Monday, March 15, 2010

Canadians taxed 40% with health insurance? Not quite

I was watching Real Time with Bill Maher this weekend and heard something that bothered me.  Specifically, Amy Holmes said something to the effect of Canadians paying a 40% income tax because of their national healthcare program.  To me, this didn't seem quite as outrageous as she meant it to be (considering the cost of healthcare paid out of pocket in the US), but I also wondered about the factuality of such a statement.

Before I get into the numbers, let me start by saying I'm no financial or healthcare expert.  I'm posting this mostly because I'm hoping someone who is more of an expert on the subject could comment on the situation.  I'm not looking to absolutely debunk her statement, but really just to introduce the idea that comparing the tax rate in Canada to that in the US as she did is neither an accurate nor a logical comparison.

Anywho, checking out the Canada Revenue Agency shows that the federal tax level is not at all 40%, even at the maximum income level.  Instead, it maxes out at 29% on income over $126,000 (even though that tax rate only applies to wages starting at that amount, everything below that is taxed at a lower rate).  Adding the provincial tax rate to that can give you something above 40%, but let's be honest, people being taxed at the highest tax rate aren't lacking healthcare in either country.  Instead, from here on out I'll be using the median household incomes and their associated tax brackets for comparison.  For the US, I'll also assume that the person is only paying for health insurance for a single person, as paying for a family in the US makes Holme's claim even more ludicrous.

The median household incomes (PPP) for both Canada and the US are relatively similar at $44,000 and $50,000, respectively.  Admittedly, the years for those two numbers are different, but I doubt Canada's changed by more than a couple thousand dollars from 2005 to 2007.  Using the progressive tax rates, this comes out to a ~17% tax for both Canada and the US (remember to convert to CAD when looking at the CRA website).  These tax rates are also for years different from the given median incomes, but when we get to the end, you'll see why any differences are likely negligible.

To that, you'd have to add state/provincial tax, which makes things fun.  This varies widely state to state, but here in Indiana that comes out to 3.4%, but let's round up for the other states that tax more and call it 21% total between state and federal in the US.  In Canada, it's quite a bit more, and again varies greatly, but the average seems to be around 10%.  I'd love to put all of those values into Excel and give you a more precise number, but I have a physiology exam in less than 30 hours so I'll pass on that.  If anyone cares to do the analysis, by all means comment and I'll update this as necessary.  Anywho, that brings the total federal and provincial tax to 27%.

For those of you keeping score, we have:
  • US:  17% federal + 4% state = 21% total.
    • Median income:  $50,000 (PPP)
    • Tax paid = $50,000 x 21% = $10,500.
  • Canada:  17% federal + 10% province = 27% total.
    • Median income:  $44,000 (PPP)
    • Tax paid = $44,000 x 27% = $11,880.
Again, I'll admit that the many deductions and whatnot that a person can claim in either country can change these values significantly.  If you're an accountant and you can enlighten me on this subject, please do so.  Either way, I think you can take these rough values as a starting point when considering the statement made by Amy Holmes.

Alright, Canadians pay an additional 6% for their taxes, so they sure are getting hammered for their healthcare, right?  Not quite.  Their taxes INCLUDE healthcare, so what about what we pay in the US?  A single American pays $5,280/year for health insurance ($13,200 for a family).  Now let's see how that pans out:
  • US:  $10,500 + $5,280 = $15,780 (31.6%) for taxes + healthcare
  • Canada:  $11,880 (27%) for taxes/healthcare
Doesn't seem quite so bad now, does it?

My point here isn't that these numbers are 100% accurate to what a person in either country is paying.  However, to say that Canadians pay some ridiculously high tax rate for healthcare and we pay so very little is absolutely false.  Yes, their taxes are higher than what we pay in the US, and I'm sure there are many differences between what their taxes pay for versus what ours pay for.  But if you're going to compare their tax rate to ours, you have to consider what we pay for healthcare as well.  For a single person making the median US household income, that's at least another 10% that he pays for health insurance.  That's 26% if we're talking about a family on that same median HOUSEHOLD income.

I'm really quite tired of politicians and media personnel making outrageous, illogical claims without backing them up.  In scientific research, we have the peer review process for checking the integrity of published works.  It's not perfect and it's not always fast, but it's certainly better than nothing.

If you've encountered someone who's done a more in-depth comparison than this, please let me know.  I will gladly remove my foot from my mouth and post an update if it turns out that I am wildly off the mark.  I fully acknowledge that these values are at best rough estimates and can vary greatly, but I'm still pretty confident that we pay more for taxes and healthcare in the US than they do in Canada.  But in the meantime, think before you take any such claims at face value, whether you read them here, on another blog, or hear them from a politician!

[Update]  Just fixed a few grammatical errors.  Reading through this today, I also realized that writing about this at 3:00 AM after studying most of the day doesn't leave much room for intelligible writing.  Blogger's lack of a table editor for all of those numbers certainly didn't help me either.  I'll try to repost this in the next few days with some better clarity and organization. 

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