Now that tax time has come around again, I decided to put together a post on various tax regimes and their rules (and how things might look under a more sensible tax regime). Like probably everybody else subject to U.S. taxes, I find them extremely draining and needlessly complex, and I am just recovering from preparing the U.S. taxes. I also found I made a major mistake on my Canadian taxes (and probably have to amend the 2014 taxes!), so I am going to take a day or two to recover and then fix them. Fortunately, I hadn't mailed them off yet.
What may be a bit surprising is that in terms of the top two tiers of detail (basic income and basic investments like dividends), the U.S. taxes are only slightly more complex than the U.K.'s and are written in a bit more straightforward fashion than Canada's (where they just don't give enough examples to make it clear that yes, your children count as eligible dependents for example). Also, while it is nice there is some responsiveness on the part of Canadian tax authorities, they made a fairly substantial change to Schedule 1 this year, and I nearly made a major mistake because of it. However, the U.S. quickly delves into completely ridiculous arcane rules and a certain point I do just give up and start zeroing out some of the rows on the Schedule D tax calculator for instance.
In any case, I would definitely prefer a system like they have in Europe, where income is only taxes where it is earned, rather than the system for both Canada and the U.S. where all income is taxed and then there are some exclusions and deductions for the tax paid to other countries. While it is true that there is a tax treaty in place between these two countries, it is also true that if you are a high earner (essentially anything over $100,000), then you absolutely are being doubled taxed in the U.S. at least on a portion of your earnings. I find it difficult to accept that as being fair, particularly given the high tax rates in Canada, which come extremely close to 50% marginal tax rate once you approach $150,000 in global income. One of the inevitable consequences of such high marginal tax rates is that high income people look into tax shelters, legal or not, and then more of the burden falls on people in the $75,000-$150,000 range.
Anyway, it doesn't seem that these issues will ever be resolved. It is interesting and more than a little shocking how low the U.S. sets taxes on investment income. I don't even recall when they cut the rate from 15% to 0% on a wide host of investment income categories, but certainly by 2014. (What's even weirder is how this very important calculation is buried in Schedule D and not directly reported to the IRS.) In contrast, Canada basically says that capital gains are taxed at 50% of the overall tax rate, but on the other hand, more people can deduct standard investment expenses, while this is only available to people who itemize their deductions in the U.S. (and then usually this is still taken away due to the machinations of the AMT).
I would certainly prefer that the U.S. eliminate the 0% rate, which seems completely unjustifiable on any grounds, but allow standard investment fees to directly offset capital gains. That would be an improvement, and would almost certainly raise more revenue, though I am sure someone would still try to game the system.
What I am not crazy about in Canada, and particularly Ontario, is that they pretend to have sort of moderate tax rates (11-13% for higher income individuals) and then they come up with crazy accounting rules, particularly a surtax (so you literally are paying a tax on your tax) that raises the effective rate to 20% and thus 47.5% or so when combined with the federal tax. If being progressive is so important to decision makers, then one should not try to hide the fact that this is embedded in the tax code.
I think more than anything, I do believe that households should be taxed as households, rather than individuals. Not only is it silly for all adults to file separate tax forms, I personally don't think it is just for a tax system to tax an individual earning $120,000 differently from 2 people earning $60,000, and yet it is so. (This is the whole impetus behind the tax sharing adjustment (Schedule 1A) that Harper brought in in 2014, and decided to label the "family tax cut." By making it such a blatantly political adjustment to the tax code, that increases the odds that the Liberals decide to undo this for 2016, which will just exacerbate the problem.) The flip is also a problem. In the U.S. married couples do get a bunch of tax breaks that two unmarried people do not get. There is no perfect treatment that works for all situations, but I do think that household income should be pooled and taxed just once, rather than the extremely complex Canadian system where literally all deductions and tax credits have to be parcelled out across household members. That seems extremely rife for mistakes -- and malfeasance, since it would be very hard for Canada Revenue to keep track and make sure there was no double-counting. Aside from the attempt to tax individuals as completely independent entities (and not part of households) and the tax surcharge, I generally do think Canada's tax rules are a bit fairer. They certainly are simpler than the U.S., which has incredibly and I think needlessly complex rules on investment income. That said, there are definitely a lot of places Canada could provide more examples or just use more straightforward definitions in their tax terms. I guess that really is all I feel like writing on the subject.
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