anywhere in the US. Finally, as was pointed out in the article, a Canadian dollar doesn’t go “as far” in Canada as a US dollar does in the US in terms of its purchasing power. Virtually everything is cheaper in the US.
    So, add it all up and if you earn more than $126,000 (taxable) there is and can be NO QUESTION that one is better off almost anywhere in the US compared to living almost anywhere in Canada. And THAT’S why Canadian tax rates are uncompetitive for that segment of the population which PAYS most of the bills versus those that receive most of the benefits. Yes, it’s true that many leave Canada for the “opportunities” that the US presents but, don’t kid yourself that; of those who leave, very few ever return – especially once they realize how much better off they are in the US.

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