Paris, Ontario
August 19, 2024
As with any topic it seems it economics and government finance, answers to questions are elusive. I was wondering about taxes in Canada and how its deficit compares to that of the United States. I thought that there might be some insights to be gained from comparisons.
I have enclosed there the best two answers I have found -- and as expected, they are useful bit not definitive. The first article -- comparing tax rates between the two countries -- bales on an answer by saying "it depends." I thought the author could have at least provided several examples to show how people if different income brackets fair in both countries. As for the deficits comparison, I am more pleased with that article. The problem when discussing national debt is that there is no clear "this is too much" (unless you hear from the simpleton politician that compares a government budget to a household budget). I know there are some really smart people who have good ideas regarding deficit levels but I guess their ideas get ground up in the sausage making of politics. But I'll keep looking for those ideas because the national debt is probably the biggest issue on my long list of issues.
Comparison of Taxes
A common belief among many Canadians is that they pay more in income tax than their American neighbors. Even politicians in Parliament have used this argument to press for lower taxes. But is it true? The differences in income tax rates, taxable income amounts, the services provided, and costs beyond taxes make broad conclusions difficult. Therefore, people must assess their financial situations individually.
Key Takeaways
The IRS taxes the wealthiest Americans at 37% on their top dollars as of 2024. The top federal tax rate in Canada is 33%.
Wealthy Americans have access to many tax deductions that Canada's alternative minimum tax doesn't allow.
Some U.S. states levy no income tax, but all Canadian provinces and territories do so.
Canadians pay taxes for the healthcare services they receive under a publicly funded healthcare system.
U.S. citizens pay for healthcare with their own funds or through a healthcare plan that they purchase, although they also pay taxes toward the government program Medicare.
Personal Income Tax Guide
Statistics-gathering agencies in both countries publish averages of income taxes paid, but comparing the two sets of numbers is like comparing the stats of a hockey player with those of a basketball player. They're based on different premises and they reflect different factors.
Using an average is also problematic because extreme wealth inequality skews the data on both ends. Lower-income Canadians generally pay less in taxes than lower-income Americans for the services they receive, but wealthy Americans are better off than wealthy Canadians.
Federal Income Taxes
U.S. federal income tax brackets range from 10% to 37% for individuals as of 2024.1 The range is 15% to 33% in Canada.2
The lowest tax bracket in the U.S. is 10% for individuals with incomes of $11,600 or less in 2024. It jumps to a 12% bracket for those with incomes of more than $11,600 and to 22% for those who earn more than $47,150.1
The corresponding bottom Canadian bracket of 15% applies to income up to $55,867 in Canadian dollars as of 2024.2
State vs. Provincial Income Taxes
Comparing state and provincial income taxes is more problematic. U.S. state taxation is completely outside the federal tax system. Each state has its own tax laws regarding deductions and credits. Some states, such as Florida and Alaska, have no state income tax at all but all Canadian provinces and territories levy an income tax.34
Provincial income taxes are coordinated with the federal tax system in Canada, except in Quebec. They're based on a percentage of federal tax.2 The provinces have the same allowable deductions and income rules as the federal system. Each province also has additional credits and incentives.
Unemployment Insurance Premiums
It's not technically an income tax, but Canadians pay employment insurance (EI) premiums based on their employment income. EI premiums are paid by employees and employers. Employees pay 1.66% of maximum gross employment income of C$63,200 in tax year 2024.5 The Federal Unemployment Tax Act (FUTA) is levied exclusively on employers in the U.S.
It's important to note, however, that Canada offers more robust unemployment benefits than the U.S. does. They include extended pregnancy leave and other parental leave as well as paid time off for compassionate care.
Social Security vs. Canada Pension Plan (CPP)
The Social Security benefits that kick in at retirement in the U.S. are paid out based on what individuals have paid into the system throughout their working lives. Canada has a similar system in place with its Canada Pension Plan (CPP).
American employees pay 6.2% of their wages into Social Security and 1.45% into Medicare for a total of 7.65%. The Social Security tax is capped at an income level of $168,600 annually in 2024. Income over this amount isn't taxed for Social Security.6 The Medicare tax has no income cap.
Canadian employees pay 5.95% of their gross employment income into CPP up to C$65,000.7 Medicare-style benefits are included as part of the country's healthcare plan.8
The Old Age Security (OAS) program is Canada's largest pension program and it's funded by general tax revenues. The OAS pension is taxable income that's available to people who are age 65 or older, who meet Canada's legal status and residency requirements, and who don't exceed maximum income caps.9
Healthcare Costs and Coverages
The income taxes that Canadians pay partially fund the country's socialized health plan. Everyone has equal access to medical facilities, practitioners, and procedures at no additional cost under this plan, but only medically necessary services are covered. Vision and dental care aren't generally covered under the publicly funded healthcare system, nor are prescription drugs, home care, or ambulance services.10
Healthcare must be paid for out of pocket or through a health insurance plan in the U.S., but only Canadians who need these types of non-covered care must dip into their cash flows or carry supplemental insurance policies to pay for them through their provinces.
All Americans contribute to Medicare in the U.S. throughout their working years. Medicare helps cover healthcare costs when people reach age 65.11 Monthly premiums for U.S. health insurance plans vary based on several factors including the state you live in, your age, and whether you have employer coverage. The average monthly premium for a plan for a 21-year-old, purchased through the Healthcare.gov Marketplace, is $376 in 2024, increasing to $1,559 for a family of four. This includes copays and deductibles
What Are the Lowest Income Tax Brackets in the U.S. and Canada?
The lowest U.S. tax bracket is 10% for income up to $11,600 in tax year 2024. It's 15% on the initial C$55,867 (Canadian dollars) in Canada
How Does the Tax on Old Age Pensions Differ?
The systems offer similar approaches. Working people in both countries pay into government retirement funds throughout their working lives, but the amount they pay differs. Americans pay a tax of 7.65% into Social Security on up to $168,600 of their income in tax year 2024. That 7.65% includes Medicare contributions for which there's no income cap.6 Canadians pay a tax of 5.95% on up to C$65,000 (Canadian dollars).7
Do Canadians Pay State As Well As Federal Taxes?
Yes. Every Canadian territory and province levies income taxes. Canadians could potentially pay more in income taxes overall than some Americans because seven U.S. states levy no income taxes as of 2024: Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska.13
The Bottom Line
Determining whether Canadians pay more in income taxes than Americans requires an analysis of the benefits received in exchange for taxes paid and out-of-pocket costs. Each taxpayer's personal situation can help determine whether they would be financially better off living in one country or the other, along with many other factors.
Comparing Deficits in Canada and the U.S.
April 12, 2024
As Parliament prepares to receive the 2024-25 federal budget, it is interesting to compare the sharply different fiscal trends that have emerged in Canada and the U.S.
Despite predictable Conservative and business complaints about ‘overspending’, Canada’s federal deficit is very small in macroeconomic terms – and one of the smallest among major industrial countries. In 2022, according to the most recent OECD cross-country data, the general government balance in Canada ranked 9th best among the OECD’s 37 member countries as a share of GDP.
Canada’s strong fiscal position is especially clear in comparison to the U.S. Canada’s federal deficits have been much smaller than in the U.S.
Deficits can be measured in two fundamental ways: on a national accounts basis (using data from the quarterly economic accounts), and on a public accounts basis (using data from the government’s official financial reports). The main difference is that the latter includes various non-cash factors: such as changes in long-run actuarial liabilities. Official budgets can also manipulate the timing of different revenue and expense items – for example, by pre-booking future expenses to capture all of the future impact of a new policy announcement in the current year’s budget. National accounts measures, in contrast, measure direct current flows of funds into and out of government: what is actually spent and received in a particular quarter or year. National accounts measures are more directly comparable across countries, since they are less affected by specific accounting strategies.
This table compares the Canadian and U.S. federal deficits using both national accounts actuals (for calendar years) and public accounts actuals (for fiscal years):
On a national accounts basis, the federal deficit in the U.S. in calendar 2023 (7.1% of U.S. GDP) was almost 11 times larger than the equivalent measure for Canada (0.66% of GDP).
On a public accounts basis the actual deficit recorded in the U.S. in the 12 months to September 30 2023 (6.27% of GDP) was almost 8 times larger than the actual federal deficit recorded in the 9 months ending December 31 2023 (0.81%). Since the Canadian 2023 public accounts actual does not include the year-end (at which time the government typically makes many adjustments to its treatment of various revenues, expenses, and non-cash items), the final deficit reported for fiscal 2023 will differ from this number. But even using prior year’s data, the U.S. public accounts federal deficit for fiscal 2022 was over 4 times larger than the Canadian deficit.
The preceding figures illustrate the comparative size of the two countries’ federal deficits, and their evolution over the last three years, on both national accounts and public accounts bases. Both countries reduced their federal deficits from 2021 (still affected by COVID) to 2022 – though Canada’s deficit started off smaller, and fell further in 2022. By either measure, the U.S. deficit got larger in 2023, while Canada’s remained small.
The comparison between the two countries’ deficits is all the more instructive, given the difference in economic trajectories between the two countries. U.S. economic growth has remained quite strong, and their unemployment rate has remained significantly lower. Both countries have been grappling with high interest rates imposed by their respective central banks. In the U.S. case, however, the impact of those rates on household finances and consumer spending has been muted by the fact that most mortgage-holders have long-term fixed-rate mortgages, and hence have not experienced the same upsurge in interest costs as many Canadian households. Interestingly, inflation has followed a similar deceleration in both countries since peaking (at similar highs) in mid-2022.
The claim that Canada has large deficits resulting from a big-spending federal government is simply false. And the parallel claim that this deficit has caused both high inflation and high interest rates (imposed to fight that inflation) is also false. Canada’s inflation and interest rates have not been consistently any better than in the U.S., where deficits are many times larger.
Superior U.S. economic performance suggests that significant deficits might actually be helpful in the current moment, not harmful. They support job-creation, investment, economic growth, and real incomes – helping to counter the contractionary impact of high interest rates. Orthodox economists will argue that fiscal policy should not run against monetary policy, but that view depends on the assumption that post-COVID inflation was the result of excess demand pressures (which government spending would only worsen). If we accept that post-COVID inflation was caused by other factors (including initial supply disruptions and shortages, pent-up consumer demand when lockdowns ended, the 2022 world oil price shock, and record surges in corporate profits), then the demand-supporting effects of government deficits can be seen as welcome, not contradictory.
From a macroeconomic perspective, therefore, Canada’s federal deficit should probably be bigger, not smaller. But that won’t stop the predictable attacks from Conservatives about the evils of bloated government spending. Those attacks should be discounted.
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