Many years ago I calculated how much in taxes citizens were paying for the privilege of living in my country. The same method of calculation can be used for taxpayers in different countries. The inspiration for this exercise came from complaints of those around me who believed they had less and less disposable income with each passing year. So, I decided to put on my research and analysis hat and calculate the average disposable income in Canada.
At the time that I first went through these calculations, Canada’s tax rate was at an all time high and the country was having difficulty issuing bonds on the international markets. The market had lost confidence in Canada’s ability to manage its economy and its debt. Federal government debt as a percentage of GDP in 1995 was 68%, climbing even higher in 1996 to 69%. In comparison, in 2009 Canada’s debt to GDP was less than 29%.
In the midst of this I wondered what Canada’s capacity was to continue raising taxes. The result of my investigation was a real eye-opener for me as I hope it will be for you. It also drove home the importance of having an effective tax strategy. It seems that the Canadian federal government at the time, and with the help of international investors giving the thumbs down, came to the same realization.
Go through this exercise and see what you discover:
1. Family Annual Income
2. Less: Government Remittances (Employment Insurance, mandatory Health Insurance, Canada Pension Plan Deductions
3. Less: Union dues
4. Less: Expenses necessary for work (work clothing, transportation to and from work, etc.)
5. Less: Mandated insurance coverage (such as automobile insurance)
6. Less: Accommodation (we all need a place to live – I used the average figure for Toronto)
7. Less: Food and groceries (I used the average figure for a family of 3 in Toronto)
8. Less: Other necessities that you do not have a choice to buy or you will die or not be able to live in the community.
9. Equals: Gross disposable income.
10. Discount for additional taxes. If you buy a good or service in Toronto you pay an extra 13% (it was 15% before the federal conservative government was elected).
11. True Disposable Income.
At the time I had done this calculation, the true disposable income for a family earning $80,000 was about 8% or $6,400. That amount would be used to buy toys for the children, gifts for Christmas, vacations, courses, books, and so forth.
I tried the calculation for different income levels and realized that it didn’t get much better the more money you made, unless you made $200,000 or more. Since, the tax rate itself (the percentage of income taxes you pay to the federal and provincial governments) increases the higher your income level you weren’t necessarily any better off if you got a higher paying job or were promoted.
As I was l looking at these calculations it reminded me of feudalism during medieval times in Europe. Only back then the farmers were only paying one-quarter of their crop to the king and what remained they could consume or trade without having to pay additional taxes.
Without getting off topic, I was inspired to revisit these calculations because now the United States and other countries are suffering from a debt burden that’s caused the rest of the world to believe in their ability to manage their economy and finances. So, I’m wondering how the United States can get its budget in order without raising taxes to the point where more jobs are lost to other countries.