1. The Personal Income Tax (PIT) system in Canada, 2000-2010 François Vaillancourt CIRANO et Université de Montréal l IBFP, Bruxelles October 2011

2. Outline Distribution of tax powers in Canada The PIT system: origins to 2000 The 2000+ system 2

3. Canadian federation-:revenues constitution (1867) Central government: 91.3 The raising of Money by any Mode or System of Taxation Provinces : 92.2 Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes Court decision 1930s direct =>sales taxation 3

4. Canadian federation-:revenues practice Central: PIT, CIT, GST(VAT),payroll taxes ( social security + employment), excises, custom duties Provincial PIT, CIT, Q/HST(VAT) or RST, payroll taxes, excises, resource royalties and transfers Local: Property taxes, fees, transfers Full base, rate and collection freedom at provincial and central level 4

5. Non PIT aspects CIT collected by federal G for 8/10 provinces Sales tax collected by federal G for 5(4) provinces HST -Max 5% base ∆ GST collected by Québec G for federal G with QST Provincial payments to federal G for exclusive use of gambling field 5

6. PIT in Canada pre WWII Introduced in late19th century at local then provincial level Introduced at federal level in 1917 By 1939 most provinces have a PIT with own base, rates and collection 6

7. Canada 1942- 1954 WWII tax rental agreements: provinces rent against transfers PIT,CIT, Succession duties to Fed G=> Central collection with federal base and rates 1947-Fed G proposes status quo: Keynes et al but 5% leeway for PIT 7

8. Canada-1954-1962 1954: Québec reintroduces PIT with own collection -Fed G adapts (10% abatement) 1957:Equalization introduced (three tax bases ) to induce provinces to accept tax responsibility 1962+ tax room and tax on tax with free federal collection. Nine provinces use it : they must set a surcharge rate to obtain $ 8

9. Canada 1962-1977 1962-1977: Increases in provincial tax room by reduced federal taxation Opting -Out/ offered in 1964:↓ transfers / ↑ tax room ;only Québec uses it (-16.5% of federal PIT per individual 1972-:Implementation of tax reforms 1977 reform of Health and Social transfers even more tax room and labeling fight 9

10. PIT –key points Income includes: –Wages, earnings, self employment income; –Net rents, interest, dividends,K gains (50%) –Pensions(public and private), unemployment insurance, –All $ are added-up, deduction exemptions applied and one tax calculated Residence is on 31 st December :fact based not linked to place of employment 10

11. % federal PIT in total PIT collection, Canada, 4 years 11

12. Canada 1999 In 1999 20+years of shared stable tax occupancy Provincial use of Fed base and progressivity modulated by use of surtaxes (tax on tax on tax! ) Various provincial credits ( savings schemes, age) in place 12

13. Canada 2000+ Federal G allows as of 2000 tax on income (TONI): 9 provinces can now set progressivity :brackets and rates on Federal taxable income They can still use tax credits 13

14. Canada (ROC) 2008 One flat tax Alberta: 10% rate One bracket Three (5) to five (1) brackets Step up 1=>2 varies from 29 591$(NS) to 39 136$ (Sask) larger for 2=>3 Rates vary between provinces as do outcomes So at 200 000$: NS PIT=78 153 and Alt PIT= 64 726$ => 20%∆ 14

15. Three indicators, PIT rates,Canadian provinces, 2008 15

16. Canada 1999-2008-1 16

17. Canada 1999-2008 -2 17

18. Why these PIT rates our tax system better meets our own social, economic, fiscal needs NB 2000 PIT mimicking in Atlantic Canada not elsewhere Flat tax as fair Alt 2000 drop in # of taxed individuals Five brackets in BC is ‘fairer’ BC 2000 18

19. An aside on the USA 2008 Seven states do not have a PIT 4 states use flat tax and 4 use tax on tax Mean number of brackets is 4.4 Max is 10 No central collection but offered in 1970s CV rates: USA VS Canada –1 st rate:0.64 VS 0.24 –Highest rate 0.63 VS 0.19 19

20. Conclusion Greater freedom in defining PIT since 2000 was used by Canadian provinces to vary progressivity Neighbours of flat Alberta exhibit highest BC and lowest Sask statutory progressivity Difference smaller in burden-tax competition? No unravelling of Canada 20