The difference between Canadian and US taxes is often exaggerated.
Total taxes amounted to 35.8% of GDP in Canada in 2000 compared to 29.6% in the US. This is a gap of 6.2 percentage points. Note, however, that the gap was 9.2 percentage points in 1990.
The Canada-US tax gap closed in the 1990's because US taxes rose significantly. And, US taxes rose because personal and corporate tax revenues jumped by a full three percentage points of GDP, from 12.1% to 15.1%, mainly because of the deficit-cutting policies of the Clinton Administration. In 1993, the US added two new high income tax brackets of 36% and 39.6% on top of the previous tax rate of 31%, and also removed the upper earnings limit on the Social Security payroll tax.
The Canada-US tax gap was closing, particularly for high income earners, even before Mr. Martin began cutting Canadian income taxes.
Note that Canadian tax revenues are higher than American taxes as a share of GDP mainly because of taxes on goods and services (sales taxes) which are four percentage points higher as a share of GDP. In 2000, taxes on income and profits were 17.5% of GDP compared to 15.1% in the US. And, personal taxes plus social security contributions paid by employees were just about the same at 15% of GDP.
It will surprise many to learn that personal taxes for most workers are actually no higher in Canada than in the US according to the OECD. Their annual calculations compare the ‘gross’ and ‘net’ incomes of workers at three different income levels and in different kinds of families in different countries. After-tax income is calculated as wages plus benefits delivered through the tax system, minus income taxes and social security contributions paid by workers.
In 2000, an average single Canadian worker paid 26.6% of their income in taxes, just a bit more than the 25.6% paid by an average worker in the US. And, a ‘higher paid’ worker — someone making 67% more than the average wage of a full-time production worker, or $60,000 per year in Canada — actually paid slightly less than in the US. The differences are also very small for single low income earners, and for married couples with children at all three income levels. Note that only the very first stage of the Martin tax cuts was effective in 2000.
Tax comparisons are very difficult because provincial and state income taxes vary, and because the Canadian and US tax systems treat people very differently on the basis of their family circumstances. Still, it is just not true to say that average and marginal personal taxes are lower in the US for lower, average and higher paid workers.
What about very high income earners? Following the Martin tax cuts, the top rate of federal income tax is 29% on incomes of more than $100,000 (with the threshold set to rise to $113,000 by 2004). There is no higher tax bracket.
When the Bush tax cuts of 2001 are fully implemented, the US federal income tax rate will be 28% on incomes of $63,550 - $132,600, 33% on incomes of $132,600 to $288,350, and 35% on incomes of more than $288,350. (The latest proposals don’t change this, but speed up the implementation of the new brackets.) Those who call for tax cuts for high income Canadians routinely ignore the fact that marginal federal income tax rates in the US are much higher.
To be sure, high income Canadians will likely pay more in provincial income taxes than Americans do in state taxes. Federal taxes on income and profits are a slightly higher share of GDP in the US than Canada (12.5% vs. 11.3% in 2000), reflecting the greater role of the US federal government. State and local taxes on income and profits are much smaller in the US (2.5% vs. 6.2% of GDP).
State income taxes range from zero, to an average of about 5% of income, to a high of about 11% of income. Some cities levy income taxes as well. For example, New York City levies a 3% income tax. A 2000 study by Jonathan Kesselman (“Flat Taxes, Dual Taxes, Smart Taxes,” Policy Matters,
www.irpp.ca) found that, while income and payroll taxes combined tended to be a bit higher in Canada for single ‘upper middle’ income earners, they were just about the same in most states for two-earner couples. And, that was in the very early stages of implementation of the Martin tax cuts.
High-income Americans who live in low-tax states will pay less tax than Canadians — and likely pay to live in gated communities and to send their children to private schools. However, high-income Americans who live in states and cities which levy income taxes can be just as ‘heavily’ taxed as comparable Canadians.
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