Friday, February 25, 2005

Canada versus the United States - the tale of a whole lot of tax forms and schedules

Today I took the time out of my busy schedule to actually take a stab at what the tax differences where from where I live in Michigan versus where I used to live in Ontario. So out with the calculators, the schedules, and all that and here is what I found out:

Assumptions:
  1. I took the median U.S. household income. Which is $45,000. No interest, no capital gains - just wages.
  2. Family of four - two kids under age 16.
  3. No special deductions for either Canadian or American taxes - assumed they took the basic exemptions allowed to them.
  4. This hypothetical family lives in Michigan for U.S. tax purposes and Ontario for Canadian purposes.
  5. The U.S. wages will be coverted into Canadian dollars at $1CDN = $0.80 US.
But some of my more liberal Canadian friends would say, and to paraphrase Jean Crouton, "Canada is the best place in the universe because we have 'free' health care paid for by our taxes." Let's be fair, and we'll tack on an extra $5,000 U.S. to the Americans wages as an offset fo the health insurance benefits paid for by his employer. We'll leave the Canadian wages at $45,000 U.S. converted to Canadian dollars, which is $56,250.

Here are the results of this little experiment:

American household:

Gross wages: $50,000 USD
Federal taxes: $1,459
Michigan taxes: $1,437
Total taxes : $2,896
Effective tax rate: 5.8%

Canadian Household
Gross Wages: $56,250
Federal taxes: $ 6,375
Ontario taxes: $2,069
Total taxes: $8,444
Effective tax rate: 15.01%

As you can tell, there is a huge difference in effective tax rates - if you doubled the wages in both cases, the differential would be even larger. And this is with the American family taking the standard deduction: if they had a typical house, they could itemize their deductions and write off property taxes, state taxes, mortgage interest, and charitable deductions to name a few and have larger tax savings. These options are not available to Canadians.

Of course this is a rudimentary comparison, only meant to give one the huge differences in taxes one would pay in either country. This goes a long way to explaining why Canadian incomes have stagnated over the past 20 years while U.S. incomes have shown real growth.

4 comments:

Taxbeaner said...

You forgot to include the FICA and Medicaid taxes on the US side, another 7.65%, since in reality this is just a flat income tax on wages capped at $87,900.

Kateland, aka TZH said...

I am a widow of 3 under 16 in Ontario with a salary under 56k - I know that I am taxed higher than 15% when both fed & prov surtaxes are applied to total taxes paid.

Brianron said...

This is going to be a long comment. Deep breath.

I am a U.S. citizen and my wife is a Canadian citizen; we have one child; we live in Grosse Pointe Shores, Michigan. My wife is a professional with her practice in Windsor. We have been debating the issue of whether it is financially better to live in Canada or the States for many years. We have been married for 14 years; 14 long frickin’ years of filing a book-sized U.S. tax return that always seems to be wrong in some manner as we and our accountant try to navigate the shark-infested waters of two countries’ tax rules. For instance, my wife gets taxed in Canada (and the U.S.) because her income is earned in Canada, but because she resides in the States, she does not contribute to Retirement Canada, but to Social Security.

I assert that living in the States is, from a tax viewpoint, much more favorable than living in Canada. I base this on several factors. First, the primary tax rates. Mine is 38% and hers is 52%. Second, we get to deduct the interest on our house; in Canada we would not. Third, our sales tax is 6%; in Ontario it is 15%.

Her arguments are that the increased taxation is less than what I pay for our health care, which is just shy of $12,000 per year. She also points out that the Social Security rate of 15% (we are both self-employed) with the current income limit is much more than what our Retirement Canada percentage would be (I do not know that figure).

While I cannot comment on your figures for the hypothetical that you gave since our income level is much higher and with different tax rates, I believe that the overall effective tax rate (which for us is between 25-30%) in the U.S. (not counting the 9% lesser sales tax) makes living in the U.S. more favorable.

There are many frustrating aspects of paying taxes to two countries – such as getting only a partial credit for the greater tax rate on our U.S. return – but none more than my wife having to pay those high taxes to support the health care system, to which she is not even eligible since she is not a Canadian resident.

Digressing from this issue, your most recent post regarding demographics is right on point and actually goes back to prove the validity of the Laffer curve made famous (or infamous, depending on your viewpoint) during Reagan’s restructuring of the tax system and rates in the early 1980’s. My wife is a Pediatric Dentist and so has contact with many patients who qualify for government benefits. The fact that these benefits are provided to non-Canadian citizens, and to many people who can actually afford her services is galling, to say the least. In my opinion, the high Canadian tax rate coupled with the benefits provided to non-working Canadian residents augers for a future of fewer and fewer people choosing to work – if they can get almost the same financial outcome without working than they can by working, why work? Until Canada figures this out and gets out of this liberal (small “l”) mindset about benefits, its economy is forever going to be minor league. Canadians may love to talk about how their society is more kind due to its mindset, healthcare and open immigration policies, but they fail to realize that the healthcare costs and open immigration (and easy access to benefits for these new immigrants who are not contributing to the tax coffers) are going to only keep the economy down and put a larger and larger burden on the productive members of Canadian society. And this is just going to continue the death spiral of more people saying “Screw it” and not working because it is just not worth it.

Brianron

Mitch said...

Brianron:

That is so funny you bring up Art Laffer. I had the pleasure of meeting him last september at the DAC. I used his arguments on an Ontario Parlimentary hearing on tax reform in 1996 which I spoke at length about the curve. There were several Liberal MPPs there, two of which are now very senior cabinet ministers, who over a couple of adult beverages after the hearings, told me that they did not know about Laffer and his theories. That, in a nut shell, should explain everything you need to know about Canadian taxes.

As for your situation - oh I know way too much about cross border returns - 1040NRs and all the like - my friends who work in the area and live in Canada figure since I'm the CPA - I can do their returns.

The points you make are valid - considering at higher levels of income (where the Canadian surtaxes kick in) - the difference is even more drastic.

As for her point on the differential being the 'price' for 'free' health care - the quality of service in Canada is horrendous. My wife was sick last year and ended up at St. Mary Mercy in Livonia for a few days from an infection. If it was Toronto, she would be in a guerney in a hallway for 3 days after waiting in emergency for 12 hours and specialist - not in Canada!. My wife saw two specialists within 4 hours of being admitted. There is a 6-8 month wait for those specialists in Ontario.

Thanks a lot for your post, and look forward to more comments.