Canadian Social Research Links

Tax surprise:
Most Canadians pay less tax than Americans


November 6, 1999
(+March 2012 addendum)

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March 2012 addendum:
100 things not to do if you hate taxes
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Tax surprise: Most of us pay less than Americans
In Canada, it's only the better off who fork out more

By Rosemary Speirs
Feature writer
November 6, 1999
Toronto Star

We've all heard that Americans pay less taxes than Canadians. But in fact, for more than half of Canadians, the grass is still greener here at home.

Looking at the United States, there is no question why everyone there has to rely on step-by-step tax guides to do their taxes. While it would always be nice to invest in a good tax program, such as ProFile professional tax software, the folks here in Canada have it much easier. For instance, in Canada, governments tax upper middle-income earners and the rich much more stiffly, and go easier on those with lower incomes. The poor, and those in the lower middle-income ranges, end up with more in their pockets in this country than they do in the States.

For simplicity's sake, the cutoff point comes at about the $60,000 level, slightly above the average Canadian family income.

This isn't what the tax-cutting advocates emphasize - people like Reform leader Preston Manning, conservatively-minded media commentators, and the executives of Canada's largest corporations. Taxes, they chorus, are a big factor in the so-called "brain drain'' of talented Canadians and help account for the shift of corporate head offices to south of the border.

In very rough figures, the federal finance department calculates that Canadians pay an average 35 per cent of their income in taxes and Americans pay 30 per cent - 5 per cent less.

Statistics Canada took a look at what Canadians and Americans have left in their pockets in a 1998 study by Michael Wolfson and Brian Murphy. The researchers compared the disposable income of Canadian and American families - what's theirs to spend after taxes and deductions.

"Families . . . living in the United States are not necessarily better off in terms of disposable income, than their Canadian counterparts,'' they concluded. "Indeed, roughly half of Canadian families had disposable incomes in 1995 that gave them higher purchasing power than otherwise comparable U.S. families.''

This was true even though the U.S. economy is better off in terms of output per capita, and even though the average American income is about $5,000 (U.S.) more a year than the average Canadian. "The reason is that the very rich in the United States pull up the income average much more than in Canada, while those at the bottom of the U.S. income spectrum have less purchasing power than those in Canada.''

Wolfson and Murphy found the first 35 per cent of Canadians are "absolutely better off'' than their American counterparts, largely because of more generous government benefits to low-income Canadians. And beyond that, up to the halfway mark of the population, differences in their disposable incomes were negligible. In a yet-unpublished update of these findings, the two StatsCan researchers confirmed the general trend through 1997.

Their study is a reminder that our tax and transfer system redistributes wealth in Canada - softening the extremes between the very rich and the very poor. It's the flip-side of the picture: the Canadian advantage of a more egalitarian society that is often forgotten in the current debate over tax cuts.

"The grass is not greener on the other side,'' says Muriel Hurst, a registered nurse from Toronto who is paid about $27,500 (U.S.) at the hospital in Bob Dole's hometown of Russell, Kansas. She's making less than she did in Toronto, and while taxes and rents are lower in her rural community, she finds herself having to pay half of her medical insurance plan costs, and must pay malpractice insurance.

Overall, she says her expenses may total less, but she's not as far ahead as she expected - and she misses the quality of life she was able to afford in a Canadian city.

So when Reform leader Manning gets up in Parliament, as he did last month, comparing taxes levied in Toronto and Chicago, and asking therefore why a bright university student should stay in Canada "one day after graduation,'' he's really raising an upper-middle-class issue.

The tax advantage of a move to the U.S. isn't obvious until you get beyond that $60,000 a year mark. Also, it's too simple to just throw around tax rates in the two countries, without factoring in other paycheque deductions for pensions and unemployment.

Canada's CPP and EI premiums are lower than U.S. social security deductions. As well, taxes levied by American states vary much more than provincial taxes in Canada. So do local and municipal levies.

A Canadian moving south would pay no state tax in Florida, but in New York would be hit by a state levy of 6.9 per cent.

So the lure of lower U.S. taxes depends very much on who you are and where you are going. Tax calculations on actual tax rates paid, after social security deductions in Ontario and, say, New York state, show surprisingly little difference even in the middle income range.

Using Statistics Canada's measure of "purchasing power parity'' in the two jurisdictions ($1.25 Canadian can purchase as much as $1 American, even after GST and other sales taxes are added at the till), we compared the proportion of income going in taxes and social deductions. (see accompanying chart)

Result: A two-earner family with two children making $50,000 a year in Canada would pay 15.2 per cent in taxes and deductions. An American family of four making a comparable $40,000 in U.S. dollars would pay 15.9 per cent.

A Canadian family with two earners and two children making $75,000 would pay 23.6 per cent. A similar American family making a comparable $60,000 (U.S.) would pay 21.6 per cent.

At the $75,000 Canadian level, an American advantage is starting to emerge, but hardly big enough to make a move to New York for economic reasons alone.

Not when you factor in Canada's free medicare and lower education costs, which would make all the difference to a family with children in school and anticipated medical bills.

"New York City is the mecca for half a dozen professions, but it is the high tax centre of North America,'' says Dave Perry of the Canadian Tax Foundation. "They pay federal tax, state tax, property tax, sales tax and the shelter costs are absurd. Clearly, migration to the States is only partly decided by taxation.''

Linda and Wayne Timson have learned life in the U.S. isn't necessarily cheaper. The couple moved to California with their two children in 1995. Wayne is a customer service engineer for the Canadian company Nortel, which transferred him to its American operations at a salary higher than he and his wife had earned together in Canada. She estimates it at just under $60,000 (U.S.)

So far, she's not permitted to work in the U.S. and says life in Manteca, a hi-tech community 110 kilometres from San Francisco, "is very expensive.'' Even with a higher family income, and somewhat lower taxes, the pair are hit with paying 12 per cent of their health care plan, or about $70 a month (Nortel picks up the rest), and with hidden fees they hadn't been warned about (such as the $10,000 in fees before purchasing a home).

"I expected much lower taxes after what we'd heard in Canada,'' she says. "Taxes overall are slightly lower, but when you take into account the hidden expenses and the cost of living, I don't believe we are any further ahead.''

To give them their due, the corporate leaders who are pressuring Finance Minister Paul Martin to lower taxes to halt the "brain drain" understand that the attraction of higher U.S. wages and lower U.S. taxes is an issue only at the upper income echelons.

"People making more than $150,000 a year are eight times more likely than average to leave the country,'' said the Business Council on National Issues in a recent memo to Prime Minister Jean Chrétien.

But, as Perry argues, moving to the U.S. is an individual decision. Bigger bucks and more left after taxes may be the motivator for some doctors, engineers and computer programmers. If it is, Prime Minister Jean Chrétien says they may as well pack up and go. But others leave for less selfish reasons, and have the kinds of brains and dedication we can't afford to lose.

One such example is Brian Williams, a biochemist who left his job as a cancer researcher at the Toronto Children's Hospital eight years ago to move to Cleveland, Ohio. In an interview this week, Williams was clear about why he moved to the Cleveland Clinic Foundation. It was "the opportunity'' - not the offer of bigger bucks and lower taxes.

Sure, says Williams, the Cleveland recruiting team offered more than double the $70,000 salary he was making at Sick Kids. He'd be able to afford a spacious home and his mortgage costs would be deductible from his taxes. But the richer lifestyle alone wouldn't have moved him and his wife Silvia across the border.

What got him was the chance to become chairman of the Cleveland Clinic Foundation's department of cancer biology. As well, the Clinic recruited the entire team of seven Sick Kid's researchers who'd been working with Williams on childhood cancer of the kidney. The team got promises of major funding for their cancer research, through into the foreseeable future.

"I wouldn't have done it just for the money,'' Williams explains in a telephone interview. "Sick Kids was a good place to work. I moved for the huge opportunity.''

Now, at 50, Williams runs 14 different cancer research projects in Cleveland. This week, he's in the middle of negotiations to recruit two more Canadians for the Cleveland facility. "Canadians are seen as a well-educated, easily recruitable people who fit very well into the American way of life,'' he says.

Funding for research in Canada over the last decade has been "grim,'' says Williams.

This is Canada's real tax problem. Following the spending cuts of the '90s, people just don't believe they are getting the bang that they ought for their tax dollars. The poor state of research funding that Williams deplores is only part of a larger picture of cuts to unemployment insurance, health and education funding, and social benefits.

"Taxpayers in the 1960s were quite ready to accept a larger tax burden in part because their real pre-tax incomes were rising rapidly, but also in part because they could see schools and hospitals being built with their taxes,'' writes economist Pierre Fortin in his recent study, Is there a Way Up?

"In recent years, Canadians have had serious problems accepting the increase in their tax burden in part because pre-tax real incomes have declined in absolute levels, but also in part because taxpayers have received fewer public services in return for higher taxes, which have mostly served to pay interest on the accumulated public debt.''

Today, 27 cents of every tax dollar collected is going towards interest on the national debt. This is the legacy of past government spending, and the real reason why Canadians may be feeling over-taxed. It's not those invidious comparisons with U.S. tax rates.

"People will pay if they think they are getting their money's worth,'' says Bill Robson of the C.D. Howe Institute. Public opinion may be changing, but for the moment there appears to be a general acceptance of paying more taxes in return for Canada's more generous social programs - provided quality remains high.

Indeed, recent polling for Finance Minister Martin by Earnescliffe Communications found that while Canadians believe Americans pay less in tax, they don't use the U.S. model as a reason for demanding lower personal or corporate income taxes. "In fact, it (the comparison) works the opposite way for many, bringing nationalist impulses to the fore,'' say the Earnescliffe pollsters.

As well, the Earnescliffe company, which offers strategic advice to Martin before each budget, says Canadians still put "growing the economy'' before tax cuts. Only in Quebec, and in Saskatchewan, did the pollsters find symptoms of "tax fatigue'' and a demand for tax cuts first.

When it came to what taxes they wanted cut, Canadians opted strongly for a cut in the 7 per cent Goods and Services Tax. Second choice was an overall tax cut that would relieve the economic pressures on the middle class. There was no public interest in high-income tax cuts to halt the "brain drain'' of those seeking wealthy U.S. lifestyles.

Tax cuts wouldn't make all that much difference anyway. The real advantage in the United States is higher salaries for upwardly mobile professionals. To illustrate the point, The Star asked the relocation company Runzheimer Associates to compare costs for a Canadian family of four making $60,000 Canadian and moving to Chicago, Illinois.

The relocation experts assumed the family income in Chicago would be the same, and made all the calculations based on the $60,000 Canadian salary equivalent. When all costs - taxes, deductions, mortgage, car, medical, food, entertainment, etc - were included in, Runzheimer found similar expenses in the two cities.

Income taxes, indeed, were lower in the States, but other costs such as real estate taxes were higher. For a family that rented, instead of buying a home, living costs in Chicago were higher than in Toronto, mainly because Chicago rents are so high.

However, says Michelle Steinowicz of Runzheimer's Canadian office, the salary of a professional employee moving to the United States would undoubtedly be substantially higher. In Chicago, the cost of living would be roughly the same as in Toronto, but a bigger income would be the major factor, leaving more in the emigrating family's pockets.

Only two decades ago, Canadian and U.S. household disposable incomes were on a par, and so was the value of the dollar. But by 1997, the average American household enjoyed an advantage of $4,825 (U.S.) in yearly disposable income. (This average, however, includes bank presidents making $5 million a year, and the Americans have more of the rich and super-rich, dragging up the average).

Canadian real incomes have been in decline in the recent past, a trend that only began to reverse last year. In his paper, Fortin argues that the income difference between Americans and Canadians is largely due to Canada's much higher unemployment rate (now 7.2 per cent compared to less than 4 per cent in the U.S).

"I have shown that 60 per cent of Canada's slowing income growth problem was due to a large drop in the unemployment rate,'' Fortin says.

Tax cuts, then, are only a small part of the solution. When it comes to the "brain drain'' to the United States, funding for research and innovation would appear to be a better answer to keeping talented Canadians at home.

Of the team of researchers who went with Williams to Cleveland, or joined him there since, one post-doctoral fellow, 34-year-old Sandy Der, is returning shortly to teach at the University of Toronto.

"The research environment in Canada is improving,'' he says, noting recent federal boosts in funding for the Medical Research Council of Canada, and for university research.

Der orginally completed his Ph.D. in Toronto, then joined Williams' laboratory to do his post-doctoral training, specializing in research on how cells respond to virus infections. For him, Cleveland offered the opportunity for well-funded, leading-edge research, he says.

In Cleveland, Der worked with new technology - DNA microrays - and this work brought him offers of jobs, on the faculty of his old school, the University of Toronto, and from a couple of American universities.

Der chose Toronto, partly for personal reasons: his family and his fiancée live here. But he says personal reasons wouldn't have been enough to bring him back if the U of T hadn't recognized the value of the research being done at the Cleveland lab and created a new division, with 10 faculty positions and new funding.

Der says his friends who stay in the U.S. "will make at least 50 per cent more'' in higher salaries and lower taxes than he will. "I'm alone of the friends I went through grad school with in coming back to Canada,'' he says.

Der doesn't regard it as a self-sacrificing decision, however. "People who are interested in research go where they can do research. . . .

"If the research funding weren't in place (at the U of T), I wouldn't be coming back.''



March 2012 addendum:

100 things not to do if you hate taxes
or, why saying taxes are not worth what we get for them is just plain stupid (PDF - 348K, 7 pages)
http://goo.gl/SH5v6
March 2012
The so-called free market can’t and won’t take care of everything; the public sector can and must play a constructive and compassionate role in our society and economy. We’re going to keep working hard to make that truth as obvious to all Canadians as the sun rising in the east. We won’t stop until we win the battle of ideas and values when it comes to taxes. In the meantime, we offer this handy list of 100 things not to do for all those people who hate paying taxes and the public sector.
1. Do not visit your doctor’s office or local hospital.
2. Do not send your kids to public schools.
3. Do not support the Canadian Forces.
4. Do not expect the Canadian Coast Guard to save you from an emergency at sea.
5. Do not expect the government to intervene and boost the economy during a recession.
(...)
After reading this list, we hope people have a better appreciation that there is a very real connection between their taxes and the services and programs they use.

Please click the source link below and join the campaign.
There are many ways you can get involved, so join the conversation and help set the record straight.

Source:
All Together Now!
A national campaign
For Public Services and Tax Fairness
http://alltogethernow.nupge.ca/

National Union of Public and General Employees
http://nupge.ca/

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See also:

Canadians for Tax Fairness
The mission of Canadians for Tax Fairness is to build a national campaign to promote fair taxation. We support the development and implementation of a tax system, based on ability to pay, to fund the comprehensive, high-quality network of public services and programs required to meet our social, economic and environmental needs in the 21st century.

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Taxes and Tax Freedom Day Links page:
http://www.canadiansocialresearch.net/tax_freedom_day.htm

 

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