Tax Rate Structure (and the Effects of Clawbacks) - The Personal Income Tax e Tax Rate Structure The federal personal income tax from 1987 to 2001 had

# Tax Rate Structure (and the Effects of Clawbacks) - The...

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The Personal Income Tax : e Tax Rate Structure The federal personal income tax from 1987 to 2001, had three tax brackets — officially. For example, for 2000, income up to \$30,004 was taxed at 17 percent, every dollar earned in excess of \$30,005 was taxed at 25 percent, up to an income of \$60,009, and every dollar in excess of \$59,180 was taxed at 29 percent. That structure meant that the average tax rate increased from 17 percent ( on all income levels below \$29,590 ), to approach 29 percent as a person’s income level increased towards infinity. Prior to 1987, there were more tax brackets : 15 brackets in 1949, and 10 in 1981. Since 2002, the number of tax brackets has increased to 4. In 2013, income below \$43,561 was taxed at 15 percent, income between \$43,561 and \$87,123 at 22 percent, income between \$87,123 and \$135,054 at 26 percent, and income in excess of \$135,054 at 29 percent. (Why the “not round” numbers for the boundaries between brackets? These brackets are indexed to inflation, and so change each year according to a fixed formula.) Also, the first \$11,038 of taxable income is exempt. This “basic exemption” is treated as a tax credit on the tax return : each person gets a non–refundable tax credit of 15% of \$11038, or \$1655.70 (if her tax payable is larger than that credit). However, this apparent simplicity is quite misleading. The actual situation is best described as having many different brackets — with the marginal rates going up and down as we move between brackets. An example of this sort of structure is the case of Alberta in 2011, depicted in figure 17.2, on page 364 of Rosen, Wen, and Snoddon . That picture shows about 13 different marginal rates, and also shows the marginal rates rising, and then falling, and then rising again. What increases the complexity of the tax structure so much, compared with the 4 brackets listed on the federal tax return? There are really three types of complication (not all included in the picture in Rosen et al). First of all, there are the other taxes on income : CPP and EI premia. These taxes are not part of the personal income tax, so it may be a bit misleading to include them here, but they are taxes on people’s ( labour ) earnings. These taxes certainly are relevant in calculating how much of an added dollar earned is taxed, in order to derive the effect of taxation on people’s after–tax rate of pay. Second, there are the provincial tax brackets. These are definitely part of the personal income tax. Alberta has only 1 provincial tax bracket. But every other province has at least 3 ( Ontario has 3, British Columbia has 5. ). And some provinces (such as Ontario) still have surtaxes on income tax, which is really just an additional bracket at the top with a higher rate. Third, there are the “clawbacks” of certain low–income subsidies, which impose an effective marginal tax on income. Again, these are not part of the official personal income tax.