What could the new government's tax changes mean for you?
Lydia McLaughlin, Business Today Magazine
Personal Income TaxThe personal income tax makes up the majority of tax revenue for the federal government, and will represent the largest change in the tax system.
Current SystemLet's start with someone working a full-time minimum wage job, for a yearly wage of about
AP 25,000. Under the current system, they would take the standard deduction of
AP 3,000 for an eligible income of
AP 22,000, of which the first AP 12,500 would be exempt. They would then be taxed at a rate of 10% for all of their non-exempt income, for a tax bill of
AP 950 (10% of AP 9,500), or an effective tax rate of 3.8%. If they had a child, their tax bill would be reduced by
AP 500 for the child tax credit, for a tax bill of
AP 450 and an effective tax rate of 1.8%. This is a low tax bill, as you might expect for someone making the minimum wage.
But what about a family making
AP 56,000, or about the national median wage? Under the current system, they would take the standard married deduction of
AP 6,000 (unless they're giving more than that to charity each year) for an eligible income of
AP 50,000, of which the first AP 12,500 would be exempt. They would then be taxed at a rate of 10% for their income between AP 12,500-25,000, a rate of 15% for income between AP 25,000-40,000, and a rate of 20% for their income between AP 40,000-50,000, for a tax bill of
AP 5,500 (AP 1,250+AP 2,250+AP 2,000 for the three brackets), or an effective tax rate of 9.8%. If they had a child (or up to 3), they would receive
AP 500 for each child under the child tax credit, for a minimum of
AP 4,100, or an effective tax rate of 7.3%. This is also a fairly low rate for the national median wage.
But what about the richer individuals? Take a family making
AP 200,000. This places them at almost the top of the income brackets. Under the current system, they would likely give more money to charity than the married deduction of
AP 6,000. Let's say they give 10% of their income to charity, or
AP 20,000 for an eligible income for
AP 180,000. They would then be taxed at a rate of 10% for their income between AP 12,500-25,000, a rate of 15% for income between AP 25,000-40,000, a rate of 20% for their income between AP 40,000-50,000, 25% between AP 50,000-60,000, 30% for AP 60,000-80,000, 35% for AP 80,000-100,000, and 40% for their income between AP 100,000-200,000, for a tax bill of
AP 53,000 (AP 1,250+AP 2,250+AP 2,000+AP 2,500+AP 6,000+AP 7,000+AP 32,000 for the seven brackets), or an effective tax rate of 26.5%. If they had children, they would receive
AP 500 off per child, but in the grand scheme of things, this would be a fairly small reduction. This is a substantial increase both in absolute and relative terms from the median wage, but it does not keep pace with the increase in wage from the median wage. It's substantially higher than in other countries, but lower than many others.
Well, how about the uber-wealthy? Take, say, a professional athlete, unmarried, who makes
AP 5,000,000? This person would be subject to the top tax rate. Under the current system, they would almost certainly give more to charity than the standard deduction of
AP 3,000. Let's say they donated 10% of their income, or
AP 500,000. In order to avoid the abuse of the charitable deduction, individuals who make as much money as this person, would only be able to deduct 30% of that amount, which results in an eligible income of
AP 4,850,000. They would then be taxed at a rate of 10% for their income between AP 12,500-25,000, a rate of 15% for income between AP 25,000-40,000, a rate of 20% for their income between AP 40,000-50,000, 25% between AP 50,000-60,000, 30% for AP 60,000-80,000, 35% for AP 80,000-100,000, 40% between AP 100,000-200,000, and 45% between AP 200,000-4,850,000, for a tax bill of
AP 2,153,500 (AP 1,250+AP 2,250+AP 2,000+AP 2,500+AP 6,000+AP 7,000+AP 40,000+AP 2,092,500 for the seven brackets), or an effective tax rate of 44.4%. This is a high effective tax rate, but it does leave them with more than AP 2.34 million, no small sum.
Proposed New SystemThe proposed new system substantially reduces the number of tax brackets, reduces the top rate, reforms the married and charitable deduction, and increases the child tax credit, which will reduce taxes for most people across the board.
Let's start with someone working a full-time minimum wage job, for a yearly wage of about
AP 25,000. Under the new system, they would take the standard deduction of
AP 3,000 for an eligible income of
AP 22,000, of which the first AP 10,000 would be exempt. They would then be taxed at a rate of 10% for all of their non-exempt income, for a tax bill of
AP 1200 (10% of AP 12,000), or an effective tax rate of 4.8%. If they had a child, their tax bill would be reduced by
AP 1000 for the child tax credit, for a tax bill of
AP 200 and an effective tax rate of 0.8%. This is an increase in taxes for low-wage workers (about AP 20/month), actually, but it remains low, as you might expect for someone making the minimum wage. If they have a child, they actually pay less than under the current system.
But what about a family making
AP 56,000, or about the national median wage? Under the current system, they would take the new married deduction of
AP 9,000 (unless they're giving more than that to charity each year) for an eligible income of
AP 47,000, of which the first AP 10,000 would be exempt. They would then be taxed at a rate of 10% for the rest of their income, for a tax bill of
AP 3,700 (10% of AP 37,000), or an effective tax rate of 6.6% and a savings of
AP 1,800. If they had a child (or up to 3), they would receive
AP 1,000 for each child under the child tax credit, for a minimum tax of
AP 700, or an effective tax rate of 0.8%. For larger families making the median wage, this would almost eliminate taxation entirely, an incredibly friendly option.
But what about the richer individuals? Take a family making
AP 200,000. This places them at almost the top of the income brackets. Under the new system, they would likely give more money to charity than the married deduction of
AP 9,000. Let's say they give 10% of their income to charity, or
AP 20,000 for an eligible income for
AP 180,000. They would then be taxed at a rate of 10% for their income between AP 10,000-50,000, and a rate of 20% for the rest of their income, for a tax bill of
AP 30,000 (AP 4,050+20% of AP 130,000), or an effective tax rate of 16.7%. This would represent a savings of
AP 23,000 for them. If they had children, they would receive
AP 1,000 off per child, but in the grand scheme of things, this would be a fairly small reduction. This is still a substantial increase from the median wage, but it's much less than they were paying earlier, and a fairly low tax burden for their income, which is in the top 10% of Nova Anglicans.
Well, how about the uber-wealthy? Take, say, a professional athlete, unmarried, who makes
AP 5,000,000? This person would be subject to the top tax rate. Under the new system, they would almost certainly give more to charity than the standard deduction of
AP 3,000. Let's say they donated 10% of their income, or
AP 500,000. Because of the reform in the charitable deduction, they would be able to deduct 50% of that donation, which results in an eligible income of
AP 4,750,000. They would then be taxed at a rate of 10% for their income between AP 10,000-50,000, a rate of 20% for income between AP 50,000-200,000, and a rate of 30% for the rest of their income, for a tax bill of
AP 1,399,000 (AP 4,000+AP 30,000+30% of AP 4,550,000 for the three brackets), or an effective tax rate of 29.45%. Their savings would be
AP 754,500. 30% of your income still represents a substantial tax bill, but much reduced from earlier.
The new tax system would result in small tax increases for some of the lowest-wage workers without children, but would be a significant reduction for higher-wage workers, especially those in the top 10% or middle class families with children.
Corporate Income TaxThe corporate income tax represents a smaller, but significant, slice of government tax revenue. All businesses will see a reduction in their tax bill, but larger corporations will see a larger reduction. Remember, corporate tax is levied on businesses' eligible income, not revenue, so businesses can deduct operating expenses, depreciation, and other costs before reporting their eligible income.
Current SystemLet's imagine a small business that has eligible income of
AP 250,000. The vast majority of Nova Anglican businesses fall below this threshold. This isn't a major corporation, or even a modestly successful local restaurant chain. This is a mom-and-pop enterprise that likely employs only a few people beyond the owner(s), but is successful. Under the current system, they pay 5% of their eligible income, which amount to a tax bill of
AP 12,500. There is no exemption threshold, but being allowed to deduct some costs means they're not paying tax on their gross revenue.
What about a larger business, with eligible income of
AP 1,000,000? This type of enterprise is either a successful sole proprietorship, such as a lawyer, or a small corporation that employs a decent number of people. This is within the top 10% of businesses in Nova Anglicana, but it doesn't approach the heights of some of the largest corporations in Nova Anglicana, let alone the world. They pay a tax rate of 5% on their first AP 500,000 of eligible income, then a 10% tax rate on income between AP 500,000 and AP 1,000,000. This yields a tax bill of
AP 75,000 (25,000+50,000 in the two brackets), or an effective tax rate of 7.5%. This is a relatively modest payment for a successful business.
But what you really want to know, is how much are the megacorps going to be paying? Let's say we have a business with eligible income of
AP 100,000,000. This places it in the top 1% of businesses worldwide, and one of the biggest in Nova Anglicana alone, but not as big as some of the largest multinationals. They pay a tax rate of 5% on their first AP 500,000 of eligible income, then a 10% tax rate on income between AP 500,000 and AP 1,000,000, and finally a 25% rate on everything above that. This yields a tax bill of
AP 24,825,000 (AP 75,000+25% of AP 99,000,000), or a tax rate of 24.83%. While this isn't as low as certain other countries, it isn't a backbreaking rate either.
Proposed New SystemThe proposed new system simplifies the corporate tax structure greatly. It introduces an exemption threshold of AP 750,000 and has a single 15% rate for all income above that.
Take the small business that has eligible income of
AP 250,000. Under the new system, they pay
nothing, for a savings of
AP 12,500. They have been exempted from taxation entirely. This means the vast majority of Nova Anglican businesses will pay nothing in tax to the central government. Of course, most provinces still have a corporate income tax, so they'll pay that.
Take the larger business, with eligible income of
AP 1,000,000. Under the new system, the first AP 750,000 is exempt, and then they pay a 15% rate on the remaining AP 250,000. This yields a tax bill of
AP 37,500, or an effective tax rate of 3.75%. This represents a savings of
AP 37,500. The new tax regime reduces their already modest payment, which largely comes from the AP 750,000 exemption. They actually pay a higher tax rate on their AP 250,000 of eligible income.
But what about the business with eligible income of
AP 100,000,000? Under the new system, they will have an exemption on their first AP 750,000, followed by a tax rate of 15% on all other eligible income. This yields a tax bill of
AP 14,887,000 (15% of AP 99,250,000), or a tax rate of 14.89%. This represents a savings of
AP 9,938,000, or a 40% reduction in tax. This represents a substantial savings for the company.
Although the relative tax rate will fall for all corporations, and fall the most for small businesses (most will pay nothing), the absolute tax bill will fall the most for those that pay the most.
Estate TaxThe new proposed system also has changes for the estate tax. If a family member of yours passes on, they will likely see no change or a slightly reduced tax rate on the value of their former assets. It's once we get into very large estates that the big changes occur.
Current SystemImagine a relatively modest estate (as far as estates go, though most are certainly worth less), worth
AP 500,000 (a house, savings, investments, car or other personal possessions). Under the current system, that estate would be
entirely tax-exempt. The current exemption threshold of AP 750,000 ensures that the vast majority of estates are not taxed upon death.
Now think of a larger estate. Let's triple the size of the estate to
AP 1,500,000. There are likely multiple real estate properties involved, or a particularly good stock investment, or some valuable piece of artwork. Under the current system, the first AP 750,000 is exempt, and the next AP 750,000 is taxed at a rate of 10%, for a tax payment of
AP 75,000, or an effective tax rate of 5%. Even under the current system, this relatively large estate is taxed at a fairly low rate.
But let's move to the highest level, the level that fewer than 1% of estates occupy, a value of
AP 10,000,000. At this level, it's a certainty that the estate comprises multiple properties, excellent stock investments, partial or full ownership of a business, and other valuable property. Under the current system, the first AP 750,000 is exempt, and the next AP 750,000 is taxed at a rate of 10%, while all value of an estate above that is taxed at a 20% rate. This gives us a tax payment of
AP 1,775,000 (75,000+20% of AP 8,500,000), or an effective tax rate of 17.75%.
This top-level estate still is able to pass down more than AP 8,200,000 to its beneficiaries, a generous sum indeed despite the taxation.
Proposed New SystemNow let's have a look at the estate tax under the new system. The new system proposes to raise the exempt value from AP 750,000 to AP 1,000,000 and lower the tax rate above that to a single rate of 10%.
Imagine the relatively modest estate, worth
AP 500,000 (remember, this likely comprises a house, savings, investments, car or other personal possessions). Under the new system, that estate would be
entirely tax-exempt, which is
no change from the current system. The new exemption threshold and lower tax rate have no effect for this estate, as they will have for the vast majority of estates.
Let's take the estate worth
AP 1,500,000. Remember, there are likely multiple real estate properties involved, or a particularly good stock investment, or some valuable piece of artwork. Under the new system, the first AP 1,000,000 is exempt, and the rest is taxed at a rate of 10%, for a tax payment of
AP 50,000, or an effective tax rate of 3%. This represents a savings of
AP 25,000 from the old system for this relatively large estate. That comes from the additional AP 250,000 of value exempted, as the tax rate for this estate remains unchanged at 10%.
But what about the 1% of estates, an estate worth
AP 10,000,000? Remember, at this level, it's a certainty that the estate comprises multiple properties, excellent stock investments, partial or full ownership of a business, and other valuable property. Under the new system, the first AP 1,000,000 is exempt, and the rest is taxed at a rate of 10%. This gives us a tax payment of
AP 900,000 (10% of AP 9,000,000), or an effective tax rate of 9%. This represents a savings of
AP 875,000 for this incredibly large estate, or almost half of their previous tax bill. AP 25,000 of that savings comes from the raised exemption, but the vast majority comes from a reduced tax rate on non-exempt income.
The estate tax changes will benefit some estates in the top 10-15% with the higher exemption threshold, but the value of the estate tax reduction is primarily for larger estates in the top 1-2%, who will see a substantial reduction in their tax bill.
Summed upThe biggest changes will be for the wealthiest taxpayers, the biggest corporations, and the largest estates, but don't ignore the substantial benefits for small businesses (who will be exempt from taxation, largely), and larger middle-class families. As for the projected growth rates, we can't say at the moment, but it does seem like this will benefit the economy. It's just a question of how much more money people and corporations will spend into the economy and how much less tax revenue will be collected.