Marginal income tax rates

Like most Canadians, I computed my income taxes in late April. Probably also like most Canadians, I was somewhat surprised by how much tax I was paying on each extra dollar I earned. Unlike most Canadians, I promptly sat down and computed not only my own marginal tax rate, but in fact all of the marginal rates for a hypothetical resident of British Columbia.

I started by making some assumptions about said hypothetical taxpayer:

I then computed the total of the income-based taxes paid by this hypothetical taxpayer, including

All of these are purely income-based taxes or tax credits; despite their names, the Canada Pension Plan and Employment Insurance program have only a very vague correlation between incoming contributions/premiums and outgoing payments, so I consider it reasonable to count these as income taxes rather than savings or insurance (unlike RRSP contributions, where you end up post-retirement with an amount of money which is determined entirely based on how much you contributed and how well you invested it). Adding all of these elements together, I obtained the following graph of marginal tax rates:

A few interesting points are visible here:

What can we learn from this? First, politicians like to give tax credits to "low income" people, but they all have different definitions of "low income". Second, once they decide someone no longer qualifies as "low income", politicians phase out said tax credits very quickly, with the effect of causing a sharp jump in the marginal tax rate followed by a sharp drop a short time later. Third, and most importantly, politicians prefer to increase complexity than to decrease it -- creating a new tax credit wins far more votes than increasing one which already exists -- and it's only when you step back, do the math, and look at the big picture that you see what's really going on.

Posted at 2007-05-07 09:30 | Permanent link | Comments

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