The CBC's vote compass has attracted a certain amount of attention and not a small amount of controversy. I like these sorts of exercises, even if the questions aren't always well-posed. So here are some 'tax compasses'. I'm not going to even try to set up some sort of interactive questionnaire, because everyone's preferred tax rate will be zero across the board (unless there are questions such as 'what tax rate should other people face?'). Instead, I'll use scatter plots to show the choices Canada has made, and put them in context with the other OECD countries. All data are taken from the OECD tax database.
This is the comparison where the economic efficiency results are most clear: consumption taxes are less distortionary than taxes on capital income, so the best pro-growth rax mix will be in the top left-hand corner of this graph:
I can't count the times people have pointed to Ireland and/or Iceland as 'proof' that the efficiency results af low CIT rates are wrong, so I'm going to digress on this point. Low corporate tax rates are at best a necessary condition, and they are by no means a sufficient condition, for sustained growth. In particular, they do not prevent banking crises. I'm unaware of any explanation of the Irish and Icelandic crises in which having low corporate tax rates was either the culprit or an exacerbating factor.
Anyway, it's interesting to note that the OECD countries who most recently put together a market economy from scratch - the Czech Republic, Hungary, Poland and Slovakia - all chose higher-than-average VAT rates and lower-than-average CIT rates.
It's clear that we are a long, long way from the top left-hand corner. (The GST/HST/QST rate varies by province. I'm using the GST/QST rate for Quebec, because that's where I live.) Before the round of CIT cuts began in 2000, the combined federal and provincial tax corporate income tax rate was 42%, way out on the right-hand edge of the chart. There are four countries that have both lower VAT and higher CIT rates, and 19 with both a higher VAT and lower corporate taxes. The data in the graph are from 2010, that is, before the most recent round of CIT cuts. Once the three-point reduction comes into effect, Canada's rates will be roughly typical of the OECD.
Personal income taxes (PIT) are more complicated. They are typically the the largest source or revenue, and the tradeoffs between efficiency and equity are much more nuanced. The OECD publishes marginal tax rates for those earning 67%, 100%, 133% and 167% of average income in each country. I'm going to look at the numbers for those earning 67% and 167% of the average. In 2009, average income was $43,568, so these rates are for those earning roughly $29,000 and $77,000. Note that those earning $77,000 are not facing the top marginal rate for Canada.
Here are the marginal tax rates; all PIT numbers are for 2009:
The 45o line traces out combinations where the both types of earners face the same marginal tax rate. In a progressive system, those with higher incomes are taxed at a higher rate. Apart from five countries in which both pay the same rate, all countries are above that line.
In addition to personal income taxes, employees are also obliged to contribute to programs such as employment insurance and social security. The "all-in" rate adds these contributions to the marginal tax rates:
In Canada, EI and CPP/QPP contributions are only required for income levels up to a certain amount (the 2011 thresholds are $44,200 for EI and $48,300 for CPP), and this seems to be the pattern across the OECD. Since high-income earners are typically above the cutoff, their *marginal* contribution out of an extra unit of income is zero. So even though the marginal rates are generally progressive, these cutoffs mean that the all-in rates are less so, and they even decline with income in countries such as Germany and Austria.
Another thing to consider is the fact that employers are typically obliged to contribute to social security programs; these contributions are calculated as a function of wages:
These contribution rates are generally higher for lower-paid workers. Employees usually don't see these contributions, and may consider them to be not their problem. But of course, the economic incidence of employer social security contributions is not necessarily the same as the legal incidence; it turns out that these contributions are largely passed on to the worker in the form of lower wages. It's probably not a coincidence that the most regressive element of the personal income tax system is the part that is not directly visible to workers.
The total tax wedge is the all-in rate plus employer contributions, less transfers received:
Canada appears here as a relatively low-tax country, with rates lower than in other places with which we'd usually compare ourselves such as the US, the UK and Australia. If Chrétien's cuts to personal income taxes were reversed, we would be up around where the US is on the graph.
The top PIT tax is typically a hotly-contested point of contention: what tax rate should the highest earners face? The upsides of high top rates are obvious; the downsides are less so:
- The revenues generated by increasing the rates for top earners are smaller than you might expect.
- When you take behavioural responses into account - and you should - increasing taxes at the top end may have unintended consequences for the distribution of after-tax income.
That said, here is a graph of the all-in tax rates faced by the top earners against the income levels - expressed as a multiple of average income - at which the top rate applies:
Canada is sort of in the middle of the pack here, although if the top rate were increased and were applied at lower incomes, we would probably still be in the range of a typical OECD country.
One of the factors constraining PIT rates in Canada is the fact that there are several countries - especially English-speaking countries - where high earners might move to escape higher PIT rates. What surprises me in these graphs is that Canadian top PIT rates are at or below those of other English-speaking countries.
One way of summarizing Canada's choices relative to those of other rich countries is that if we were a 'typical' OECD country, we'd have
- a higher GST/HST/QST,
- corporate taxes around where they will be in 2012, and
- higher personal income taxes.