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The Personal Income Tax (PIT) system in Canada, 2000-2010

The Personal Income Tax (PIT) system in Canada, 2000-2010. François Vaillancourt CIRANO et Université de Montréal l IBFP, Bruxelles October 2011. Outline. Distribution of tax powers in Canada The PIT system: origins to 2000 The 2000+ system.

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The Personal Income Tax (PIT) system in Canada, 2000-2010

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  1. The Personal Income Tax (PIT) system in Canada, 2000-2010 François Vaillancourt CIRANO et Université de Montréal l IBFP, Bruxelles October 2011

  2. Outline • Distribution of tax powers in Canada • The PIT system: origins to 2000 • The 2000+ system

  3. Canadian federation-:revenues constitution (1867) • Central government: 91.3 The raising of Money by any Mode or System of Taxation • Provinces : 92.2 Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes • Court decision 1930s direct =>sales taxation

  4. Canadian federation-:revenues practice • Central: PIT, CIT, GST(VAT),payroll taxes ( social security + employment), excises, custom duties • Provincial PIT, CIT, Q/HST(VAT) or RST, payroll taxes , excises, resource royalties and transfers • Local: Property taxes, fees, transfers • Full base, rate and collection freedom at provincial and central level

  5. Non PIT aspects • CIT collected by federal G for 8/10 provinces • Sales tax collected by federal G for 5(4) provinces HST -Max 5% base ∆ • GST collected by Québec G for federal G with QST • Provincial payments to federal G for exclusive use of gambling field

  6. PIT in Canada pre WWII • Introduced in late19th century at local then provincial level • Introduced at federal level in 1917 • By 1939 most provinces have a PIT with own base, rates and collection

  7. Canada 1942- 1954 • WWII tax rental agreements: provinces rent against transfers PIT,CIT, Succession duties to Fed G=> Central collection with federal base and rates • 1947-Fed G proposes status quo: Keynes et al but 5% leeway for PIT

  8. Canada-1954-1962 • 1954: Québec reintroduces PIT with own collection -Fed G adapts (10% abatement) • 1957:Equalization introduced (three tax bases ) to induce provinces to accept tax responsibility • 1962+ tax room and tax on tax with free federal collection. Nine provinces use it : they must set a surcharge rate to obtain $

  9. Canada 1962-1977 • 1962-1977: Increases in provincial tax room by reduced federal taxation • Opting -Out/ offered in 1964:↓ transfers / ↑ tax room ;only Québec uses it (-16.5% of federal PIT per individual • 1972-:Implementation of tax reforms • 1977 reform of Health and Social transfers even more tax room and labeling fight

  10. PIT –key points • Income includes: • Wages, earnings, self employment income; • Net rents, interest, dividends ,K gains (50%) • Pensions(public and private), unemployment insurance, • All $ are added-up, deduction exemptions applied and one tax calculated • Residence is on 31st December :fact based not linked to place of employment

  11. % federal PIT in total PIT collection, Canada, 4 years

  12. Canada 1999 • In 1999 20+years of shared stable tax occupancy • Provincial use of Fed base and progressivity modulated by use of surtaxes (tax on tax on tax! ) • Various provincial credits ( savings schemes, age) in place

  13. Canada 2000+ • Federal G allows as of 2000 tax on income (TONI): • 9 provinces can now set progressivity :brackets and rates on Federal taxable income • They can still use tax credits

  14. Canada (ROC) 2008 • One flat tax Alberta: 10% rate One bracket • Three (5) to five (1) brackets • Step up 1=>2 varies from 29 591$(NS) to 39 136$ (Sask) larger for 2=>3 • Rates vary between provinces as do outcomes So at 200 000$: • NS PIT=78 153 and Alt PIT= 64 726$ => 20%∆

  15. Three indicators, PIT rates ,Canadian provinces, 2008

  16. Canada 1999-2008-1

  17. Canada 1999-2008 -2

  18. Why these PIT rates • our tax system better meets our own social, economic, fiscal needs NB 2000 • PIT mimicking in Atlantic Canada not elsewhere • Flat tax as fair Alt 2000 drop in # of taxed individuals • Five brackets in BC is ‘fairer’ BC 2000

  19. An aside on the USA 2008 • Seven states do not have a PIT • 4 states use flat tax and 4 use tax on tax • Mean number of brackets is 4.4 Max is 10 • No central collection but offered in 1970s • CV rates: USA VS Canada • 1st rate:0.64 VS 0.24 • Highest rate 0.63 VS 0.19

  20. Conclusion • Greater freedom in defining PIT since 2000 was used by Canadian provinces to vary progressivity • Neighbours of flat Alberta exhibit highest BC and lowest Sask statutory progressivity • Difference smaller in burden-tax competition? • No unravelling of Canada

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