In my last post, I visualized the income tax implications of the Alberta PC’s proposed 2015 budget. It’s now worth redoing this analysis given the NDP election victory. This post focuses on Alberta only; how are provincial income tax bills expected to change under the NDP, and how does this compare had the PC’s stayed in power? My next post will compare the NDP’s proposed income tax regime to the rest of Canada.
Alberta NDP Income Tax Plan
The Alberta NDP’s Election Platform calls for the top 10% of income earners to pay more in provincial income taxes. In addition to the existing 10% income tax rate on taxable income, there will be a 12% rate on taxable income over $125,000; 13% over $150,000; 14% over $200,000; and 15% over $300,000.
In comparison, the Progressive Conservative's (PC) tax plan called for an 11.5% rate on taxable income over $100,000 by 2019 (see pg 88 of the PC's 2015 Budget). As well, they called for a health care tax that would begin at $50,000 of taxable income, increase in $200 increments for every $20,000 of additional taxable income, and cap out at $1,000 (at $130,800 of gross income) (see pg. 86 of the PC’s 2015 Budget)
My last post detailed my income tax calculation methods, so I’ll keep my explanation here short. I’m interested in calculating two main things:
1. An individual’s provincial income tax bill. This is calculated based on earned personal income (e.g., excludes capital gains or dividend income) that I let vary from $0 to $500,000, in $500 increments. This is based on the tax year of 2014 (i.e., uses the provincial income exemption limit for 2014) and factors for all the different tax brackets a person in Alberta may fall under.
2. An individual’s “effective tax rate”. This is simply the percentage of gross income owed in provincial income taxes, for varying levels of gross income. The effective tax rate is a curve that starts at 0% - because of the provincial income exemption limit - and approaches the top marginal provincial tax bracket at high levels of income.
Effective Tax Rates Under the NDP
To provide the best context to the NDP's expected effective tax rates, I've included the effective tax rates with our soon-to-end flat-tax regime and from the PC's election platform. For the PC scenario, I used the income tax brackets proposed for 2019 – but still used the tax year 2014 for income exemption limits - and factored in their proposed health care tax.
In this first graph, let's address what's I'm sure is on everyone's mind: why is the PC plan's effective tax rate curve all squiggly? This is caused by the design of the proposed health care tax, which - and I think this is the simplest way of putting it - taxes income at a constant rate for a bit, maxes out at $200 for awhile, kicks in again after a bit, maxes out at $400 for awhile, and so on until reaching $1,000. It was a weird and awkward thing - there, I said it.
With our flat-tax regime as a baseline, the NDP plan will increase effective tax rates on those with gross income exceeding about $144,000, while the PC plan would increase effective tax rates starting at about $68,000.
Despite the NDP plan having a higher top marginal tax bracket (15%) than the PC plan (11.5%), those earning between about $68,000 and $238,000 will face a lower income tax bill than what the PC plan called for, with only those earning above $238,000 paying more. About 21.5% of Albertans earn between this $68,000 to $238,000 range, and just over 1.5% of Albertans earn $238,000 or more (based on 2012 tax filer data).
Incremental Tax Increases ($) under the NDP plan and PC plan
Using our flat-tax regime as a baseline, this next graph shows how much more Albertans will pay under the NDP plan, as well as what the PC plan called for. Starting at $68,000, one would pay more taxes under the PC plan compared to the NDP plan, with this tax spread hitting a maximum of $1,329 at $152,000 of gross income. The tax spread between the NDP and PC plan diminishes beyond this until at $239,000, Albertans will pay more with the NDP plan compared to the PC's.
Similar to the graph above, this graph shows how much extra - as a percentage of gross income - that will be collected as provincial income taxes.
What's most interesting to me here is that although the AB NDP tax plan only focuses on increasing taxes on the top 10% of Alberta earners, only about the top 1.5% of Albertans will face a higher tax bill compared to what the PC plan called for. As well, the roughly 21.5% of Albertans who earn just below this will face a lower tax bill compared to what the PC plan called for.
Still, taxes are going up on the top 10% of Alberta earners, and it can be asked whether we are being too "progressive", that we are excessively soaking the rich. What I'll show in my next post is that the AB NDP will only be closing the gap on taxing the rich compared to the rest of Canada.