Effective Marginal Tax Rate

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marty123
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Effective Marginal Tax Rate

Post by marty123 »

About 5 years ago, Adrian2 had done a great job pointing out that the highest marginal tax rate (MTR) for most families was around $36,000 and approached 70%. As some tax brackets since move, and programs changed a bit, I thought it was a good time to revisit this. Unfortunately, 70% may remain common, with EMTR rates that potentially reach 80%+ in some cases. We can even reach a situation where more than 90% of the income is lost in a certain bracket, due to taxes, lost credits, lost benefits and payroll taxes. It's not meant as a tax planning exercise, so please do your own DD before using what's below.

That's only for Ontario, because, well, I've spent way too much time on this already!

The concept of Effective Marginal Tax Rate (EMTR) has since surfaced, to describe the adjusted MTR when eligibility to social benefits is included.

By adding the Ontario Health Premium, we get the following mess for 2011:

Code: Select all

000000 - 009104        0% (Ontario Basic Amount ends)
009104 - 010527     5.05% (Federal Basic Amount ends)
010527 - 020000    20.05% (First Ontario Health Tax bracket begins)
020000 - 025000    26.05% (First Ontario Health Tax bracket ends)
025000 - 036000    20.05% (Return to first bracket)
036000 - 037775    26.05% (Second Ontario Health Tax bracket starts)
037775 - 038500    30.15% (Second Ontario tax bracket starts)
038500 - 041544    24.15% (Second Ontario Health Tax bracked ends)
041544 - 048000    31.15% (Third Ontario Health Tax bracket starts)
048000 - 048600    46.15% (Third Ontario Health Tax bracket ends)
048600 - 066514    31.15% (Second Federal tax bracket starts)
066514 - 072000    32.98% (First Ontario surtax rate starts)
072000 - 072600    57.98% (Fourth Ontario Health Tax bracket starts)
072600 - 075550    32.98% (Fourth Ontario Health Tax bracket ends)
075550 - 078361    35.39%
078361 - 083088    39.41%
083088 - 128800    43.41%
128800 - 200000    46.41%
200000 - 200600    71.41% (Last Ontario Health Tax bracket)
200600 -           46.41%
The above table is as simple as it can get. The rest of the EMTR components cannot be integrated for all taxpayers due to eligibility, some are based on family income while others are based on expense levels. These next ones are neither family driven, nor expense driven:

Age Amount
Federal: gets clawed back between 32,504 and 75,475, adding 2.25% to EMTR.
Provincial: gets clawed back between 33,091 and 62,725, adding 0.76% to EMTR.

This basically pushes the highest EMTR to 60.23% between $72,000 and $72,600.

Old Age Security Clawback
Starts at $67,668. Clawed back at 15% for taxable income above that amount until all OAS is clawed back around $109606 (assuming the maximum is paid). Because this amount is pre-tax, the EMTR impact is not 15%, but rather around 10% for the first few thousands (taxed at 32.98%) and 8.5% for the last few thousands (taxed at 43.41%). For the small Ontario Health Tax bracket between $72,000 and $72,600, after-tax clawback is equivalent to 5.97% (bringing the EMTR from 60.23% (including Age Amount clawback) to 66.2%.

These following EMTR adjustments are based on family income, which makes them difficult to integrated into the standard MTR/EMTR table. The EMTR quoted in this section are for single parents, single-earner families or families with the lowest-earning spouse making less than the spouse credit.

Canada Child Tax Benefit
It is $1,348 per child for the first 2, and $1,442 per child after the second. It is clawed-back based on family income above $40,970 at a rate of 2% (for families with 1 child) or 4% (for families with 2+ children).

The impact for families with 1 child is that the EMTR increases by 2% between $40,970 and $108,370. For families with 2 children, the EMTR increases by 4% for the same range, while families with more children continue to see their EMTR reduced by 4% until the benefit is expired (at $144,420, $180,470, $216,520 for 3,4,5 children).

For a single earner family with a $200+ income and 5+ children, this pushes the maximum EMTR to 75.41% for the mini-bracket between $200,000 - $200,600. If a parent is over 65, the EMTR can be pushed to 70.2% between $72,000 and $72,600 of personal income when combining CCTB, Age Amount and OAS clawbacks.

Note: the UCCB or RDSP income are not considered in calculating the CCTB clawback.

National Child Benefit Supplement
1 dependent: $2,088 clawed back at 12.2% between $23,855 and $40,970.
2 dependents: $3,936 clawed back at 23% between $23,855 and $40,970.
3 dependents: $5,694 clawed back at 33.3% between $23,855 and $40,970
4 or more: additional $1,758 clawed back at 33.3% after $40,950 (up to $46,224 at 4 dependents, or $51,500 at 5 dependents)

For a single-earner family with 3 children, that pushes the EMTR above 50% between $23,855 and $40,970, with a peak of 63.45% between $37,775 and $38,500. It's also just below 60% between $36,000 and $37,775 and between $23,855 and $25,000.

Note that if the single-earner with 3 children is above 65, the top clawback is pushed another 3% up after 32,000-33,000 (to a maximum of 66.46%).

GST/HST tax credit
There are several possibilities depending on marrital status and number of children, but the clawback is 5% starting at $32,506, and ending at $37,506 for a single, $42,506 for a couple, $47,746 for a family of 4 and $50,366 for a family of 5.

(Note, the above are 2010 thresholds, not 2011, they will go up a few hundred dollars)

Our top EMTR is now 68.45% betweem $37,775 and $38,500 for a single-earner with 3 children (71.46% if the single-earner is a senior).

Ontario Sales Tax Credit
Single: Clawed-back at 4% between $20,000 and $26,500.
Couple: Clawed-back at 4% between $25,000 and $38,000.
Family of 4: Clawed-back at 4% between $25,000 and $51,000 (up to 57,500 for our family of 5).

So we've now increased our EMTR to 72.45% for our family of 5 between $37,775 and $38,500 (75.46% if also a senior). Not that this highest EMTR threshold is small ($725), but our family of 5 will still average about 70% of taxes and lost benefits between roughly $36K and $46K.

Ontario Child Benefit
$1,100 per child, clawed back at 8% starting at $20,000. Our family of 5 now has an EMTR of 80.45% between $37,775 and $38,500 (and averaging over 75% between $36,000 and $46,000). Add 3% for a senior.

Ontario Energy and Property Tax Credit
Non refundable tax credit. Gets clawed back at 2% (maximum EMTR of 82.45% (or 85.45% for a senior)).

CPP & EI
Even if these are not considered as taxes, they’ll reduce the take home pay by 4% for CPP (after 20% credit) and 1.4% for EI. Combined with the maximum 80.45% So the marginal take home pay for head of a family of 5 in the worst EMTR bracket could be as little as 12% (or 9% if the single-earner is a working senior).

The following are less common (or less automatic) credits and benefits that may also get clawed back. If they don’t increase the maximum EMTR at the worst bracket, they may help increase the nearest tax brackets:

- The Child Disability Benefit start getting clawed back after $41,000. (2% for 1 child, 4% for 2+)
- The medical expense credit may be clawed back at 3% of the lowest earner's net income, which doesn't affect our single-earner family of 3+ children, but may affect others.
- GIS clawed back at 50%
- Caregiver amount for parents and grandparents is clawed back entirely between their income of $14,600 and $18,900.
- Infirm dependent amount clawed back entirely for adult children earning between $6,000 and $10,000.

So, a 65-year old man(*) with a stay at home wife, 3 children (including 1 disabled) who is delaying CPP will lose 93% of his pay cheque between $37,775 and $38,500, and probably an average of 85% of any earned income between $33,000 and $42,000.

(*): I'm not being chauvinistic. 65-year old men with minor children are much, much more common for biological reasons.
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Re: Effective Marginal Tax Rate

Post by adrian2 »

Add to the excellent post above the Ontario Tax Reduction mechanism, which makes people otherwise paying less than a few hundred dollars in Ontario tax a full credit resulting in zero Ontario liability. This is clawed back at a rate equal to the first provincial tax bracket, which doubles the rate of the first Ontario tax bracket for people just above that threshold. Note that if one has lots of credits such as tuition, medical, donations, margin interest, dividend tax credit etc, is it very possible to have an annual taxable income of 20-40k and the above situation applicable.
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Re: Effective Marginal Tax Rate

Post by newguy »

There is also increased RESP, but those situations are probably rare.

Look at real world examples. At gf's work many people won't do overtime because they know it reduces benefit payments and increases taxes. So these small few thousand dollar brackets have an effect. Sometimes the expenses to work an extra day outweigh the take home pay.

If you're looking at this for a new full time job you should only take the beginning and end points. What happens in between is only useful for things like deciding to work one more day or to optimize the rrsp deduction.

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Re: Effective Marginal Tax Rate

Post by Peculiar_Investor »

There is some excellent work here. When can we expect a) the analysis for the other 9 provinces or b) the topic title to change to Ontario Effective Marginal Tax Rate?
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Re: Effective Marginal Tax Rate

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newguy wrote:There is also increased RESP, but those situations are probably rare.
Yes, there would come a point where an extra earned dollar disqualifies you from the CTB supplement, which means you can't get the Canada Learning Bond portion of the RESP ($500 + $100/yr). You'd could also lose the extra 20% of the first $500 contribution for families earning up to ~$41,500 or the extra 10% up to $83,000.
adrian2 wrote:Add to the excellent post above the Ontario Tax Reduction mechanism, which makes people otherwise paying less than a few hundred dollars in Ontario tax a full credit resulting in zero Ontario liability.
Thanks. I had forgotten that (and probably more). A quick look at the tax form shows that our single-earner family of 5 earning $37,500 would get all its Provincial tax waived. Seeing the marginal tax rate is 9.15% above $37,000, we may very well have entered a territory where the EMTR approaches 100% in that small bracket.
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Re: Effective Marginal Tax Rate

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Peculiar_Investor wrote:When can we expect a) the analysis for the other 9 provinces or b) the topic title to change to Ontario Effective Marginal Tax Rate?
The bulk of the numbers apply across the country but you're welcome to present the Alberta specific analysis. :)
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Re: Effective Marginal Tax Rate

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Peculiar_Investor wrote:There is some excellent work here. When can we expect a) the analysis for the other 9 provinces
Be my guest. I promise to not complain when you post the AB version :wink:
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Re: Effective Marginal Tax Rate

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marty123 wrote:
Peculiar_Investor wrote:There is some excellent work here. When can we expect a) the analysis for the other 9 provinces
Be my guest. I promise to not complain when you post the AB version :wink:
Quebec has a calculator here. The computer tax packages also do a good job.

http://www.budget.finances.gouv.qc.ca/B ... te_en.html

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Re: Effective Marginal Tax Rate

Post by Peculiar_Investor »

marty123 and adrian2, my purpose was not to complain, as I stated at the start of my post,
Peculiar_Investor wrote:There is some excellent work here.
My quibble is tax rates are very different across the country and care must be taken when dealing with this fact. Within the context of the detailed analysis, marty123 makes it clear
marty123 wrote:That's only for Ontario, because, well, I've spent way too much time on this already!
I just was offering the view that perhaps topic title should reflect an Ontario based analysis. My apologizes if I've offended and detracted from the effort to share this detailed analysis.
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Re: Effective Marginal Tax Rate

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Peculiar_Investor wrote:I just was offering the view that perhaps topic title should reflect an Ontario based analysis. My apologizes if I've offended and detracted from the effort to share this detailed analysis.
No offense taken :D

Either moderators will consider the Ontario illustration an example of how the effective Marginal Tax Rate is much higher than our financial porn authors tell us (i.e. "people in low income shouldn't save outside their RRSP" is probably the worst advice), or they'll rename it to include Ontario. I'll leave it up to them, as users can't change the thread name. At first I wanted to dig out Adrian's original thread, but it's in the basement archives.
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Re: Effective Marginal Tax Rate

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Peculiar_Investor wrote:My quibble is tax rates are very different across the country and care must be taken when dealing with this fact.
I'd change "very different" to "somewhat different" and would ballpark the differences to be within +/- 10%.
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Re: Effective Marginal Tax Rate

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newguy wrote:Quebec has a calculator here.

http://www.budget.finances.gouv.qc.ca/B ... te_en.html

newguy
Wow. Great tool, and probably most valuable for people who game the system, courtesy of the Quebec Government. :roll:

- $40,000 family income, stay at home spouse and 3 children. I got $43,474 disposable income.
- $41,000 family income, stay at home spouse and 3 children. I got $8.00 less (effectively "taxed" at 100.8% on the extra $1,000)

with 2 children:

- $40,000 + stay at home spouse + 2 children = $40455
- $41,000 + stay at home spouse + 2 children = $40542 (91.3%)
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Re: Effective Marginal Tax Rate

Post by Peculiar_Investor »

May I also suggest that the OP consider making the detailed analysis available via http://www.finiki.org, perhaps under http://www.finiki.org/index.php?title=Tax_Planning
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Re: Effective Marginal Tax Rate

Post by Bylo Selhi »

FWIW I recall seeing an article in one of the papers a few days ago about marginal effective tax rates but I can't seem to find it now. As I recall the author claimed that under some situations the rate could reach 100%.
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Re: Effective Marginal Tax Rate

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marty123 wrote:- $41,000 family income, stay at home spouse and 3 children. I got $8.00 less (effectively "taxed" at 100.8% on the extra $1,000)
WTF :shock: I gotta go F.

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Re: Effective Marginal Tax Rate

Post by epson600 »

We can also add GAINS to the list for ontario residents.

A senior in ontario with only OAS-GIS income would be eligible for $1000 on top of the OAS-GIS money they would receive.

The clawback for GAINS is 50%; add the 50% for the GIS and you have a 100% EMTR on the first $2000 of income earned from other sources (for example a small CPP)

This table illustrates the situation
http://www.rev.gov.on.ca/en/lists/itrp/1934.html?tid=1
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Re: Effective Marginal Tax Rate

Post by pmj »

Just a minor quibble:
Our top EMTR is now 68.45% betweem $37,775 and $38,500 for a single-earner with 3 children (71.46% if the single-earner is a senior).
.. and ..
So we've now increased our EMTR to 72.45% for our family of 5 between $37,775 and $38,500 (75.46% if also a senior).
There can't be too many seniors who are also receiving benefits for 3 kids...
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Re: Effective Marginal Tax Rate

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pmj wrote:Just a minor quibble:
Our top EMTR is now 68.45% betweem $37,775 and $38,500 for a single-earner with 3 children (71.46% if the single-earner is a senior).
.. and ..
So we've now increased our EMTR to 72.45% for our family of 5 between $37,775 and $38,500 (75.46% if also a senior).
There can't be too many seniors who are also receiving benefits for 3 kids...
It happens a lot more than before. I have a brother with 2 children that will turn 18 when he is 66 and 69. It just requires a man in his late forties starting to have children with a woman in her late 30s. That's for the old fashion relationships. Remember that it's not impossible for a 65-year old man to live common-law with a 50-year old woman that had children in her mid-30s. People aren't having children in their 20s as much as they used to, and that's been going on for a generation.
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Re: Effective Marginal Tax Rate

Post by adrian2 »

marty123 wrote:Thanks. I had forgotten that (and probably more).
Just a few of the other ones I have seen applicable (BTW all of them at the federal level):
- 3% clawback of medical expenses over the threshold
- 15% clawback of working income tax benefit, for those in the lower part of the first tax bracket (and zeroth tax bracket, too)
- 25% for the refundable medical supplement.
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Re: Effective Marginal Tax Rate

Post by OhGreatGuru »

An interesting point of view. But I think there is a problem with the methodology. Once income reaches the level where benefits have all been clawed back, and the credits reduced to zero, the marginal tax rate then falls back down below 50%.

PS: It also seeemed to me unusual that the "typical" tax payer is +65 years of age (collecting OAS and eligible for the age amount) but aslo has multiple minor children.

PPS: The "Step Funcion" of the Ontario Health Premium does induce a high marginal rate every time you cross a threshold, and that is one of the reasons why II dislike it too But is that really statistically meaningful?

PPPS: By selecting your data you could probably prove that the death of a minor child or spouse suddenly propels you into a higher marginal tax bracket.

All that being said, I agree the analysis points up some inequities, not to mention ridiculous complexities, in all our income-tested credits and benfits.
Last edited by OhGreatGuru on 03 Apr 2011 09:21, edited 2 times in total.
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Re: Effective Marginal Tax Rate

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OhGreatGuru wrote:An interesting point of view. But I think there is a problem with the methodology. Once income reaches the level where benefits have all been clawed back, and the credits reduced to zero, the marginal tax rate then falls back down below 50%.
But that's one of the points of this thread: contrary to "common wisdom", at least some people in the first and second tax bracket pay a lot more (marginal) tax than what's supposedly the top tax bracket. Around $35k ... $42k annual income there are real people paying a real 60%..70%..100% marginal tax rate. These people are very much served by contributing to an RRSP, against the usual advice that RRSP are a "bad deal" for someone in the lowest "official" tax bracket.

Yes, once your salary reaches the "upper middle class" levels of $60k...100k you're more or less back to the "usual" tax brackets never (or in rarer cases) exceeding 50% MTR.
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Re: Effective Marginal Tax Rate

Post by iluvnascar »

There are a couple of other "clawbacks" that haven't been mentioned.....although I think they are, for the most part, federal.

1. 30% of EI benefits paid to many recipients are clawed back progressively above a certain income threshhold. The most ridiculous aspect of this is that after paying out the money at some point in the year - and after having the recipients presumably spend the benefits received.........they have to pay back the 30% when they file their taxes the following year.

2. The age exemption - the extra personal exemption for those age 65 and over - applies completely only if you make under about $32,000. From $32 - $75 thousand, it is progressively reduced and eventually eliminated.
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Re: Effective Marginal Tax Rate

Post by Flights of Fancy »

FWIW - there are other social benefits, depending on your province of residence, that are tied into net income and clawed back as net income rises. The one that comes most readily to mind is subsidized child care in the City of Toronto: if you are eligible for subsidy, you can boost your subsidy income by making RRSP contributions. Perverse but true.
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Re: Effective Marginal Tax Rate

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iluvnascar wrote:2. The age exemption - the extra personal exemption for those age 65 and over - applies completely only if you make under about $32,000. From $32 - $75 thousand, it is progressively reduced and eventually eliminated.
This one was mentioned by the OP.
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Re: Effective Marginal Tax Rate

Post by izzy »

For those who live in a province e.g.Manitoba, which has Pharmacare the deductible is usually dependant on family income which can also result in an increase in the "effective" tax rate if medication expenses are high enough,(our medications alone come to well over $50,000 a year) I'm sure there are similar situations in other provinces too.Not that I'm complaining since in some provinces we would have had to pay the whole shot which would make our "effective" rate very scary indeed,even after deducting medical expenses..
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