Canadian tax rates—diversity worthy of Tolstoy
Statistics Canada published income tax data for 2017 this week. The Daily picked out a number of interesting facts to highlight, many of which got picked up in news stories about the release.
- The average or “effective” rate of tax was lower than in 2016, down to 11.4 per cent from 11.8 per cent (that’s the percentage of people’s incomes that went to federal and provincial income taxes, as well as employment insurance and Canada or Quebec Pension Plan “contributions”). StatsCan attributed the reduction to declines in provincial income taxes offsetting a slight increase in the effective federal rate.
- Incomes grew faster at the top of the distribution, a result I also saw reported in a number of places. To get into the infamous top one per cent in 2017 you needed a total income of $236,000. (Total income consists of, as StatsCan describes it, “income from earnings, investments, pensions, spousal support payments and other taxable income plus government transfers and refundable tax credits.”) When we hear that top one per cent incomes grew we tend to think everyone who was in the top one per cent in 2016 experienced the same percentage increase in income into 2017. But of course, some people in the top one per cent in 2017 hadn’t been there in 2016, while some who had made it in 2016 exited in 2017. So the average increase in “the group’s” income is actually an average, at least in part, of different people’s incomes.
- Dividend income, which is especially important at the top end of the distribution, has been quite volatile in recent years, registering $57 billion in 2014, $69 billion in 2015, $57 billion in 2016 and $68 billion in 2017. StatsCan’s thought is that many tax filers with incomes over $200,000, the cut-off for the new federal top bracket of 33 per cent introduced in 2016, “may have taken dividends early to reduce their overall tax burden.” Hence the big bump in 2015. Here’s the government recognizing that tax policy can have big effects on taxpayer behaviour. That’s progress.
- Women continue to move into the top one per cent. They were 24.2 per cent of such earners, almost a quarter, in 2017, which is almost double their share in 1982.
These are interesting stories about averages. But one data table in particular makes me curious about individual stories: Table 5, “Distribution of filers, federal and provincial/territorial income taxes and federal payroll taxes, by modified total income percentile group, 2017.” That mouthful just says the table looks at how many people in each income bracket pay how much tax on average. You might think everyone in a given bracket would pay the same rate. Economists would call that “horizontal equity,” i.e. likes being treated alike.
Of course, people aren’t all alike, not even in the same bracket. Some earners of a given income will have a spouse, lots of kids, many investments that earn deductions, and so on, while other earners of that income won’t. The tax code is a million words long, after all. A code twice as long as War and Peace must involve hundreds and hundreds of special cases.
To be sure, in most income brackets there’s a fair amount of clustering around what seem to be reasonable average tax rates (i.e. low average tax rates for low-earners and high average rates for high-earners). But there are exceptions.
For example, 63.5 per cent of people in the top one per cent—basically two-thirds—pay tax equal to 30.1 per cent or more of their income. We’d expect that. They’re high earners. High earners are supposed to pay lots. But 0.3 per cent of people in the top one per cent pay 0.0 per cent, while 3.5 per cent pay 0.1 to 5.0 per cent. It would be interesting to know why. I’m sure W5 or Marketplace or other such investigative TV shows would try to make a scandal out of low tax rates for top-enders. But I suspect there’s no real scandal—rather top-earners take full legal advantage of the many different tax breaks available for myriad good causes. They’re doing something, be it giving things away or investing in activities the government wishes to encourage, that attracts big tax breaks. We might think it’s wrong to give so many tax breaks for so many supposedly good causes, and I do—mainly because I would prefer governments to be neutral with respect to what people do with their money. But it’s not wrong if people take advantage of the rules on the books.
At the bottom end of the distribution, among the lowest five per cent of earners, 93.9 per cent of people pay a rate of 0.0 per cent. But there’s an unlucky 0.1 per cent who are paying as much as 25 per cent of their (very low) income in tax. That’s not a tonne of tax in absolute dollars. Their income in this bracket is between $0 and $3,499, so 25 per cent of that isn’t that much. But still, they’re paying a quarter of their income in tax. It’s not a ton of people, either: 0.1 per cent of five per cent of the 27.8 million Canadians who filed in 2017 works out to 1388 people. Still, what gives? It would be fun to know.
In each and every income bracket there are people paying almost every tax rate, from 0.0 per cent to 30.1 per cent and higher. In most income brackets most people are grouped around two or three average tax rates, and those clusters are for higher and higher tax brackets as you move up the income brackets.
Still, there are lots and lots of outliers. I wonder what their different stories are.