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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.

$0 to $10,527 0%
$10,528 to $41,544 15%
$41,545 to $83,088 22%
$83,089 to $128,800 26%
$128,801 and over 29%

 

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.

$0 to $8500 0%
$8500 to $34,500 15%
$34,500 to $83,600 25%
$83,600 to $174,400 28%
$174,400 to $379,150 33%
$379,150 and over 35%

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.

$0 to $18,150 0%
$18,150 to $44,150 15%
$44,150 to $93,250 25%
$93,250 to $184,050 28%
$184,050 to $388,800 33%
$388,800 and over 35%

Corporate tax rates remain unchanged. 2011 marginal rates below

$0 to $50,000 15%
$50,000 to $75,000 25%
$75,000 to $100,000 34%
$100,000 to $335,000 39%
$335,000 to 10,000,000 34%
$10,000,000 to $15,000,000 35%
$15,000,000 to $18,333,333 38%
$18,333,333 and over 35%

 

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.

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Discussion

15 thoughts on “Comparison of Canadian and US federal tax rates for 2011

  1. Although your numbers be factual, your little comment at the end… ‘It is an incomplete picture’ could not be closer to the truth!! In Ontario where I reside, tack on health care premium issued on top of standard taxes, tack on provincial tax ( around 15% of income ) that most states don’t pay. Our property taxes are through the roof compared to the US because of high property values. Not to mention the standard 13% sales tax… I’m would be shocked it I saw that anywhere close in any state!

    Although I am not debating the Federal taxation numbers, I think its fair to say that Canadians are taxed a little heavier when you break it down, all be it not an apples to apples comparison.

    I love capitalism, but the socialist values that Canadians have hung on to have faired much better in maintaining our middle class.

    Wishing everone prosperity it the years to come. United we stand!

    -Eric

    Posted by Eric | March 27, 2012, 10:43 am
    • FYI, Ontario’s provincial tax rate is just over 11% and over 40 states have a state income tax ranging from 2 to 11%. Also, state sales taxes ranges from 1 to 7%. Adding to this is the fact many cities and counties levy their own sales tax. Making the average combined state and local sales taxes range from 2 to 10%.

      As for Canadian property taxes, they are not as you say through the roof compared to US rates. Average property tax rates in Canada range from 0.7% (B.C.) to 1.9% (Quebec) with most falling between 0.9% to 1.2%. In the US, the rates range from 0.40% (Hawaii) to 2.57% in Texas. Take Toronto as an example, the current residential property tax rate is 0.77% and in Chicago it’s around 1.25%.

      Though not an apples to apples comparison the fact of the matter is that there is always been a perception that Canadians pay much higher taxes then Americans when in truth the gap isn’t nearly as wide as people think. The biggest contributing factor for this perception is the high price for similar goods in Canada compared to the US. People automatically assume the price difference is based on higher taxes in Canada when in fact for most items the price difference is due to other factors.

      Posted by Thomas | June 22, 2012, 2:57 am
  2. The Canadian Household Median link has changed to: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108a-eng.htm

    Posted by Paul | June 30, 2012, 1:44 pm
  3. There is no “category 1″ in the United States. Even those on Medicare and Medicaid spend a crap ton of money out of pocket every year. Sorry, but that’s just misleading information.

    Posted by Kris | August 21, 2012, 3:30 pm
  4. My friend from california has to pay $11,000 more this year as a result of working for the exact same company for the exact same wage but because he worked here in ontario for the most of the year he has to pay canadian taxes and not american. His net income was just over 150,000. These numbers do not tell a proper story whatsoever.

    Posted by dereck | November 5, 2012, 7:37 am
    • It’s possible that your friend had to pay Canadian AND American taxes, not “canadian taxes and not american.” I’m a Canadian who’s been in the US for some time and while I was a student earning scholarship income coming from Canada, I had to pay Canadian Federal taxes on it (b/c of its origin) and US Federal and State taxes on it (because of where I was living). So yes, I was taxed three times on the same (scholarship) income. Also, and this is true in the US — perhaps in Canada too, but as a non-resident foreign worker, you get taxed at a higher tax rate than residents.

      I really appreciate this analysis b/c I hear so many old Canadian friends talking about how much more taxes we Canadians pay. But having lived in the US for 13 years, believe me, the services we get for it in the Northernland are absolutely worth it.

      Posted by buffy | November 13, 2012, 11:49 pm
  5. Its an interesting read but it makes several flawed assumptions:
    1. That the difference in expenditures between USA and canada is solely from healthcare
    2. Canadians having a median 3 year longer average lifespan is due to their nationalized rationed healthcare resulting in more people living longer (aside from lifestyle differences, aka fast food and no excercise… AFAIK US life expectancy calculations do not exclude non natural deaths like car accidents and the like, while most countries do).
    3. Having no healthcare in USA = put a bandaid on it and walk it off… The law REQUIRES that people cannot be denied healthcare due to having no money. You walk in, get treatment, if you have no healthcare you either pay cash (if you can afford to) or pay nothing and it is then spread to the other customers.

    Also, not assumptions but:
    4. Pundits on the right say US pays highest corporate tax in the world and has some of the highest income taxes, and that taxes need to go down and we should not get a socialist healthcare system.
    Pundits on the left say taxes aren’t high enough and if we raise them like our socialist neighbors everyone can benefit from socialized healthcare.

    Posted by Tal Tamir (@TalTamir1) | December 9, 2012, 9:31 pm
  6. Comparison of Canadian and US federal tax rates for 2011
    The Dragon Well, was a very good title to give this
    particular blog post. Exactly where may I read even more about this?

    Posted by familytreechart.org | December 18, 2012, 1:02 am

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