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Sunday, February 28, 2010

Canadian Tax Foundation

Canadian Tax Foundation: "The Evolution of Payroll Taxes"




The Evolution of Payroll Taxes

Statistics Canada's Provincial and Territorial Economic Accounts provides easily accessible data on public finance. The information shows that since 1981 federal and provincial payroll taxes have remained a small part of the overall tax burden, despite long-term increases in Canada and Quebec Pension Plan contributions and a long-term decline in employment insurance (EI) premiums.

As shown in the table, federal and provincial income taxes rose from 19.6 percent of wages, salaries, and supplementary labour income in 1981 to a high of 27.1 percent in 1998 and have since settled in the range of 23 to 24 percent. Over the same period, the payroll taxes identified in the table rose from 6.3 percent of income to a high of 9.6 percent in 1998 and in 2007 amounted to 9.2 percent, an increase much smaller than the overall increase in personal income taxes. The two main payroll taxes have changed in opposite directions. The amounts shown for Canada and Quebec Pension Plan contributions, which include employee, employer, and self-employed contributors, rose substantially with the rate reform introduced to restore financial stability to the plans. These levies were equivalent to 2.0 percent of income in 1981 and now amount to 5.5 percent. Employee and employer contributions to the EI program amounted to only 2.4 percent of income in 1981, but rose to 4.0 percent in 1998 and then began a steady decline until 2007, when they were equivalent to only 2.1 percent.

Income and Payroll Taxes as a Percentage of Wages, Salaries, and Supplementary Labour Income
1981 1990 1998 2006 2007
Personal income tax
Federal 11.7 15.9 16.8 14.1 14.9
Provincial 7.9
10.2
10.3
9.2
9.4
Subtotal 19.6
26.1
27.1
23.3
24.3
Payroll taxes
CPP and QPP 2.0 2.7 3.9 5.6 5.5
Employment insurance 2.4 3.5 4.0 2.3 2.1
Workers' compensation 1.1 1.6 1.3 1.2 1.2
Medical care 0.8
0.3
0.4
0.4
0.4
Subtotal 6.3
8.1
9.6
9.5
9.2

Economic theory indicates that workers bear the burden of all payroll taxes: even those taxes initially imposed on employers are presumably passed along eventually in the form of lower wages. But employers see payroll taxes as a direct cost of employing workers. The move to increase Canada and Quebec Pension Plan levies was offset for most employers by reductions in the more onerous EI premiums. The balance shown in the table will change when the EI premiums are revised to reflect the program costs inflicted by the recession.

David B. Perry
Toronto