Low and middle-income Canadians face highest marginal effective tax rates: Study
Low and middle-income Canadians face highest marginal effective tax rates: Study

Canadian families and individuals with incomes between $30,000 and $60,000 are often shouldering the heaviest tax burden, finds a new study by the Fraser Institute. 

These low- to middle-income earners face marginal effective tax rates (METRs) that approach or exceed 50%, reducing the incentive to earn additional income and complicating their financial stability. 

Marginal effective tax rates account for the combined effect of the tax and transfer system and represent an individual’s take-home income.

Individuals and families with incomes between $30,001 and $60,000 face the highest METRs. In Quebec, the METR for a family in this tax bracket is as high as 57%.

“This unfortunately creates a disincentive for earning additional income, as the financial benefits are significantly offset by increased taxes and reduced government benefits,” read the study.

High METRs mean low to middle-income earners have less take-home pay after taxes. In some cases, these individuals and families keep only 40 cents or less for every additional dollar earned due to higher taxes and reduced government benefits at both the federal and provincial levels.  

“Canadian families with modest incomes face high marginal effective tax rates, often higher rates than Canadians in top income tax brackets,” said Jake Fuss, director of fiscal studies at the Fraser Institute. This results from a combination of income taxes, reduced government benefits, and other fiscal mechanisms that punish low- and middle-income families for trying to get ahead.

For instance, the Canada Child Benefit is reduced as income increases. This reduction contributes to the high METRs and compounds lower-income families’ financial challenges.

The average METR across every tax bracket and province is 38%. However, for those who make $30,001 to $60,000, this average climbs to 50%. The METRs in this tax bracket are highest in Quebec at 57% and lowest in British Columbia at 38%.

In most provinces, those who earn between $30,001 and $60,000 annually have higher METRs than those who earn $300,001 or more a year. 

The report suggests a few potential solutions to reduce the burden on low and middle-income families and reduce the barrier to socioeconomic development. 

However, each of the proposed solutions comes with trade-offs.

“There is no low-hanging fruit or easy win-win solution to the issue of high METRs on low-income families,” concluded the report. 

One solution proposed by the study is to reduce clawback rates, the percentage by which government benefits are reduced as income increases. When people earn more money, they earn less from programs such as the Canada Workers Benefit. The clawback effectively functions as an additional tax, reducing the incentive to earn more.

Another solution proposed is to increase the basic exemption amount on earned income which doesn’t get taxed. Canadians do not pay federal income tax on the first $15,000 of their taxable income. Each province has a different value for provincial tax exemptions. 

The final proposal involves reducing statutory taxes on employment income.

While all of these solutions would flatten the METR curve for low- and middle-income individuals or families, government tax revenue would have to be shifted to other economic brackets, which the report deemed to be “a politically costly move.”

The disproportionately high METRs on low- and middle-income families raise questions about fairness and efficiency in Canada’s tax and transfer system, indicating that there is much work to be done to ensure that tax policy encourages, rather than discourages, economic participation and progression for all Canadians.

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