When the infamous American bank robber Willie Sutton was asked by a reporter why he robbed banks, his now-legendary alleged response was “because that’s where the money is.”
Whether he actually uttered those exact words or not, they nonetheless became the basis for “Sutton’s Law,” a colloquial medical phrase referring to the principle of going straight to the most likely diagnosis for a medical condition.
Western governments have traditionally relied on a variation of Sutton’s Law by choosing to impose the highest marginal tax rates on the wealthiest segments of their taxpayers on the basis that, well, they earn most of the nation’s income.
Statistics Canada caused quite a buzz earlier this year when it released data on the top 1%, breaking it down even more granularly to take a close look at what the top 0.1% and even the top 0.01% earn and pay in federal and provincial taxes.
Looking at 2010 tax filing data, the top 1% of Canada’s 25.5 million tax filers accounted for 10.6% of Canada’s total reported income that year. To join this elite club of nearly 255,000 taxpayers, your income would have to have exceeded $201,400. The median age of this group was 51.
What about the super-elite? The threshold for the 25,475 Canadians that make up the top 0.1% was $685,000 of income and the median age was slightly higher at 54. And the super-duper elite or those in the top 0.01%? These 2,550 Canadians, with a median age of 55, reported income of at least $2.57-million in 2010.
So, how much do these groups pay in taxes? Not surprisingly, the higher your income, the more tax you will pay, not just in dollars but as a percentage of income, due to the progressivity of our tax system.
The federal government and all provinces and territories, other than Alberta which has a 10% flat tax, impose a progressively higher tax rate on each dollar of taxable income above a certain threshold. For example, in 2013, you pay 15% federal tax on the first $43,561 and 22% tax on the next $43,562. Once your income is above $87,123, your federal tax rate jumps to 26% until it peaks at 29% for any income exceeding $135,054.
While unlikely, it remains to be seen whether this Thursday’s federal budget could add a fifth federal tax bracket for Canada’s highest income earners, taking a page out of various provincial budgets that have recently introduced higher rates for their richest income earners. For example, earlier this month, B.C. announced its intention to increase its personal income tax rate for B.C. taxpayers earning more than $150,000 by 2.1 percentage points bringing its top marginal federal/provincial tax rate to 45.8%, starting January 1, 2014.
B.C. will be joining Ontario, Quebec and Nova Scotia which all introduced special, high income tax brackets for their wealthiest income earners, although the threshold income levels at which they begin to apply vary wildly. Ontarians earning more than $509,000 in 2013 face a combined federal/provincial marginal tax rate of 49.5% while Quebecers who earn more than $100,000 and Nova Scotians who earn more than $150,000 currently pay tax at combined marginal tax rates of 50%.
This progressivity can help us understand why the top 1% of income earners paid a staggering 21.2% of the total federal and provincial taxes in 2010. The top 10% paid 54.8% of all taxes while the bottom 50% of Canadian income earners contributed 4% towards the collective personal tax bill.
Wondering how this compares with our neighbours to the south, where it’s sometimes said that the rich are richer and the poor are poorer?
This maxim indeed appears to hold true, according to IRS data released earlier this month. To join the top 1% club in the U.S., your 2010 income would have to have exceeded US$369,691 – nearly 85% higher than Canada’s 1% elite income threshold. This group paid 37.4% of total 2010 U.S. personal federal income taxes.
U.S. tax filers with income above US$116,623 represented the top 10% of taxpayers and paid 70.6% of total 2010 taxes. By contrast, the bottom 50% of income earners paid only 2.4% of the total federal income taxes collected in the U.S.
Jamie Golombek is the managing director, tax & estate planning with CIBC Private Wealth Management in Toronto. email@example.com