Effective Marginal Tax Rate

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
marty123
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Re: Effective Marginal Tax Rate

Post by marty123 »

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%.
True, but it doesn't change the fact that careful tax planning, and RRSP contributions are much more important to a low-income family than to an upper middle-class one, because the benefits (of getting 60%, 70% or 80% back) are significantly higher than for someone who gets less than 50% back.
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.
I didn't think I presented it as a typical scenario. The original post was meant to both highlight the 70%+ tax and benefit clawback rate that any low-income family may pay, as well as the highest possible effective MTR that exists in our country (which is maximized for a working senior with children). A senior with children is not typical, but it's plausible and relatively frequent.

I started the post with the Age Amount and the OAS clawback for a simple reason: they are the only clawbacks that are not complicated by family income or expense levels.
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?
It is meaningful, and not only for the small tax bracket. If you look at the $72,000-$72,600 step, you can't assume it's only important to those making between between $72K and $72,600. If you have a taxable income of $78,000 and contribute $2450, you'll get to the beginning of your current tax bracket and get a 35.69% refund. However, if you can spare additional RRSP savings to bring your taxable income to $72,000, you'll get 37% back from the extra contribution (excluding other clawbacks, if any). These micro brackets mess up common logic and are worth extra calculations for those seeking to optimize tax planning.

Our tax planning always include considerations for these micro tax brackets, because going down to the previous health tax bracket (rather than just the previous income tax bracket) may give reasons for increasing RRSP contributions beyond the (sometimes suggested) beginning of the current tax bracket.
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Arby
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Re: Effective Marginal Tax Rate

Post by Arby »

http://www.taxtips.ca/marginaltaxrates.htm provides tables showing marginal tax rates for 2012 for various sources of income (e.g. ordinary income, capital gains, dividend income). In Ontario, the marginal rate for dividend income has increased in 2012.
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RRIFmetic vs MTR

Post by Benchwarmer »

I am at the stage of my life where I will be making decisions on the value of work vs personal time, so I find this an interesting thread. Thanks to marty & adrian for your research. When I find time I will do one for Alberta, but using only those parameters that affect me (many of them such as child tax credit do not).

Of all the factors listed in the original post, I assume that RRIFmetic takes into account the following: age amount, OAS clawback, CPP, GIS clawback? And that none of the other ones are accounted for?
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Re: RRIFmetic vs MTR

Post by steves »

Benchwarmer wrote:I am at the stage of my life where I will be making decisions on the value of work vs personal time, so I find this an interesting thread. Thanks to marty & adrian for your research. When I find time I will do one for Alberta, but using only those parameters that affect me (many of them such as child tax credit do not).

Of all the factors listed in the original post, I assume that RRIFmetic takes into account the following: age amount, OAS clawback, CPP, GIS clawback? And that none of the other ones are accounted for?
Yes it does. As well the $2000 pension tax credit, dividend tax credit, charit don credit, HCP, EI & CPP withholding, plus various provincial surtaxes/credits.
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Re: Effective Marginal Tax Rate

Post by epson600 »

So I did an EMTR bracket for someone I know and I'd figure I'd post it here in case its useful to someone else.

Case: 2014 tax year, Ontario, senior, single, living in on own home, pays $3500 property tax, income levels 20k to 50k. I started the brackets at 20k as by then they should have used up the Basic, Age, Pension credits and will assume that they are past GIS eligibility since there are other threads here that deal with that.

Fed/ON Income Tax, -$40120@20.05%, $40120-43953@24.15%, $43953-70651@31.15%
Ontario Health Premium $20000-25000@6%, $36000-38500@6%, $48000-48600@25%
GST Credit $35465-43945, add 5%
Ontario Sales Tax Credit, $22058-29233, add 4%
Ontario Energy & Prop Tax Credit $27572-(79362 @ $3500/pa property tax), add 2%
Ontario Seniors Home Prop Tax Grant $35000-50015, add 3.33%
Federal Age Credits $34873-80979, add 2.25%
Ontario Age Credits $33146-66619, add 0.9075%

Code: Select all

-20000	     20.05	(FED-ON 20.05%)
20000-22058	26.05	OHP start
22058-25000	30.05	OSTC start
25000-27572	24.05	OHP end
27572-29233	26.05	OPETC start
29233-34873	22.05	OSTC end
34873-35000	24.30	FEDAGE start
35000-35146	27.63	OSHPTG start
35146-35465	28.54	ONAGE start
35465-36000	33.54	GST start
36000-38500	39.54	OHP start
38500-40120	33.54	OHP end
40120-43495	37.63	tax bracket bump (FED-ON, 24.15%)
43495-43953	32.63	GST end
43953-48000	39.64	tax bracket bump (FED-ON, 31.15%)
48000-48600	64.64	OHP start
48600-50015	39.64	OHP end
50015-	     36.31	OSHPTG end
past this you still have some OPETC, FEDAGE, ONAGE credits, and ON surplus taxes/OAS clawbacks will kick in at some point as well but that was beyond the scope of what they needed
METR20k50k.PNG
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Re: Effective Marginal Tax Rate

Post by cashinstinct »

Someone in Québec, Claude Lafrenière, is doing such exercices for many different scenarios.

http://cqff.com/claude_laferriere/accueil_courbe.htm

There are 37 scenarios in total, depending of couple or not / % of salary each / number of kids / kind of daycare / age....

pretty interesting, marginal tax rate can be more than 85% for low-income parents with 1 child in daycare.
http://cqff.com/claude_laferriere/courb ... be-241.pdf
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Re: Effective Marginal Tax Rate

Post by steves »

Sigh...
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newguy
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Re: Effective Marginal Tax Rate

Post by newguy »

steves wrote:Sigh...
Why?

I read some the Quebec scenarios (note some show > 100% emtr) and the one closest to my situation seemed wrong. I guess I'm supposed to read 20 pages of french to figure out why...

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Re: Effective Marginal Tax Rate

Post by epson600 »

So here's an interesting case...

The Ontario Electricity Support program that was created recently gives a monthly rebate on your utility bill based on your after tax income. According to the table; at $28,000 or less a household of one gets $540 for the year. At $28,001 they would get nothing.

One dollar of after tax income gets an effective marginal tax rate of $540. What % rate does that work out to? I think I've found the highest METR ever :lol:
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adrian2
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Re: Effective Marginal Tax Rate

Post by adrian2 »

What exactly is "after tax income"?

[Rhetorical section]
Look at a tax return and describe it to me, line such and such.
Does it take into account the HST credit? The Ontario Trillium benefit? The CCTB? RRSP contributions?
[/Rhetorical section]

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Re: Effective Marginal Tax Rate

Post by Peculiar_Investor »

adrian2 wrote: 11 Jul 2017 19:57 What exactly is "after tax income"?
One would think the agency that runs the program would define it. But ONTARIO ELECTRICITY SUPPORT PROGRAM - FAQ uses exactly that terminology without any reference to any specific lines from the T1 return.
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Re: Effective Marginal Tax Rate

Post by longinvest »

epson600 wrote: 11 Jul 2017 19:25 According to the table; at $28,000 or less a household of one gets $540 for the year. At $28,001 they would get nothing.
That's a 54,000% tax on the additional dollar!

Only an idiot who doesn't understand taxation would design such a thing. (Sorry for the rant, but this is just too much).
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Re: Effective Marginal Tax Rate

Post by AltaRed »

Except I never would consider that a tax in the first place. It is simply elimination of a social subsidy/welfare based on an,albeit abrupt, means test. Just like OAS that is arbitrarily given at a certain age and clawed back based on means.
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Re: Effective Marginal Tax Rate

Post by DenisD »

Yabbut, we're talking about the effective marginal tax rate. :wink:
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adrian2
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Re: Effective Marginal Tax Rate

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longinvest wrote: 11 Jul 2017 21:28
epson600 wrote: 11 Jul 2017 19:25 According to the table; at $28,000 or less a household of one gets $540 for the year. At $28,001 they would get nothing.
That's a 54,000% tax on the additional dollar!

Only an idiot who doesn't understand taxation would design such a thing. (Sorry for the rant, but this is just too much).
A Wynne/win design! :evil:
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Re: Effective Marginal Tax Rate

Post by adrian2 »

Hat tip to PrefBlog:

Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions
Governments need to be cautious of discouraging work among certain segments of the population, such as mothers and secondary earners in a family, because taxes and benefit programs can interact to potentially create extraordinarily high effective tax rates.

Because benefit programs pile up at the lower end of the income scale, low-income families’ METRs have generally been higher than those of higher-income families. In some cases, the lower-earning parent in a dual-earner family of four might lose more than 70 cents per extra dollar of earnings. Nationally, 9 percent of lower-earning parents in dual-income families with children face a METR above 50 percent, and 13 percent of stay-at-home parents face a PTR above 50 percent.

[...]

Recognizing the work disincentive stemming from high effective tax rates, the Quebec Taxation Review Committee, chaired by Sherbrooke Prof. Luc Godbout, proposed in 2015 a new initiative known as a “tax shield.” Its intent was to offset the loss of income-tested fiscal benefits as families earn additional income. The Quebec government followed through on the recommendation, and beginning in 2016, the new Quebec tax shield has been partly compensating workers for the loss of the work premium and the tax credit for childcare expenses – but only in the first year after they take on more work. On the assumption that work decisions are mostly influenced by short-term financial considerations, the tax-shield approach may enable governments to provide relief from high effective tax rates at a low fiscal cost (because relief is only offered for one year after taking on extra work) while maintaining the same level of generosity of targeted fiscal benefits. It will be interesting to monitor the effectiveness of this new measure in Quebec.
Previous discussion: Highest marginal tax rate and at what income level applies?!
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Re: Effective Marginal Tax Rate

Post by Norbert Schlenker »

adrian2 wrote: 08 Jan 2019 16:42The Quebec government followed through on the recommendation, and beginning in 2016, the new Quebec tax shield has been partly compensating workers for the loss of the work premium and the tax credit for childcare expenses – but only in the first year after they take on more work. On the assumption that work decisions are mostly influenced by short-term financial considerations...
Some wishful thinking here, it seems. "Let's see, our means tested benefit suite disincents people to go to work; recipients are doing a rough calculation that they won't be much better off, if at all, by working so let's shield them for a year." A year goes by and the shield goes poof. Is the Quebec government counting on people having forgotten how to do that same rough calculation a year later?

I've done at least a hundred tax returns for low income people for a dozen years now. They may not have much money but they aren't dumb. They know the ins and outs of every single federal and provincial support mechanism, and they know how to game everything.
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Re: Effective Marginal Tax Rate

Post by coghlan »

At first I thought the METR numbers seemed quite high, and although I question the CCB dropping by $4K when family income jumps from $30K to $60K I can see how the combination of fed/prov tax, CPP, EI, CCB clawback and loss of the spousal credit can result in very high effective tax rates on portions of that 2nd income.
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Re: Effective Marginal Tax Rate

Post by Shifty1 »

coghlan wrote: 10 Jan 2019 16:01 At first I thought the METR numbers seemed quite high, and although I question the CCB dropping by $4K when family income jumps from $30K to $60K I can see how the combination of fed/prov tax, CPP, EI, CCB clawback and loss of the spousal credit can result in very high effective tax rates on portions of that 2nd income.
With 2 kids, family income going from $30k to $60k would result in a clawback of $9k! For CCB, HST, and Trillium, if in Ontario. Play with results for yourself with the calculator - https://www.canada.ca/en/revenue-agency ... lator.html
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