This morning on Kingkade and Kelly, a man named Owen called in to complain about Canada’s tax system. He was hard to decipher at times, but essentially he was complaining that on one of his paycheques, he worked more but earned $150 less than usual.
Roger and Erin were talking about something completely different at the time, so they essentially thanked him for calling and moved back on topic. Thankfully, Roger later pointed out that we operate in Canada based on a marginal tax rate, and that it is not possible to be taxed in a way that working more causes one to earn less.
These false myths are so often perpetuated about taxes that it’s easy to see why people believe them. But why? Many authors have discussed the idea of the Big Lie—from Hitler to Orwell—but the most applicable seems to be Belzer: “If you tell a lie … often enough, people will believe you are telling the truth.”
As Roger very correctly pointed out, it’s not possible to earn a higher gross income and end up with less after-tax income. (Well, it’s possible, but would require a marginal tax rate of over 100%.) To understand why, it helps to consider an example. Note that we will ignore provincial income taxes for brevity (though they work the same way, except in Alberta where there is a flat income tax of 10%). We will also assume only the basic personal tax credits (a fairly safe assumption, though including them would simply increase the amount of initial income that is not taxed).
- 0% from $0 – $11,138.
- 15% from $11,139 – $43,953.
- 22% from $43,954 – $87,907.
- 26% from $87,908 – $136,270.
- 29% over $136,270.
The crucial distinction is that Owen is not taxed at 22% on all $60,000! His first $11,138 is not taxed. The next $32,814 ($43,953 – $11,139) is taxed at 15%. Only the final $16,046 ($60,000 – $43,954) is taxed at 22%.
Imagine Owen gets a raise of $30,000, which would put him in a higher tax bracket. Although this “higher tax bracket” refers to the highest amount of tax he pays, he only pays it (26%) on his final $2,092 of earnings ($90,000 – $87,908). He still pays the relevant rates (0%, 15%, and 22%) on each group of earnings up to that point (as per the list and previous calculations above).
Owen’s fear that he will somehow bring home less money on a higher income is grounded in his mistaken belief that he will be paying the new tax rate on his entire income. Let’s consider a more extreme example.
Say I earn $11,138. As I am at the threshold of the personal basic amount (for 2014), I will pay no federal income tax. But now my boss wants to give me a raise to $12,000.
Owen would tell me to stop! An income of $12,000 would be taxed at 15%, meaning I would lose $1,800 to the government and only bring home $10,200. Clearly this is less than I made before; that damn government is “keeping me from getting ahead” (he said something along those lines).
Actually, my first $11,138 of income would remain untaxed. Only the final (remember, Owen—marginal) $862 would be taxed at 15%. The government would take its $129, meaning I bring home $11,871—clearly more than I made before my raise.
Essentially, when each additional (marginal) dollar you earn is taxed at a rate below 100% (which it always is in Canada), it is impossible for your net income to decrease.