A common belief among many Canadians is that they pay more in income tax than their American counterparts. Even politicians in Parliament have used this statement to press for lowering taxes. But, is it really true?
TUTORIAL: Personal Income Tax Guide
The answer is more complex than you might think. Statistical gathering agencies in both countries publish averages of income taxes paid, but comparing the two numbers is like comparing the stats of a hockey player with those of a basketball player. The numbers are based on different premises and include different pieces.
Using an average is also problematic as the very poor and the very rich skew it on both ends. In general, lower income Canadians pay less in tax for the services they receive and rich Americans are better off than rich Canadians. Here's a breakdown of the relevant tax components and their contribution to the overall tax picture. (Mastering these fundamentals now will take the stress out of tax season. Check out Next Season, File Taxes On Your Own.)
Federal Income Taxes
U.S. federal income tax brackets range from 10% to 35% for individuals. On the Canadian side, the range is 15% to 29%. In the U.S., the lowest tax bracket bumps to 15% at $8,500 and to 25% at $34,501. The bottom Canadian bracket stays at 15% until $41,544. This is the bulk of the reason that lower-income Canadians are often better off than Americans in an identical tax situation. On the other hand, the IRS taxes the richest Americans at 35% whereas the top federal tax rate in Canada is 29%. Rich Americans, however, have access to many tax deductions that Canada's Alternative Minimum Tax does not allow.
The mortgage interest deduction is touted as being a huge benefit to home-owning Americans, and it is. However, if you make less than $82,000 and do not own a home, you will most likely pay less tax north of the border.
State Versus Provincial Income Taxes
Comparing state and provincial incomes taxes is a more problematic endeavor. State taxation is done completely outside of the federal tax system and each state has its own tax laws regarding deductions and credits. In Canada, provincial income taxes (except in Quebec) are co-ordinated with the federal tax system and are based on a percentage of federal tax, meaning that the provinces have the same allowable deductions and income rules as the federal system. Each province also has extra credits and incentives.
Some states, like Florida and Alaska, have no state income tax at all whereas all Canadian provinces and territories levy an income tax.
Unemployment Insurance Premiums
Although not technically an income tax, Canadians pay Employment Insurance (EI) premiums based on their employment income. EI premiums are 1.73% of gross employment income, and employers pay 1.4 times that amount. In the United States, the Federal Unemployment Tax Act tax (FUTA) is paid for exclusively by employers.
When comparing the extra tax on employees in Canada, you must also consider the fact that Canada has more robust unemployment benefits including lengthy maternity and family benefits.
Social Security Versus Canada Pension Plan (CPP)
In the United States, social security benefits represent a fund in which what you pay in during your working life forms the basis for what you get out in retirement. In Canada, a similar system exists in the Canada Pension Plan.
Employees pay 5.65% (as of 2011) of their wages for social security taxes and Medicare- a system that provides medical benefits for retired people. Social security premiums are capped at an income level of $106,800 and Medicare premiums are not capped. In Canada, employees pay 4.95% of gross employment income into CPP up to $44,800 and Medicare-style benefits are included as part of the socialized health care plan. Canada also has a supplemental retirement plan in the Old Age Security program. The benefits under this plan lessen as income increases and, therefore, are not available to Canadians in higher tax brackets.
No discussion of U.S. versus Canadian taxes would be complete without comparing the healthcare systems in both countries. The income taxes that Canadians pay partially fund the country's socialized health plan, where everyone has equal access to medical facilities, practitioners and procedures for no additional cost. In the U.S., health care must be paid for out-of-pocket or through a health care insurance plan. Premiums for these plans averaged out at $4,824 per person as of 2009, not including amounts paid for co-pays and deductibles.
The Bottom Line
Comparing income taxes in the United States and Canada requires an analysis of the benefits received for those taxes and any other out-of-pocket costs outside of taxes. Each taxpayer's individual situation will determine whether they would be financially better off in one country over the other. (Read about the political parties' differences in tax ideology, and how it can affect your paycheck. See Parties For Taxes: Republicans Vs. Democrats.)