Personal income taxation brings in between 18-21% of provincial revenues in western Canada, and has a substantial effect on the incentives for families to work, save, and invest as well as being a direct determinant of the economic standing of each household. Personal income is taxed both by the federal and provincial governments, which has generated a legacy of co-operation. The most recent innovation in 2000-01 devolved to the provinces the ability to set their own rates, brackets, and credits, using a federally-defined taxable income base.
Through simulations, I show that the different choices made by the four western Canadian provinces have yielded substantially different tax systems, each with unique attributes. British Columbians have a relatively progressive system, with much higher rates at the top than the bottom. Albertans have the lowest marginal tax rates at top incomes, but higher for lower incomes. In Saskatchewan, average tax rates are high, but sizeable work incentives at lower incomes are provided by refundable child credits. Finally, Manitoba features high average and marginal tax rates, but a strong degree of progressivity. In common across the provinces, there is very little progressivity at higher incomes; the marginal tax rate is the same at $125,000 as at $125 million.
Internationally, these results are compared to the systems of the United States, the United Kingdom, Japan, China, and Hong Kong. Both the United States and Japan feature much greater progressivity. In contrast, the United Kingdom and Hong Kong have low and fairly flat tax structures.
The paper concludes with five recommendations, supported by the evidence and analysis gathered here.