With the new Alberta NDP government's recent abandonment of the flat-tax and its introduction of progressive taxation, it's worth seeing how Alberta's new effective tax rates compare to the rest of Canada.
The Alberta NDP's Income Tax Plan
The new Alberta NDP government recently announced the end of the personal income flat tax and a move towards progressive taxation on the wealthiest of Albertans via Bill 2. The new tax system includes the existing 10% tax rate up to $100,000, and new rates of 12% over 125,000; 13% over $150,000; 14% over $200,000; and 15% over $300,000.
Properly Comparing Income Tax Regimes Across Provinces
I'm interested in seeing how Alberta's new income taxes will vary across income earners, and how this compares to other Canadian provinces. To do this, it's necessary to calculate the "effective tax rate" curve for each province. What do I mean by an effective tax rate curve? Well, an individual's effective tax rate is the percentage of their gross income that is owed in provincial income taxes. The effective tax rate curve is how this rate changes for varying levels of income.
I calculate the effective tax rate curve for each province based on gross personal income (e.g., excluding capital gains or dividend income), from $0 to $500,000, in $500 increments. I use the tax brackets, tax rates, and income exemption limits for each province based on the 2014 tax year. This base scenario excludes some tax exemptions that only apply to select categories such as Age (> 65 yrs), Disability, Caregiver, and Spouse or Common Law. It's worth pointing out that in general, Alberta is more generous in these tax exemptions than other provinces.
I have attempted to capture all the important components in my calculations, but will adjust my figures if anyone can point out any important missing parts.
Effective Tax Rate Curves: Alberta and the rest of Canada
High Income Tax Provinces
Figure 1 shows the Effective Tax Rate Curves for Alberta (with the flat tax and the NDP's new rates), along with the provinces that generally tax everyone higher across the board than Alberta (i.e, all provinces except for British Columbia and Ontario). A few remarks here:
What I've done in Figure 2 is subtract Alberta's Effective Tax Rate from each of the higher taxing provinces; this way it will be easier to see where on the income scale an Albertan saves the most and least. The more negative a point is on the graph, the lower an Albertan at that gross income level pays compared to the other province. A few remarks:
British Columbia and Ontario
British Columbia and Ontario are worth comparing to Alberta on their own as these are the only two provinces where the majority of Albertans pay higher effective tax rates (both under the flat-tax and the NDP rates). Figure 3 shows these effective tax rates for the three provinces.
Figure 4 shows the effective tax spread between Alberta and Ontario. Positive (negative) means higher (lower) rates in Alberta. Under Alberta's flat-tax, only the working poor ($10-26k gross), and very high income earners ($194k+) paid lower effective tax rates than Ontario.
Based on 2012 income and population data, for Albertans earning at least $10k+, around 64% of Albertans paid more than Ontario rates (those in the $26-194k range). With the NDP rates, high income earners will pay higher effective tax rates than Ontario, just like any other Albertan earning more than $26k.
Figure 5 shows the effective tax spread between Alberta and British Columbia. Again, positive (negative) means higher (lower) rates in Alberta. Under Alberta's flat-tax, only the working poor ($10-26k gross), and high income earners ($147k+) paid lower effective tax rates than British Columbia.
Based on 2012 income and population data, for Albertans earning at least $10k+, around 63% of Albertans paid more than British Columbia rates (those in the $26-147k range). With the NDP rates, those earning above $147k will stay pay less than British Columbia, but by a largely reduced margin that flattens out at about $315k.
With the exclusion of British Columbia, Ontario, and a slice of Newfoundland (when earning $500k+), Albertans pay lower (personal) effective income tax rates than the rest of Canada. This has been preserved under the NDP's new rates since they don't kick in until one earns $125k in taxable income, and because even the NDP's highest tax bracket (15%), is lower than the highest tax brackets of these other provinces. More important in my opinion, the new rates raise substantial new revenues ($0_.8 to $1 billion in 2016-2017) by largely eliminating the massive tax savings that the wealthiest of Alberta income earners received under the flat tax when comparing to the rest of what Canada taxes at.
As well, it's worth saying that while the majority of Albertans pay higher effective income tax rates compared to British Columbia and Ontario, when you factor in the other forms of taxation that British Columbia and Ontario has - e.g., health care premiums and sales taxes - most Albertans across the income spectrum almost certainly pay lower levels of overall taxation. Incorporating these other forms of taxation may be in the works for a future post!