No attempt was made to compare state/provincial tax rates.

No deductions are factored in.

Unemployment insurance contributions are not factored in.

Only the “single” tax rate is calculated on US taxes. Married filing jointly, married filing separately, and head of household categories are omitted.

Currency parity is assumed, which is reasonable.

Wage parity is also assumed, which is not reasonable. Unskilled labour wages will vary from region to region. Skilled labour wages will be higher in the US (due to fewer people per capita getting a degree due to the high cost) but is offset by the high financial cost incurred to get that degree.

The American Alternative Minimum Tax (AMT) is omitted. This is a parallel tax system which has a [almost] fixed rate but few deductions, designed to put a minimum amount of tax for high wage earners with big deductions. US taxpayers pay the higher of regular income tax and AMT.

The tax codes are complex and pregnant with many detailed rules. Only a gross comparison is attempted, with attention given only if there is a significant effect. Your mileage may vary.

Maximum Tax Rates

Maximum federal income tax rate in Canada: 29%

Maximum federal income tax rate in US (single): 35% going up to 39.6%

Maximum capital gains rate in Canada: 14.5% (half of capital gains is taxable as regular income, the other half is tax free)

Maximum long term capital gains rate in US: 15% going up to 20%

Maximum short term capital gains rate in US: same as income

Maximum estate tax in Canada: 0%

Maximum estate tax in US: 35% perhaps going back up to 50%

Maximum corporate federal tax rate for Canadian small businesses: 11%

Maximum corporate federal tax rate in Canada for other businesses: 18% going down to 15%

Maximum corporate federal tax rate in US: 39%

Maximum Canada Pension Plan contribution per employee (combined): 9.9% with a cap of $4,326.30 (i.e. no contribution made on income above $47,200 with a basic exemption of $3,500)

Maximum FICA contribution per employee (combined): 12.4% with a cap of $13,243.20 (i.e. no contribution made on income above $106,800)

Maximum Medicare tax per employee (combined): 2.9% going up to 3.8%

There is no equivalent to the Medicare tax in Canada since health care is funded from the general tax pool

Maximum unemployment insurance in Canada per employee (combined): 4.152% with a cap of $1,793.66

Maximum unemployment insurance in Canada for self-employed: 0%

Unemployment insurance in the US is a mix of state and federal programs.

Comments

Sales taxes in Canada are usually higher than the US (but not always; depends on province and state), but Canada has a GST/HST rebate program for low income earners. This serves to eliminate its regressive aspects, while still reigning in excessive consumption.

US corporate marginal tax rates are a hodge podge that go up and down with income. The highest marginal rates are at $100,000 to $335,000 (39%), and $15,000,000 to $18,333,333 (38%), before settling down to 35% at revenues above $18,333,333. So much for “encouraging” small business.

The oft stated US mortgage deduction is a fallacy. Because home buyers almost always buy the biggest and most expensive home that they can afford, and home sellers almost always ask the highest price they can sell it at, the the price of homes reach a fair market value very quickly. In the absence of the deduction, home prices would drop and the home owner would in effect have a similar net cost. The effect of the deduction is to subsidize building developers, who are the first sellers.

The US AMT has a particular quirk in it where unrealized gains in stock options can be taxable. This can lead to enormous taxes being levied against individuals which can be far greater than their current income should that stock drop precipitously. During the dot com bust, many employees wound up owing millions of dollars to the IRS which they didn’t have nor could they ever make back in their lifetimes. Those people are doomed to a lifetime of wage garnishment.

Canada has paid maternity leave of 15 weeks and paid parental leave (combined) of 35 weeks paid from the unemployment insurance pool. The US has no equivalent benefit.

The American tax code is the most complex in the world, and it is difficult to capture a “typical” case.

There are also additional extraordinary expenses in the US that are not considered tax, but are benefits in Canada paid by tax dollars, either entirely or highly subsidized.

$8000/year per person for health insurance, plus deductibles and denial of claims. Sometimes subsidized by employers to varying degrees. Complex medicare and medicaid programs which only apply to the people least able to sort out the bureaucracy. 100% subsidy in Canada to every resident (citizen or not) with no paperwork. Longer wait times (mostly for non-life threatening or elective surgery) in Canada, but 3 years longer life span.

Private school (up to 5 to 6 digits per year) or up to 6 to 7 digit housing premiums (take the price of what you think the house ought to cost, then add the premium) to live in a neighbourhood with a good school district. Public schools in Canada are more uniform, so private schools are up to 4 digits per year, or up to a 5 digit housing premium (since I am speaking in orders of magnitude, this is 1/10th to 1/100th the US cost should a parent choose to pay the premium; not paying the premium is an option in Canada and your kids will still get a respectable education). YMMV depending on region.

Six figures to go to a decent university. 75% subsidized in Canada for residents (except most MBA programs).

Graphical Comparison

Ok let’s graph a somewhat typical income range of the two systems of tax brackets, with the employee contributions of FICA/CPP and US Medicare tax included. The Canadian personal deduction tax credit is factored in, as well as the American standard deduction, personal exemption, and personal exemption phase out. Unemployment insurance is not included.

For corporate taxes, payroll taxes are not included because the amount depends on wages and number of employees. When it is factored in, expect it to be much higher.

The horizontal axis shows the unadjusted gross income, and the vertical axis shows the total amount of taxes paid. Income levels are shown up to $73,500.

Americans pay more taxes at all levels. Although federal tax brackets are quite progressive, both FICA and Medicare are very regressive. CPP is not as regressive due to its $3,500 exemption.

Now let’s look at higher levels of income that span the entire range of tax brackets. Same graph, now up to income levels of $490,000.

It’s good to be rich in Canada. However, wealthy Americans need not apply. If you are a US citizen or permanent resident (i.e. green card holder), you are required by law to file income tax with the IRS regardless if you reside in the US or not (however tax rates for non-residents are lower). If your country of residence has a tax treaty with the US, you get a tax credit for the taxes paid to the IRS. If there is no tax treaty, you are out of luck and will be double taxed. The US is the only country which taxes non-residents. Luckily, Canada and the US do have a tax treaty.

Next is a graph of corporate taxes (with personal income taxes included as a reference) up to revenue levels of $980,000, which shows the US small business penalty

And finally, a graph of both corporate and personal income taxes which spans all corporate tax brackets.

But Why?

Canada has a lower debt as a percentage of GDP, a lower budget deficit as a percentage of GDP (and would even have a surplus if not for the recession), and far greater social benefits than the US, so why are Canadian taxes so much lower than American taxes? Or perhaps we should rephrase that as: why are US taxes so much higher than Canadian taxes?

Let’s take a look at the 4 largest spending line items in the US 2010 budget:

Medicaid: $293 billion

Medicare: $462 billion

Social Security: $724 billion

Defense: $663 billion

Defense: American voters choose to have a strong military, and American politicians choose to have military adventures.

Social Security: Both the US and Canada have a demographic problem. Too few young workers fund an increasingly ageing population. The US chooses to defer addressing the problem to the future, and slowly ratchets up the retirement age and reduces benefits. Canada chooses to address the problem with an open immigration policy in an attempt to change the demographic. Higher poverty rates in the US probably also play a role in this, though it is difficult to get an objectively comparative measurement.

Medicare and Medicaid: There are thousands of health care lobbyists in Washington whose sole job it is to keep health care industry profits high, thus costs high. Health care spending in the US as a percentage of GDP is more than double that of Canada, and rising. There are plenty of reasons why, but the scope of that debate is beyond the discussion at hand. On average, Canadians live 3 years longer than Americans.

So what should I do?

If your sole objective is to maximize your earnings, then here is a guide on what you should do:

If you are an American unskilled worker: emigrate to Canada. There are many routes to doing this, but your profession is not likely to be one of them. If you are willing to have job retraining, get a nursing degree; that skill is in demand everywhere around the world. Otherwise your best bet is to marry a Canadian. Enjoy the low taxes and good benefits.

If you are a skilled American worker: continue working in the US for higher wages until 3 years prior to retirement age. Just as your health care expenses start getting higher, emigrate to Canada and enjoy the free health care. It is relatively easy for skilled workers to work anywhere within NAFTA provided that you find an employer. After 3 years, get your citizenship and collect both Social Security and CPP. Enjoy the tropical paradise that Canada has become after global warming (perhaps an exaggeration, or perhaps not?).

If you are a wealthy American: emigrate to Canada, move your corporate headquarters to Canada, after 3 years get your Canadian citizenship and renounce your American citizenship (to avoid continued filing with the IRS).

If you are a Canadian unskilled worker: stay in Canada.

If you are a Canadian skilled worker: emigrate to the US for the higher wages. Luckily your tuition was subsidized 75% by Canada so you don’t hold any education debt. Work on temporary work visas for as long as possible. If you must get a green card, make sure that you do not possess it for longer than 8 years. If you do, you are subject to an expatriation tax on your worldwide assets when you move back to Canada. Whatever you do, do not have children in the US as they will be subject to filing with the IRS forever and it will be difficult for them to emigrate anywhere else later. Education will be much more expensive too. Make your money then move back to Canada.

If you are a wealthy Canadian: life is good.

Updates

Read my 2011 update with an attempt to normalize health care costs.