The main marginal tax rates in Canada are penalized, they put Canada in a non-competitive position and discourage individuals from engaging in productive economic activity, which ultimately hampers economic growth and prosperity. These are the observations of the Fraser Institute, based on the study of the highest tax rates in Canada and their comparison with other jurisdictions. Findings were published in a new report published this week, just in time for the upcoming federal, pre-election budget, to be delivered on March 19th.
The report, called the Canadian Personal Taxation Rate and the Decline in Tax Competition, urge both the federal and provincial governments to consider "turning the trend toward higher tax rates on those who earn more" and start lowering personal tax rates. The marginal tax rate is the tax rate you pay to the next dollar you earn.
According to the Institute's analysis, Canadian workers in the full range of income – and throughout the country – pay a significantly higher personal income tax than colleagues from the United States. In fact, on revenues of 50,000, 150,000 and 300,000 dollars, among all 61 provinces and states in Canada and the United States, the ten largest combined personal marginal income tax rates are in ten Canadian provinces.
So, how did we get here?
Federally, you will recall that in December 2015 our newly elected Liberal Government introduced several changes to the Canadian income tax system. One was a reduction in middle-income taxes, which reduced the rate for those earning in middle income (for the 2019 income between 47,629 and 95,259 USD) to 20.5% from 22%. At the same time, the federal government added a new income tax group, which had the highest tax rate from 29 to 33 percent on revenues over $ 200,000 (currently $ 210,371).
As for the complex issues, the increase in the highest federal rate has reached numerous recent provincial increases. Nova Scotia increased its highest rate in 2010, and almost every year since then, at least one Canadian government has increased the highest rate of income tax. Namely, since 2010, seven out of ten provincial governments have increased their tax rates on people earning more. The net result is the increase in the highest combined federal / provincial tax rate in each province over the past decade.
Who was hit hardest? Not surprisingly, these were high-income Alberta earnings, which increased their largest combined federal / provincial rate (48 percent) by 9 percentage points (or 23.1 percent), largely due to the fact that the increased federal rate was added to top of Alberte's decision to eliminate his relatively low tax rate of 10 percent. In Ontario, the combined federal / provincial highest marginal rate (53.53%) increased by 7.1 percentage points (or 15.3%), while Kuebecker's highest rate (53.31%) increased by 5.1 percentage points or 10.6%).
Our largest combined marginal tax rates are unfavorable compared to those in the US and other industrialized countries. The study found that from 61 Canada and US jurisdictions (50 states, 10 provinces and Washington, D.C.), New Scotland currently has the highest combined top marginal tax rate of 54% followed by Ontario and Kuebec. Nine Canadian provinces take the list 10 of Canada / USA. jurisdictions with the highest combined income tax rate limits and all of our provinces are at the top 12. The report showed that there are 49 US jurisdictions with combined highest tax rates lower than all ten Canadian provinces.
Not only at the highest levels of revenue, we are uncompetitive. Most Canadian tax rates are often applied to lower earnings than in the US. For example, the US top-rate ranges to $ 510,300 in 2019. The report dealt with revenues of $ 150,000, $ 75,000 and $ 50,000 (in Canadian dollars!) And concluded that our combined rates are uncompetitive, even at those lower levels of revenue.
The report also referred to the US, as Canada also competes with other industrialized countries for highly skilled workers and investment. The study is compared to the highest tax rates in Canada and rates in 34 industrialized countries. It was found that in 2017 (the latest year of available international data) Canada had the seventh highest combined highest tax rate from those countries. The increase in our highest federal rate from 2016 "significantly worsened Canada's competitive position," which has increased us from the 13th highest rate, before changing federal rates in 2016.
Most economists would agree that high marginal tax rates, which reduce the revenue to generate more income, discourage people from engaging in productive economic activity, which can ultimately hinder economic growth and – although there is some debate about the exact size of this effect.
Knowing why, then, our Canadian governments insist on raising rates? The obvious answer is to collect more revenue because they pay for higher spending while trying to catch up with deficits and increased debt burden. But, according to the Institute, tax increases are unlikely to increase revenues as governments expect, as taxpayers, and especially those who earn more, tend to change their behavior in response to higher tax rates in a way that reduces the amount of taxes that pay . In other words, increasing tax rates often does not increase the amount of revenue that governments expect.
In order to understand why, keep in mind that the amount of income collected from income tax does not depend only on the tax rate itself, but on the total income taxable or "base" in order to use the economic jargon. The tax rate that is the base is equal to the amount of income tax the state collects. But when the government decides to increase the tax rate, studies have shown that taxpayers often react by changing their behavior in a way that actually reduces the tax base, resulting in lower total government revenue.
Previous research by the Institute has shown that there are many ways in which taxpayers can respond to an increase in taxes that would reduce the tax base, including working less and thus reporting less taxable income or negotiating with an employer to replace taxable income with a certain tax. free benefits.
The study cites the example of the UK in which the government introduced a 50 percent tax rate for people with higher incomes in 2010, expected to make £ 2.5 billion. The government's report estimates that it has brought a billion pounds or less, and that the highest rate of U.K. reduced to 45 percent.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is Managing Director, Tak & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.