Canadian Commentary

The Myth of US Taxes

April 2000

Even after the tax cuts announced in the 2000 federal budget, Canada's corporate leaders have continued to berate the federal government over its supposedly high taxation rates. The Business Council on National Issues (BCNI), representing Canada's biggest companies, issued a spectacular whine-fest last month in which they demanded lower taxation rates on their companies, themselves, and their senior employees. Because the Canadian government taxes its wealthy citizens at a higher rate than the US government, they argued, Canada's most talented workers are moving south to benefit from lower taxes. The problem with this argument is that US federal taxes on the wealthy are actually roughly comparable to those of the Canadian federal government. The difference in taxation rates lies elsewhere, as do the reasons for the brain drain, but Canada's corporate leaders focus on the federal government because they do not want to address the real issues.

Let us start with one of the most commonly cited statistics in the "our taxes are too high" argument: that the highest marginal rate of US taxation does not start until $280,000. This is true - but it is because the US imposes more tax brackets on the wealthy than Canada does. As of 1999, the Canadian government only has three taxation bands, the highest of which is 29%, starting at CA$59,180. The US government taxes its second band of taxation at almost as high a rate, 28%, starting at US$25,750 for a single person. The US third band - comparable to Canada's highest band - is 31% starting at US$62,450 for a single person.

So, in fact, the US second band of taxation is almost as high as Canada's highest rate, and the third brackets of taxation rates are roughly comparable, with the US charging a higher rate, but starting at a higher level. Once you get into the high-salary range that is relevant for skilled and managerial workers, the difference is negligible. Canada's rates may have been slightly higher as a result of the deficit-fighting surtax imposed on the highest income bracket by the Mulroney government, but that surtax is now being phased out.

There is a significant difference, though, once you get to truly high salaries. Once you are a high-income earner (over $100,000), Canada imposes no more taxes. But in the US, high-income earners face two more tax brackets - 36% over US$130,000, and a punishing 40% over US$283,000 - the tax bracket that Canada's corporate leaders supposedly envy.

Table 1: Comparative Canadian and American Tax Brackets

Canadian Taxes (1999)
US Taxes (single person) (1999)
Up to CA$29,590 17% Up to US$25,750 15%
Above CA$29,590 26% Above US$25,750 28%
Above CA$59,180 29% Above US$62,450 31%
    Above US$130,250 36%
    Above US$283,250 39.6%

So, in fact, the US charges higher federal taxes on high-income earners than Canada does. No doubt Paul Martin would be happy to impose a comparable tax bracket in Canada, but you can just imagine the howls of protest it would engender among the corporate leaders and commentators who keep pointing to this very bracket as an example of generous tax treatment. Furthermore, the tax cuts announced in the most recent federal budget will bring Canada's federal tax rates below those of the US. Even if the US government cuts taxes after the next presidential election, they will do no more than catch up with the Canadian cuts already announced.

So, far from being lower, US federal taxation rates before exemptions and deductions are in fact higher than Canadian federal taxes on high-income earners. They key phrase here is "before deductions", because one of the significant differences between the two federal taxation regimes is that in the US, taxpayers are allowed to deduct mortgage payments from their taxes. For taxpayers who own homes, this means a significant reduction in taxation. So, if Canada's corporate leaders really want a US-style tax system, they could always argue for mortgage deductibility. But mortgage deductibility is a brutally market-distorting government intervention in the economy, a massive government subsidy to the middle class which discourages purchasers from making rational economic decisions about whether to purchase property and how much to spend on it. It is completely contrary to the free-market principles that corporate leaders profess to believe in. They could not advocate mortgage tax deductions without revealing themselves to be hypocrites.

The other significant difference lies in the rate of provincial/state taxation. Canada's provincial tax rates are in general far higher than US state taxes. The reasons are obvious: medicare, and much more extensive public post-secondary education. If Canada's corporate leaders really want lower Canadian taxes, they should be addressing themselves, not to the federal government, but to the provinces, which is where the real difference in taxation rates lies. But of course, in order to do so, they would have to argue for the destruction of Canada's public university and college system, and for the abolishing of medicare, which these taxes pay for. They know that they can never make this argument. Not only would such a position be extremely unpopular with Canadians, it makes little economic sense, since public health care and education are considerably more efficient and effective than the private systems operating in the US. So our corporate leaders focus on the federal government instead, while trying to fudge the fact that federal taxes are roughly equivalent in the two nations.

Furthermore, if the disparity in provincial/state taxation rates was the true reason that talented young Canadians were moving to the US to work, you would expect them to be moving to states such as Texas and New Hampshire, which do not even have state income taxes. Instead, the vast majority of "brain-drain" Canadians move to California and New York - states that have among the highest state income tax rates in the US, resulting in effective income tax rates that are almost as high as Canada's. The reason is that, as any number of surveys have shown, tax considerations are not a significant factor in drawing talented Canadians to the US. The real problem is that Canadian companies offer significantly lower salaries to young employees than American companies, even before taxes. Our corporations take advantage of the fact that many talented Canadians will choose to stay in Canada despite lower pay, for family reasons or because they prefer Canadian society. Canadian corporations have been quite happy to let a small number of talented Canadians move south, if it means they can get those who stay behind at much cheaper rates than their American competitors. So in a sense, Canadian corporations actually encourage the brain drain, because it allows them to underprice their labour costs relative to their competitors south of the border. They then have the gall to turn around and blame the resulting loss of talent on the Federal government.

The other significant factor cited by young Canadians moving south is that American companies offer more challenges, better working conditions, better training, and more opportunity for advancement. In other words, American companies are better to work for, regardless of the pay they offer. These factors are not something that Canadian governments can fix - instead, they are factors directly under the control of the same Canadian corporations that are whining so loudly about taxation.

The fact is, Canadians are NOT moving south because of high taxation rates. Canadians are moving south because Canadian corporations are cheap, complacent and stodgy, run by narrow-minded, inflexible old men who prefer to blame the government rather face up to their own responsibilities, change their stale old attitudes, and do the work necessary to stay competive. If the BCNI and the Canadian corporations it represents are serious about wanting to keep Canadian talent in Canada, they can start by offering salaries that are competitive with those of their competitors south of the border. Then they can think about getting off their complacent rear ends and re-inventing their companies so that they are challenging, flexible and attractive to young workers. Let's see how that works before we start talking about taxes.

April 2000

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