Comparison of Canadian and US federal tax rates for 2011

This is a 2011 update for my original comparison of 2010 rates.  Read that for a detailed comparison of the tax codes.  In addition to a simple update of rates, every year I plan to go in depth on a specific topic in an attempt to get a fairer comparison.  This year, it’s the elephant in the room: health care.

Errata

In my original 2010 comparison, I factored in the personal exemption phase out.  The phase out existed in 2009, but was eliminated in 2010.  The difference was so small and only happens at higher incomes that there would have been no difference observed in the graphs, thus I did not correct the original post.

Differences from 2010 to 2011: Canada

Corporate tax rates lowered from 18% to 16.5%

Personal income tax rates and personal exemption tax credit adjusted for 1.41% inflation. Below are the 2011 marginal rates. The 0% tax bracket is not an official tax bracket, it just works out that way after factoring in the personal exemption tax credit.

Differences from 2010 to 2011: USA

Employee contribution of FICA lowered from 6.2% to 4.2%.  The employer contributions remains the same at 6.2%.  Maximum FICA contribution adjusted for inflation.

Personal income tax rates and standard deduction adjusted for 1.48% inflation. 2011 marginal rates below.

And because nothing is allowed to be simple in the tax code, here is the adjusted marginal tax table after accounting for the personal deduction and personal exemption.  This allows for a fairer comparison to the Canadian marginal tax rates.

Corporate tax rates remain unchanged. 2011 marginal rates below

The Graphs

In these graphs of income taxes paid:

• Canadian personal exemption tax credit is factored in.
• American personal exemption and personal deduction are factored in.
• Canadian CPP is factored in for personal income tax.
• American FICA and Medicare tax are factored in for personal income tax.
• Employment insurance is not factored in due to difficulties in comparison.
• Payroll taxes are not factored in for corporate taxes because they vary widely depending on number of employees and wages.
• Deductions are not factored in.

Our low to middle income graph below shows that US taxes are comparatively lower than 2010.  Canadian taxes are still lower at all levels, but there are two income points where US taxes almost drop below the Canadian.  Almost all of this tax break is due to the lowering of the employee contribution of FICA from 6.2% to 4.2%.  This is a temporary rate reduction which is due to expire at the end of February 2012.  It was designed for economic stimulus, since giving a tax break to low to middle income wage earners has a much more stimulating effect than giving a tax break to the rich, since lower income households will spend a much higher percentage of additional dollars than higher income households.  Forget all the “job creator” political rhetoric you hear on television, that’s actually bullshit.  Tax cuts to the rich do have a small stimulus effect (that’s why it’s called the trickle down effect and not the waterfall effect), but it is much less efficient than tax cuts to the lesser incomed. Think of it this way, if you gave $1 to a poor man he would spend almost all of it and if you gave $1 to a rich man he would spend almost none of it.

Next up, same graph but ranged through all tax brackets.

And finally the graph of both corporate and income tax, through the range of all tax brackets.  Canadian corporate tax is down, but looks very similar to the 2010 graph. Not shown is the Canadian small business tax rate, which is at 11%.

Health Care

Although I have made every attempt to directly compare federal income tax and payroll taxes between the two countries, the comparison remains unequal.  The biggest reason for this inequality is health care.  Canada funds health care from the general tax pool for all residents, and the US funds health care for only a small percentage of residents mostly funded by special payroll taxes.  This big difference in benefit has no small monetary value.  We could get a fairer comparison if we removed health care completely from both federal budgets and reduced tax rates comparatively.  But how to reduce taxes?  This is the subject of considerable debate between parties of both countries.  An alternative way to get a fair comparison is to assign a monetary value to health care in the US and raise taxes.  But how to raise taxes?  Luckily, the US already provides a mechanism in the form of employer health insurance plans.

First, let’s examine how health care funding works in both countries.  In Canada, the federal government funds health care for all residents.  Based on a formula of population and other statistics in the various regions of the country, they transfer funds to the provinces and territories for administration.  Consequently, every province and territory has slightly different benefits.  Overall, they pay for doctor and hospital visits, tests, ER, physiotherapy and all other health care related costs with the exception of eye care, dental, partial prescription drugs, and no non-prescription drugs.  In 2009, the per capita costs were $4089 for the year.  Eye care and dental are often covered with employer insurance plans in a similar manner as the US.

In the US, the situation is substantially more complicated.  In general, a US resident would fall into one of these 3 categories:

1. Your health care is fully paid for by the federal government through a special program.  The 3 big programs are Medicare, Medicaid, and the military or veterans affairs.  Medicare is funded by the federal government, but is run by private sector health insurance companies.  Medicaid is also funded federally, but is administered by the states.  Some states subcontract to private sector health insurance companies and some don’t.  Military health care directly hires medical professionals.  85 million Americans get health care within this category.  If you are within this category, the tax comparisons between the US and Canada that I do every year apply to you.
2. You have no health care insurance.  In2007, 45 million Americans fell into this category. Put a bandaid on that. Walk it off.
3. You have an employer or private health care insurance plan.  This behaves like a payroll tax in that both employee and employer make contributions and it shows up on your paystub just like FICA.  The employer contribution may be all of it, most of it, some of it, or none of it (if you are self-employed or have a private insurance plan) depending on employer.  Eye care and dental plans are often provided as well, as separate plans from your main health insurance policy.  Most Americans fall into this category.

So the key to making this comparison is to pretend that your employer health plan is a payroll tax.  The next thing to do is to assign a value to it.  In 2009, an insurance trade group published a report titled Individual Health insurance 2009: A Comprehensive Survey of Premiums, Availability, and Benefits.  Here are some of the key findings:

• Average policy premium for an individual was $2985, or $6328 for a family.
• The policy premium could vary wildly depending on age, state of residence, and deductible.
• The most expensive insurance is in New York.  The cheapest for individuals was Iowa, for families North Carolina.

Note that the premium cost does not include out-of-pocket costs, such as co-pays, deductibles, out-of-network cost, or denial of claims.  Most insurance plans have a cap on some out-of-pocket costs (co-pays and deductibles) which is usually in the thousands of dollars per year.  However, they also cap the benefit with a lifetime limit, usually in the $5 million range.

In the next graph, the combined employer and employee contributions of payroll taxes are factored in (previously only employee contributions were used), since we cannot predict what percentage of the burden the employer will take.  [There is always the argument to be made that if the employer did not have to pay their portion of health insurance, those monies would go towards your salary instead. Remember that health care insurance is considered to be a part of an employees total compensation package]. For US taxes, an additional payroll tax of $2985 is added in for the health insurance premium.  This does not represent the total cost, but it’s the only number we can wring out from the report.  Since we already know from various OECD reports that the US spends about twice the amount per capita than Canada on health care, we know that $2985/year is far from the complete picture, we should really expect aggregate public/private spending to be in the $7,000 range (or maybe these health insurance companies are grossly overbilling Medicare?).  But we’ll stick to $2985 for now.

• CPP combined rate is 9.9%, maximum contribution is $4,435.20
• FICA combined rate is 10.4%, maximum contribution is $11,107.20
• Medicare combined rate is 2.9%
• Health insurance cost is fixed, and does not vary with wages

Umm, yah. Did you expect something different? And before you make the argument that America has the best health care system in the world, let me quickly mention that Canadians on average live 3 years longer than Americans.
Make no mistake, the blue line is *not* a model of the taxes you would pay if the US government ran universal health care, it’s a model of what you pay now when you pay for private sector health insurance. The red line is the model of a government running universal health care.
 

The Deceptive Statistic: Tax as a Percentage of GDP

Many are surprised to hear that Americans pay higher taxes than Canadians, yet all the pundits on TV say that Americans pay lower taxes than any other country in the Western world.  But listen carefully, they don’t actually say that.  They choose their words carefully, and actually say that Americans pay the lowest taxes in the Western world as a percentage of GDP.  This is a very important distinction, since Americans benefit unequally from production when compared to other countries.  In other words, a small number of Americans become tremendously wealthy and pay lower taxes than the vast populous.

To prove this effect, all we have to do is look at the median household income (not the average) of the two countries.  Click here for the Canadian medians and click here for the American medians.  These do not take into account currency differences, but since both CAD and USD have been roughly at parity for the past few years, it makes for an easy comparison.  For the latest year available, we see that the median Canadian household income for 2009 was $68,410, whereas for the USA it was $49,081.  Yet the CIA World Factbook reports that the GDP per capita for Canada in 2010 was $39,400 and for the USA it was $47,200, with currencies normalized.  Of course just using these numbers is a gross over simplification, but they are telling enough that we can conclude that the USA has more productive workers who make less money than Canadians. The real beneficiaries to productivity in America are the wealthy, who pay at such a lower tax rate than everyone else that they can skew the statistics. Wealthy Canadians pay even less taxes than wealthy Americans, but their aggregate wealth is far less than their American counterparts, thus they don’t skew the statistics. Canada also does not have a vanishing middle class.

The statistic that really matters to the average citizen is taxes paid as a percentage of income, which is never quoted and is precisely the thing being calculated above. Even so, it is an incomplete picture since sales taxes, provincial/state taxes, employment insurance, duties, and social benefits are not included due to the difficulty of comparison.