Does half your money go to taxes?
Every year tax time is a good reason to complain about paying too much tax. One of the big misconceptions I hear over and over again is this notion that we pay half of our money to the government. Just recently, someone showed me an insurance proposal where the advisor used a 50% tax rate to illustrate the benefits of a tax sheltered life insurance policy. We pay a good chunk of tax but this is very misleading to me!
Tax Freedom Day
It’s nearly impossible for the average Canadian to really figure out how much tax they pay especially when you include all forms of tax from all three levels of government like sales taxes, import duties, excise taxes, gas tax, payroll tax, etc.
The Fraser Institute in Canada calculates tax freedom day every year. Tax Freedom Day is the theoretical day in the year the average Canadian family has earned enough money to pay the taxes imposed on it by the three levels of Canadian government: federal, provincial, and local. Taxes used to compute Tax Freedom Day include income taxes, property taxes, sales taxes, profit taxes, health taxes, social security and employment taxes, import duties, licence fees, taxes on alcohol and tobacco, natural resource fees, fuel taxes, hospital taxes, and a host of other levies.
Tax freedom day has lead many people to believe 50% of their money goes to tax in some way shape or form. In 2015, Tax Freedom day was June 10th. In theory this means we pay 44% in tax, not 50%.
Here’s some tax freedom dates from the past:
- June 10, 2015
- June 9, 2014
- June 10, 2013
- June 11, 2012
- June 10, 2011
- June 6, 2010
- June 3, 2009
- June 22, 2005
- June 25, 2000 (latest tax freedom day)
- May 3, 1961 (earliest tax freedom day)
Tax freedom day is also different from province to province. Here in Alberta, we enjoy the lowest tax freedom day in Canada, which was May 19 in 2015. On that basis, this translates to a 38% tax rate, which is far from 50%.
Even at the peak of tax in 2000, tax freedom day in Canada was June 25 th. which makes it closer to that 50% figure.
I’ve been following the tax freedom day for quite some time now but I’m always skeptical of the dates given because they seem to be inconsistent. I think it’s an interesting view of tax but another perspective is to look just at marginal tax rates (including both Federal and Provincial Income Tax).
Marginal tax may not a true reflection of tax
A lot of times, people use marginal tax to reflect how much tax we pay but this can also be misleading. Marginal tax is the amount of tax we pay on any additional dollar we earn. As we make more money, we pay more tax. To understand your marginal tax rate (MTR), you can start with the federal tax rates (2015):Source: retirehappy.ca