Friday, September 21, 2012

Non-Payers in Canada

As you've probably heard by now, Mitt Romney made some disparaging remarks about the estimated 47% of the US that do not pay federal income taxes. A natural question for us Canadians is to wonder how many non-payers there are in Canada. Glen McGregor suggests that the comparable figure for Canada is 34%, but unfortunately, he is comparing apples to oranges. So here's a more accurate answer.

The 47% (actually 46.4%) might refer to the proportion of estimated total tax units in the US that had no federal tax liability in 2011, according to a model by the Urban-Brookings Tax Policy Center. Or it might refer to the estimated 45.9% of estimated total tax units in the US that had no federal tax liability in 2010, according to actual IRS data for filers and estimates of non-filers.

The 34% refers to the proportion of tax filers in Canada that had no federal or provincial tax liability in 2009, according to actual CRA data.

Obviously, the year used in the computations and the data sources are different. But those are not the main problems here.

One issue that will always arise when comparing the US and Canadian income tax systems is that most married couples file a single return in the US. This is why US data refers to "tax units" rather than individuals. But this, too, isn't the main problem, since it's unclear how this distinction skews figures.

A major issue that is easily fixed is that the 34% refers to Canadian filers that did not pay federal or provincial income taxes. But, as it turns out, over a million Canadians that paid provincial income tax in 2009 did not pay federal income tax. The US statistic refers only to federal income tax, so a more comparable figure would be the 38.2% of Canadian filers that paid no net federal tax in 2009.

Another major issue is that the 38.2% refers to the proportion of Canadian filers, while the 47% in the US includes non-filers. The proportion of American filers that didn't pay federal income tax in 2010 was 40.9%. Now, filing requirements are different in the two countries, so even comparing filers with filers is not a fair comparison. Unfortunately, I can't find an estimate for the adult population in Canada at year-end 2009, but the estimates for the 15+ and 20+ population in mid-2009 and mid-2010 are readily available from Statistics Canada. From those, we can estimate that the adult population was roughly 27.0 million at the end of 2009, which means that the proportion of the Canadian adult population that did not pay federal income tax in 2009 was about 41%.

Looking at 33.9% and 46.4% might drive us to think that, proportionately, much fewer Canadians than Americans escape the federal income tax. But when you realize that the comparison should be between 41% and 46%, the two countries look much closer.

In actuality, the gap is probably even smaller. In the US, the child tax credit gets directly subtracted off your income taxes. By contrast, in Canada, the child tax benefit (as well as the GST/HST credit) is provided throughout the year. So a family that owes $400 and gets $1,000 in child benefits would count as non-paying in the US, while it would count as paying in Canada.

In the end, the proportion of Canadians that avoid federal income tax is probably not much lower than the proportion of Americans. Careless interpretation of data in the media strikes again...

McGregor also mentions at the end of his piece that much more Quebecers (38%) than Ontarians (32%) or Albertans (28%) avoid income taxes. But he's looking at provincial and federal income taxes for ON and AB, while for QC, he's only looking at federal income taxes since the CRA does not collect Québec income tax. The actual fractions of filers that did not pay federal income tax in 2009 are:

NL 41.5%
NB 39.5%
NS 39.5%
MB 39.1%
ON 39.0%
BC 38.84%
QC 38.82%
PE 37.8%
SK 37.3%
AB 31.6%

A slightly greater proportion of Québec filers paid federal income tax in 2009 than Ontario or BC filers!


Bernard von Schulmann said...

There is a big difference between the two countries in what their sources of government revenues are. In the OCED no other country collects as large a share of its revenues from personal income taxes than Canada.

Election Watcher said...

True, but the big difference is at the state/provincial level. In 2011, *Federal* personal income tax was 7.3% of GDP in the US, and 7.0% of GDP in Canada, which is quite comparable.