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.