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PRB 05-107E

International Tax Burdens:
Single Individuals With or Without Children

Prepared by:
Alexandre Laurin
Economics Division
15 February 2006

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Table of Contents

Introduction

This paper compares the estimated income tax burden (inclusive of social security contributions) of single individuals with or without dependent children in Canada with that in various industrialized countries.  Countries selected for this analysis are the G-7 group of industrialized countries, plus Sweden (commonly regarded as an industrialized high-tax country) and Ireland (commonly regarded as an industrialized low-tax country).  The tax rates presented here were calculated using the Organisation for Economic Co-operation and Development (OECD) Taxing Wages model.(1) 

In this comparison, two reference income levels (expressed in Canadian dollars) were selected.  To make the required calculations for countries other than Canada, the OECD rates of purchasing power parities (PPP) were used to convert the selected reference income levels from Canadian dollars to the respective home currencies.  PPP rates enable the computation of income taxes based on the income level needed in each country’s currency to buy the same representative basket of consumer goods and services.

In reviewing the results, it is important that the reader not compare tax levels among countries as if this were a “report card” on national fiscal policies.  Because taxes are collected to finance public goods and services, any assessment of the tax burden must take into account the public goods and services that are paid for by those taxes.  Also, the cost of similar public goods and services may vary by region and country, as well as by the fiscal capacity of various governments, which is greater in countries with higher incomes.

For example, although Sweden ranks first among OECD countries in terms of its ratio of government revenues to gross domestic product (GDP), it has been described recently as a model of “smart taxation” in view of its tax structure.(2)   Sweden also has a well-developed government family policy, including a generous parental insurance program and a publicly funded universal child care system. 

Figure 1 shows, for 2004, total government revenue as a percentage of GDP and the government net debt-to-GDP ratio for each of the countries selected for analysis.  Sweden was the country with the highest government revenue-to-GDP ratio (59%) and the lowest government net debt-to-GDP ratio (-5%) in that year.  Japan was the country with the lowest government revenue-to-GDP ratio (31%) and the second-highest government net debt-to-GDP ratio (78%), next to Italy (99%).  Canada was in the middle of the group with respect to total government revenues as a percentage of GDP (41%) and was the country with the third-lowest government net debt-to-GDP ratio (31%), next to Ireland (29%) and Sweden (-5%).

Average Income Earners

The average employment income of permanent employees working full-time in 2004 was about $37,000 in Canada and about $40,000 in Ontario.(3)  Figure 2 compares the average tax rate(4) on employment income in selected countries for single workers without children earning $40,000 in 2004.  With an average tax burden of 25% of income, Canada’s tax system ranked in the middle of the countries selected in that year, while Germany had the highest average tax rate (38%), followed by Sweden (31%), Italy (30%) and France (28%).  In 2004, countries such as the United Kingdom (24%), the United States (24%), Ireland (20%) and Japan (17%) had a lower average tax rate on single workers without children than that found in Canada.

In Figure 3, average income tax rates are estimated for single parents with two young children (generally under seven years old) with employment earnings of $40,000 in 2004.  Average tax rates are considerably lower for single parents with two children than for single individuals without children.  For example, in 2004, having two young children reduced the average tax rate of a single parent by 19 percentage points in the United Kingdom,(5) by 17 percentage points in Ireland, by 14 percentage points in Germany and the United States, and by 11 percentage points in Canada and France.

High Income Earners

It is often argued that, in today’s global economy, a country’s tax system can influence the location decisions of highly skilled workers that are in high demand.  Figure 4 shows the average tax rate and the marginal effective tax rate(6) faced by workers earning $150,000 in 2004.  Overall taxes paid varied from a high of 49% of income in Sweden to a low of 28% in Japan in that year.  Canada was in the middle of the countries studied, with an average tax rate of 37% – only three percentage points higher than that of the United States.

In terms of marginal effective tax rates for high-income earners, Sweden was at the top in 2004, with nearly 57% of the last $100 earned by such workers paid in taxes.  In 2004, seven of the nine countries selected had a marginal effective tax rate between 41% and 47%, including Canada, at 46%.  Finally, the marginal effective tax rate was noticeably lower in the United States, at 36%, in that year.

Conclusion

From the perspective of, single individuals without children earning either average or high employment income in 2004, Canada was neither a high-tax nor a low-tax country.  In that year, Sweden, Germany and Italy were the countries where the tax burden imposed on employment income was the highest, whereas the United States and Japan were amongst the countries with a lower tax burden.  Finally, the fiscal benefit experienced by Canadian single parents for having two children was comparable to that of France, but significantly lower than that of the United Kingdom, Germany, Ireland and the United States in 2004.

Figure 1 – Total Government Revenues (as a % of GDP) and
Government Net Debt-to-GDP Ratio (%), Various Countries, 2004

Figure 1 shows total government revenues (as a percentage of GDP) and government net debt-to-GDP ratio for nine countries in 2004. The country with the highest total government revenues (as a percentage of GDP) was Sweden, at 59%; then came (in descending order) France, at 50%; Italy, at 45%; Germany, at 43%; the United Kingdom and Canada, at 41%; Ireland, at 35%; the United States, at 32%; and Japan, at 31%. The country with the highest government net debt-to-GDP ratio was Italy, at 99%; then came (in descending order) Japan, at 78%; Germany, at 55%; France and the United States, at 45%; the United Kingdom, at 37%; Canada, at 31%; Ireland, at 29%; and Sweden, at minus 5%.

Notes:

  1. Total government revenues of central and sub-central governments.
  2. Government net debt consists of the financial liabilities of central and sub-central governments net of financial assets.  A negative number indicates that financial assets exceed financial liabilities.
  3. Countries listed are:  Canada (CAN), France (FRA), Germany (GER), Ireland (IRE), Italy (ITA), Japan (JAP), Sweden (SWE), United Kingdom (U.K.) and the United States (U.S.).

Source:   Organisation for Economic Co-operation and Development (2005), Economic Outlook No. 78.

 

Figure 2 – Average Tax Rate on Employment Income, Various Countries, 2004
Single Individuals Without Children with Income of $40,000*

Figure 2 shows the average tax rate for a single individual without children and an income of C$40,000 in nine countries in 2004. Germany had the highest rate, at 38%; then came (in descending order) Sweden, at 31%; Italy, at 30%; France, at 28%; Canada, at 25%; the United Kingdom and the United States, at 24%; Ireland, at 20%; and Japan, at 17%.

*   *    For countries other than Canada, the Organisation for Economic Co-operation and Development (OECD) rates of purchasing power parities (PPP) were used to convert the selected reference income levels from Canadian dollars to the respective home currencies.  PPP rates enable the computation of taxes based on the respective income level needed in each of the countries’ monetary unit to buy the same representative basket of consumer goods and services.

Notes:

  1. The average tax rate is calculated as the combined central and sub-central government income tax, including tax credits, tax allowances and cash transfers, plus employee social security contributions, as a percentage of gross wage earnings.
  2. Countries listed are:  Canada (CAN), France (FRA), Germany (GER), Ireland (IRE), Italy (ITA), Japan (JAP), Sweden (SWE), United Kingdom (U.K.) and the United States (U.S.).
  3. When sub-central government income taxes vary within a country, such as in Canada and in the United States, the OECD Taxing Wages model assumes that the taxpayer lives in a typical manufacturing area.  In Canada, workers are assumed to live in Ontario, whereas in the United States workers are assumed to live in Detroit, Michigan.

Source:   Computations by the Parliamentary Information and Research Service of the Library of Parliament based on the OECD model described in Taxing Wages:  2003/2004 – 2004 Edition:  Basic Methodology and Main Results.

 

Figure 3 – Average Tax Rates on Employment Income, Various Countries, 2004
Single Parent with 2 Children and an Income of $40,000*

 

Figure 3 shows the average tax rate on employment income for a single parent with two children and an income of C$40,000 in nine countries in 2004. Germany, Italy and Sweden had the highest rate, at 24%; then came (in descending order) France, at 17%; Japan, at 15%; Canada, at 14%; the United States, at 10%; the United Kingdom, at 5%; and Ireland, at 3%.

*    For countries other than Canada, the Organisation for Economic Co-operation and Development (OECD) rates of purchasing power parities (PPP) were used to convert the selected reference income levels from Canadian dollars to the respective home currencies.  PPP rates enable the computation of taxes based on the respective income level needed in each of the countries’ monetary unit to buy the same representative basket of consumer goods and services.

Notes:

  1. The average tax rate is calculated as the combined central and sub-central government income tax including tax credits, tax allowances and cash transfers, plus employee social security contributions, as a percentage of gross wage earnings.
  2. Countries listed are:  Canada (CAN), France (FRA), Germany (GER), Ireland (IRE), Italy (ITA), Japan (JAP), Sweden (SWE), United Kingdom (U.K.) and the United States (U.S.).
  3. When sub-central government income taxes vary within a country, such as in Canada and in the United States, OECD Taxing Wages model assumes that the taxpayer lives in a typical manufacturing area.  In Canada, workers are assumed to live in Ontario, whereas in the United States workers are assumed to live in Detroit, Michigan.

Source:   Computations by the Parliamentary Information and Research Service of the Library of Parliament based on the OECD model described in Taxing Wages:  2003/2004 – 2004 Edition:  Basic Methodology and Main Results.

 

Figure 4 – Average Tax Rate and Marginal Effective Tax Rate
on Employment Income, 2004
Single Individual Without Children with Income of $150,000*

Figure 4 shows the average tax rate and the marginal effective tax rate on employment income in nine countries in 2004. The single individual is assumed to be without children and to have an employment income of C$150,000. For the average tax rate, Sweden had the highest rate, at 49%; then came (in descending order) Germany, at 48%; Italy, at 42%; Ireland, at 38%; Canada, at 37%; France, at 36%; the United Kingdom and the United States, at 34%; and Japan, at 28%. For the marginal effective tax rate, Sweden had the highest rate, at 57%; then came (in descending order) Germany, at 47%; Italy and Canada, at 46%; Ireland, at 44%; France, at 43%; the United Kingdom and Japan, at 41%; and the United States, at 36%.

*    For countries other than Canada, the Organisation for Economic Co-operation and Development (OECD) rates of purchasing power parities (PPP) were used to convert the selected reference income levels from Canadian dollars to the respective home currencies.  PPP rates enable the computation of taxes based on the respective income level needed in each of the countries’ monetary unit to buy the same representative basket of consumer goods and services.

Notes:

  1. The average tax rate is calculated as the combined central and sub-central government income tax including tax credits, tax allowances and cash transfers, plus employee social security contributions, as a percentage of gross wage earnings.
  2. The marginal effective tax rate is calculated as the additional central and sub-central government personal income tax, including tax credits, tax allowances and cash transfers, plus employee social security contribution, resulting from a $100 increase in gross wage earnings.
  3. Countries listed are:  Canada (CAN), France (FRA), Germany (GER), Ireland (IRE), Italy (ITA), Japan (JAP), Sweden (SWE), United Kingdom (U.K.) and the United States (U.S.).
  4. When sub-central government income taxes vary within a country, such as in Canada and in the United States, the OECD Taxing Wages model assumes that the taxpayer lives in a typical manufacturing area. In Canada, workers are assumed to live in Ontario, whereas in the United States workers are assumed to live in Detroit, Michigan.

Source:   Computations by the Parliamentary Information and Research Service of the Library of Parliament based on the OECD model described in Taxing Wages:  2003/2004 – 2004 Edition:  Basic Methodology and Main Results.

 

Endnotes

  1. See OECD, Taxing Wages:  2003/2004 – 2004 Edition:  Basic Methodology and Main Results.
  2. The Institute for Competitiveness & Prosperity, “Taxing smarter for prosperity,” Working Paper 7, March 2005.
  3. Author’s calculations based on Statistics Canada, CANSIM Table 282-0073.  The average for Ontario workers is relevant since the OECD Taxing Wages model assumes that families live in a typical manufacturing area. In Canada, workers are assumed to live in Ontario.
  4. The average tax rate is calculated as combined central and sub-central government income taxes including tax credits, tax allowances and cash transfers, plus employee social security contributions, as a percentage of gross wage earnings.
  5. One percentage point of $40,000 is equivalent to $400; consequently, a 19-percentage-points reduction in the average tax rate is equivalent to a fiscal benefit of about $7,600 for having two dependent children.
  6. The marginal effective tax rate is calculated as the additional central and sub-central government personal income tax, including tax credits, tax allowances and cash transfers, plus employee social security contribution, resulting from a $100 increase in gross wage earnings.
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