« Is it moral to vote? | Main | Worthwhile Survey Initiative »


Feed You can follow this conversation by subscribing to the comment feed for this post.

Excellent post, very informative.

Terrific post. Another point about taxing high earners is that their incomes vary a lot more, since the very rich earn the money from investments, business deals, and big contracts. One of the problems that has best California is that, as a state where the top 1% apparently pay 50% of all PIT, the recession brought about a massive drop in state revenue from that source, which might not have happened had the burden been less unequal.

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.

Could it possibly be because they were getting advice on how to put together a market economy from economists such as yourself, and so chose exactly what you recommend because it was the only recommendation made?

The Corp Tax axis on graph 1 doesn't read right to me. Ireland looks way further to the left than 12.5pc. Which OECD table was used, please?

No, it's 12.5%. Looks right to me.

And Leo, yes, I like to think so.

Very interesting.

Extremely interesting. I would not have guessed that Canada has lower taxes once you add up all the "tax-like" levies. The fact that we end up lower than the US is really surprising. Especially as we fund a universal health system which means a lot at the personal and retail level. It's the one government program that really says "I'm getting something for the taxes I pay."

Great stuff! As always, thanks for all the analysis. On the unintended consequences of high income taxes:

I pay the top marginal rate. My plan for retirement is based on continuing my current rate of consumption until I die. I have it all worked out pretty carefully. The more money I have, the earlier I will retire. My consumption is extremely inelastic as a function of expectation of future annual current income: upwards, since my overriding purpose is to maximize my retirement time and I simply don't need more stuff, but especially downwards as I cannot tolerate any decrease in consumption :-( . So if my wealth decreases, I *will* work longer. It is a painful truth that if you raise my tax rate I will feel forced to work more, not less. I suspect that you would have to raise it to 85-95% before I would seriously contemplate just giving up, accepting a huge decrease in permanent income, and "going Galt". Here's another way to look at it: If my marginal tax rate had been zero until now, I'd quit working. Right now, at the age of 42.

If you do the math, I'm pretty sure it's the most entrepreneurial workers, the ones who take the greatest risk, and who expect the highest wealth growth rate who would be least disincentivized by a high tax rate, since they are the ones who would still be able to affect a significant change in their personal wealth by working. On the other hand, those with high wealth, but low outlook for future income would be most disincentivized - they will simply prefer to consume their wealth.


Not to in anyway dismiss the analysis Stephen has presented but part of the reason that Caanadian PIT taxes appear to be comparable to American ones is that this analysis is done at the INDIVIUAL PIT level. On that basis, Canadian personal income taxes certainly are fairly comparable.

Where American personal income taxes are lower however is at the family unit level. Americans can file either as individuals, as head of household or as joint tax filers and it is here that the Americans do have a tax advantage, though as you rightly note, they get less for those taxes and not simply just universal health care.

It's been a while since I've looked at the stats in detail or the OECD website - they moved things around a bit - but the following illustrates the difference:

A single unmarried earner at 100% of average income:
Canada - 30.62%
US - 29.36%

A single income earner, married couple, 2 children with 100% of average income:
Canada - 17.45%
US - 13.72%

We've been over that. Americans when they file as a family have to pay at 167% of their marginal rate. It works out to a wash.

If you don't have a family it doesn't matter anyway.


If you are paying the top marginal rate after a retirement savings vehicle deduction you are extremely fortunate. Who cares what you invest in, it's just a large tax advantage available to you.

Determinant: what I invest in? I was only commenting on the impact of the tax rate on my choice of work vs leisure. Nothing about tax shelters. I don't think what I said had any investment implications. And, yes I'm lucky.

Since RRSP's, Individual Pension Plans and other retirement vehicles are tax deductions, your contributions to these vehicles will not be impacted by increasing tax rates. In fact they are helped by tax increases because of the way a deduction works.

Therefore I fail to see how your ability to retire is negatively impacted by higher marginal rates. I also fail to see the basis of your complaint that you cannot retire immediately since you pay substantial taxes, unless your income is what the income tax system refers to as "unearned income" which doesn't generate retirement contribution allowances.

Determinant: I really wasn't complaining. On the contrary, I was making the point, as strongly as possible, that lower income tax rates discourage, rather than encourage productivity. Cut my taxes and I'll work less, not more. Though I'd love to pay less tax I have *no* problem with my current rate of taxation. You really misread my comment - probably it was poorly written.

Ah. My point, in reply to your point, was that wealth accumulation for retirement, due to its unique treatment in the Income Tax Act, has a different calculation framework than simple saving vs. spending of after-tax income. Income tax rates have a much different impact here, due to the treatment unique to retirement savings provisions in law.

Perhaps I was misled by the word "retirement" which has a specific meaning in financial circles.


How much time and energy do you spend avoiding taxes? There is some theory and evidence that high marginal rates encourage greater tax avoidance effort.

Anyhow, a great way to tax you leisure-loving lifestylers is through a high VAT.

Westslope: I pay an accountant but have very little leeway on taxes (not a business owner). The only form of "evasion" I would ever consider would be to permanently leave the country. But taxes would have to rise a lot. Social/family costs too high.

Thanks for the charts Stephen,

So looking at the first chart, no corporate tax - massive financial crisis, no vat = massive fiscal crisis, best stick with the baby bear approach to things...

no corporate tax - massive financial crisis

Um, I really hope you're kidding. Especially after I went through such lengths explaining how policy analysis is done.

I figured out the axis thing - apparently the vertical is at 10pc not 0, should have spotted that, but it doesn't explain why Chile at 17pc isn't to the left of Iceland at 18pc. Transposition? I would point out that setting the CT axis start at 10 not 0 makes Ireland's CT rate look ridiculously low. If I wanted to see that kind of spin I'd call Berlin or Paris.

About the axes: call it a stylistic preference: I try to avoid empty spaces where I can.

As for Iceland, you're right. I had made a graph for 2009 data and updated it for 2010. Along the way, I missed Iceland's increase from 15% to 18%. Dang.

Mostly just teasing Stephen, although I do think the lack of a VAT in the U.S. reflects the challenges of developing a rational tax policy there which is a factor in their fiscal crisis, and I think the low corporate tax rates in Ir/celand are partly a reflection of a push for modernization/liberalization/deregulation that was a primary cause of their financial crises (more so in Iceland, Ireland was somewhat like the tech bubble in the sense of being a real leap forward that just got out of hand towards the end)

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad