Monthly Archives: July 2011

Marginal Tax Rates

People talk a lot* about marginal tax rates**. You often hear that the income tax rate is going down from 16% to 15.5%, or that the highest marginal tax rate is now 29%. What we don’t talk about is the full structure of the tax system, and what the marginal tax rate is overall as you go up (or down) in income***.

Marginal Tax Rates, Ontario, 2011
Marginal Tax Rates, Ontario, 2011

Looking at the above graph, you may notice a few things. One is that the highest tax rates are paid by those with the least income (this is largely due to the 50% clawback of all income for those on welfare). The marginal tax rates for those earning less than $15k are never reached by anyone earning more than $15k. Many consider this a very strong disincentive to work (or at least a strong disincentive to report income).

There are a few oddities in the graph:
Around $15k, the spike is caused by the loss of the welfare prescription drug benefit
Between $43k and $49k, the tax rate decreases by about 7%, because Employment Insurance and Canada Pension Plan contributions max out
The spikes at $20-25k, $36-38k, $48k, $72k, $201k are caused by the strange way that the Ontario Government implemented the Ontario Health Premium

It might be interesting to overlay this graph with a graph of what percentage of the population is in each category, and what percentage of each of those groups vote.


Some calculations:

Welfare: $224 basic needs, $368 shelter allowance
Welfare: $592/month = 7104 + 848/yr = 7952/yr
(includes ** Includes 2010 Ontario Energy and Property Tax Credit and 2010-11OntarioSales Tax Credit.)

*Well, probably not that much.
**Marginal tax rates in this instance are defined as the amount of tax paid per thousand dollars of income (marginal tax rate at $10k income would be: (Tax paid @$10k-Tax paid @ $9k)/$1000 )
***This post assumes Toronto, Ontario residents, 2011 tax rates, single adult