1. The causes of the declining realized rate of provincial income taxation experienced in sk
Jeff Bowman
April 10, 2018
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2. Personal Income Tax Share of Federal Tax Collections 1867 - 2017
Source: Di Matteo, 2017

3. SK – Current Fiscal Challenges

4. Provincial & Federal Average Realized Tax Rates (2004-2015)
Realized Tax Rates Calculation:
Total Income Assessed (for all filers); Divided by
- Net Provincial Tax (for all filers); or
- Net Federal Tax (for all filers)
Provincial & Federal Average Realized Tax Rates ( )
Data Source: CRA T1 Statistics (Tax Years 2004 – 2015)

5. Provincial Realized Average Tax Rates (2004-2015)
Note the dip in 2008, never came back up.
Data Source: CRA T1 Statistics (Tax Years 2004 – 2015)

6. Federal Realized Average Tax Rates (2004-2015)
Note the dip in 2009, came back by 2011 and increasing.
Data Source: CRA T1 Statistics (Tax Years 2004 – 2015)

7. Marginal Rates in 2015
Realized Average Rates MUCH lower than marginal rates (SK ~ 6%, Fed ~ 10.5%) in 2015
2015 Federal Rates
2015 Saskatchewan Rates
Data Source: TaxTips.ca
Data Source: TaxTips.ca

8. Interesting Questions:
Clearly, tax collections changed during the Global Financial Crises, with a couple of other federal changes in 2005 and 2007.
How was this accomplished when the tax rates remained unchanged (except a small change in 2005)?
Why has Saskatchewan’s collection rate stayed roughly constant while the federal rate has been steadily increasing since?
Often the marginal tax rates are used to compare jurisdictions / assess tax systems, but these aren’t the “real” (i.e., realized) rates that are ultimately collected / paid.

9. Reconciling Marginal (i. e. , statutory) and Realized (i. e
Reconciling Marginal (i.e., statutory) and Realized (i.e., Real) Rates:
Assessed Income
Less: Deductions
Equals: Net Income
Less: More Deductions
Equals: Taxable Income
Multiplied by Applicable Marginal Tax Rates
Equals: Gross Taxes
Less Credits:
Equals: Net Taxes
The CRA Data has most of these fields.

10. Data Challenge:
Total
$9,999 and under
$10,000 - $14,999
$15,000 - $19,999
$20,000 - $24,999
$25,000 - $29,999
$30,000 - $34,999
Aggregate Assessed Income ($ Billions)
30.93
0.50
0.84
1.36
1.30
1.42
1.62
Aggregate Basic Personal Amounts Claimed ($ Billions)
7.98
1.40
0.69
0.81
0.60
0.53
0.52
CRA Data Reports Deductions and Credits Claimed (i.e., they don’t estimate the resulting reduction in taxes).

11. Solution:
Calculate Combined Realized Deduction and Credit Rates based on expected average tax rate. Limitation is that we cannot directly calculate the impact of individual provincial or federal deductions and credits (couldn’t have anyways).
$35,000 - $39,999
$40,000 - $44,999
$45,000 - $49,999
$50,000 - $59,999
$60,000 - $69,999
$70,000 - $79,999
$80,000 - $89,999
Total Income Assessed (millions)
1,767
1,816
1,616
3,039
2,634
2,397
1,874
Number of Filers
47,170
42,870
34,080
55,560
40,660
32,100
22,120
Average Income per Filer
37,467
42,350
47,428
54,706
64,777
74,659
84,698
Expected Average Tax Rate
26.00%
26.37%
27.30%
28.32%
29.36%
30.11%
30.84%
Realized Combined Average Tax Rate
10.24%
11.61%
13.00%
14.89%
16.94%
18.43%
19.51%
Implied Deduction and Credit Rate
15.76%
14.77%
14.30%
13.43%
12.42%
11.68%
11.33%

12. Average Realized Deduction Curve:
Opposite of tax curve: sloping down = progressive

13. Marginal Combined Tax Curve:
Note the erosion of CRA reporting brackets due to inflation

14. Average Realized Tax Curve:
Note the fall in average rates for 2015 for $250,000 and over

15. Major Provincial Changes 2008:
Disability-related income tax credits “significantly increased” (some reported by CRA).
Basic and spousal exemptions increased by $4,000, eligible dependent deduction increased by $2,000 per child (reported by CRA).
Low-Income Tax Credit “significantly enhanced” (not reported by CRA).
Graduate Retention Program (not reported by CRA).
Mineral Exploration Tax Credit (not reported by CRA).
Caregiver
Infirm Dependent
Disability Tax Credit
Supplemental Amount for Disabled Children
Source: 2017/18 Saskatchewan Budget Press Release

16. Disability Credits: Potential Impact on Provincial Tax Collections
Could explain some of reductions for low incomes. Progressive.

17. Increase in Personal Exemptions: Impact on Tax Collections
Underestimate for higher income (s.b. marginal tax rate). Explains a lot of the reduction in SK tax collection rate.
Adding up disability and underestimated personal amounts explains 90% of the reduction in tax rates.

18. Major Federal Changes 2009:
2005: Lowest marginal rate lowered by 1% (from 16% to 15%).
2007: Pension Splitting and Children’s Fitness Amount.
2009: Home Renovation and Home Buyers’ Amount.
2010: Elimination of Home Renovation Credit.
2011: Children’s Arts Amount.
2014: Family Tax Cut.
Source: CRA Major Changes for The Tax Year (2004 – 2015)

19. Lowering Marginal Tax Rate 2005:
Note that low income people don’t get the full 1% since they pay less than a 1% tax rate. Biggest beneficiaries are $25,000 to $50,000 who get close to the full 1% cut, before they move into higher brackets and get less bottom rate.

20. Lowering Marginal Tax Rate 2007:
Pension splitting explains almost all of the decrease in federal tax rates in 2007.

21. Home Renovation Expenses:
Home Renovation Expenses claims exceed decrease in realized federal tax rates (i.e., tax rates would have increased without it).

22. Rising Incomes and Tax Progressivity:
SK Filers steadily moving into income brackets above $45k

23. Rising Incomes and Tax Progressivity:
Federal Tax Rates have grown with SK incomes post 2009 cuts.

24. Rising Incomes and Tax Progressivity:
Provincial Rates have not grown with SK incomes.

25. SK: Increasing Real Tax Collections Despite Falling Rates:
Despite falling rates, tax collections have increased, even accounting for inflation.
Function more of economic growth – likely caused (though interprovincial debate is a bit different than international debate).

26. Capital Gains Deductions and Average Tax Rates:
Cumulative Capital Gains growth has been much higher than cumulative Income growth (capital gains taxed at half the rate of income).
Capital Gains: $350 million to over $1.12 Billion.
Income: $21.16 billion to $42.22 billion
Capital Gains make up about 2.6% of total income. Note huge, but it also is not progressive.

27. Capital Gains Deductions and Average Tax Rates:
Voila! The source of the decreasing tax rates for earners over $250,000.

28. The causes of the declining realized rate of provincial income taxation experienced in sk:
2008 permanent increases to personal exemptions and disability credits (fed tax cuts were temporary).
Capital gains taxation rate of 50% (v. 100% on income).
Less progressive provincial structure means that SK income growth has not increased average tax rates by enough to offset #1 and #2 (like it has federally).

29. Discussion Discuss outcomes of the case study or class simulation.
Cover best practices.