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Discussion Starter #1
In one of the past threads there was debate about tax rates in retirement vs pre-retirement. Great scepticism was evinced that rates could be higher in retirement than pre-retirement. Marginal effective tax rates (marginal tax rates taking into account clawback of social benefits) can exceed marginal tax rates pre-retirement. Look at www.nationalpost.com/rss/story.html?id=2528406
 

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The issue is as follows...

If you take an average wage earner saving for retirement using his RRSP, retiring at some age 60-65 and living off the proceeds of his RRSP such that his savings deplete in an ordered fashion out to some horizon age (90-95-100) and you assume that the taxation rules (current marginal rates of 15/22/26/29 and brackets indexed to inflation, OAS and GIS clawbacks as well as age credits etc) apply, then there is no way that the effective income tax rate will be higher in retirement than pre-retirement. In any case I have seen, the rate is lower.

Give me a sample case.... a just-starting-out wage earner, retiring at 65 say and living off the proceeds out to some horizon age. I will run and post the numbers. Pick a salary, ret age and final horizon age as well as rates for inflation and rate of investment growth.
 

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Discussion Starter #4
Remember there is no such animal as a marginal effective tax rate.... there is the T1 you submit every year. That's it.

You're being too narrow in your definition. As explained in previous posts, marginal effective tax rates take into account clawback of social benefits (also explained in the article I cited). Taxation goes beyond the T1.
 

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That example includes the effect of the OAS&GIS clawbacks. My model defines the taxation algorithm to include clawbacks, EI&CPP withholdings, etc.

So, for 'T1', read 'the stuff the feds take away each year'.
 

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I truly don't understand this discussion.

When you are describing a tax amount paid for a given level of income, that amount can be expressed as a ratio or "rate." Why do you insist there is "no such thing" as a marginal effective tax rate?

The same ME rate will be applicable across a range of income, hence it is a useful concept - particularly in planning scenarios to find the tipping point between different tax rates. (Or do you run multiple scenarios adding and removing single dollars of income?) :confused:
 

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I truly don't understand this discussion.

When you are describing a tax amount paid for a given level of income, that amount can be expressed as a ratio or "rate." Why do you insist there is "no such thing" as a marginal effective tax rate?

The same ME rate will be applicable across a range of income, hence it is a useful concept - particularly in planning scenarios to find the tipping point between different tax rates. (Or do you run multiple scenarios adding and removing single dollars of income?) :confused:
I don't understand this discussion either. Surely, there is such a thing as how much is taxed away for every extra dollar you earn. And surely, that's a very important consideration in contributing to a RRSP, choice of investments in taxable accounts etc.
 

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I guess I don't understand comments such as.... "my metr is 70%". Where does that piece of information get into an individual's day to day financial decision making? The above pdf I posted stands up to an accuracy audit... each number can be checked arithmetically and the tax payable can be checked against a T1. It contains most of the surtaxes, credits and clawbacks, although not all.

All I was responding to was the original commentary that tax rates are higher in retirement. I have never been able to verify that except in the situation where the subject is not only saving for retirement, but is amassing a very large estate. Tax rates can be higher then in retirement.

When I say there is no such thing as marginal, average or marginal effective tax rates, I am merely making the point that the only meaningful metric is after tax income.... the amount you get to keep after the feds have finished.
 

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Ok, Steve, but "the only meaningful metric is after-tax income" doesn't actually mean the same thing as "there is no such animal as a marginal effective tax rate."

As for whether the scenario of having a higher (effective) tax rate in retirement than during your working life can ever occur, the C.D. Howe Institute's report contains two pages of appendices purporting to show exactly when (at what income points) and where (which provinces) that happens.

Right now, I have your assertion that this phenomenon "cannot" exist, plus two pages of published appendix suggesting exactly when, where and how it does exist. It's hard for me to reconcile your assertions with the C.D. Howe report. Perhaps you should publish a white paper refuting their study. I'm sure lots of us would read it!

Finally: I understand that the C.D. Howe methodology may operate at the extremes - i.e., at extremely low or high (as you've pointed out) levels of income, the model does weird things, and perhaps they're just pointing out the weirdnesses at the edges. However, the point of their report was to challenge the middle-of-the-road, mainstream thinking about "RRSPs always win for long-term savings."

p.s x-posted with you, CC. I think I'm going to take your advice and fire up the espresso machine...
 

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If this was a meaningful measure, then surely it wouldn't be difficult to add it to Quicktax, Taxwiz.... Increment income by $1, recalculate the tax, determine the Marginal Effective Tax Rate and have it drop out alongside the tax payable, and effective tax rate. A programmer could do that over coffee.

Maybe they will, who knows.

The other thing to remember is that a decision I make now re tax tweaking may come back to bite me in the future. Minimizing my METR this year will change the tax dynamic each and every year out into the future. I am not aware that the CD Howe study got into that, did they?
 

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Would 2 smileys have helped?. Sheesh. (I guess you haven't been tuned into the AGW controversy)

OK..... I will re-post with the numbers. Stay tuned.
 

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The Post article is journalistic fluff, and the CDHowe report it references is deeply flawed in its conclusions ... the effects of various forms of income on program eligibilities is something that people should be aware of, but the media and most participants in forums such as these place far too much emphasis on these.

Some of the problems in the CDHowe report include …

  1. The majority of the population is married (or equivalent, for income tax purposes) … this includes seniors … thus the income-splitting opportunities available to most of the population are ignored in the CDHowe report, as are the reduced effects of clawbacks that are based on household income instead of individual income .... therefore, the study is meaningless to the majority of the population …
  2. They seem to be treating CPP contributions as a “tax” during the contribution years ... the corollary to this would be that receiving benefits from CPP in retirement ought to be treated as an “anti-tax” ... so that if I draw $60k from RRSP, with corresponding $10k tax bill, while simultaneously receiving $10k CPP benefits, then the using CDHowe’s methods, my METR should be ZERO ... obviously, that is an absurd approach ... receiving CPP benefits is no more a “tax refund” than contributing to CPP is a tax.
  3. Also, they make the incorrect assumption that marginal rates in retirement are sufficient to be able to judge the effectiveness of RRSP ... this is an all-too-common mistake ... it is the tax rate that matters, not the marginal tax rate, and not the marginal effective tax rate ... the METR is essentially a worst-case-scenario, but the majority of cases are not the worst case … it is quite a simple matter to face a tax burden on RRSP withdrawals, that is far far less than ones’ marginal rate.
 

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My devious mind says..... "Hmmmm how can we convince the average wage earner to eschew the RRSP and opt for the TFSA, because if they do, the CRA will collect more tax in the near term, ergo more revenue."

I am not sure where the CDHowe institute sits politically, but hey, every little conspiracy theory helps.:)
 

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Discussion Starter #20 (Edited)
Some of the problems in the CDHowe report include …

The majority of the population is married (or equivalent, for income tax purposes) … this includes seniors … thus the income-splitting opportunities available to most of the population are ignored in the CDHowe report, as are the reduced effects of clawbacks that are based on household income instead of individual income .... therefore, the study is meaningless to the majority of the population …
Can you point to the section of the report that says it speaks for all Canadians? If not then your argument is a straw man. Also, once couples split income, they still face individual marginal tax rates.


They seem to be treating CPP contributions as a “tax” during the contribution years ... the corollary to this would be that receiving benefits from CPP in retirement ought to be treated as an “anti-tax” ... so that if I draw $60k from RRSP, with corresponding $10k tax bill, while simultaneously receiving $10k CPP benefits, then the using CDHowe’s methods, my METR should be ZERO ... obviously, that is an absurd approach ... receiving CPP benefits is no more a “tax refund” than contributing to CPP is a tax.
How do you define "tax"? If you define it as a fee/ levy on income, then CPP contributions are a "tax." Those taxes are used to fund retirement benefits, but that doesn't make CPP contributions less of a "tax." Please explain your rationale for saying that CPP contributions aren't taxes. Does this mean that US social security taxes aren't taxes?


Also, they make the incorrect assumption that marginal rates in retirement are sufficient to be able to judge the effectiveness of RRSP
Actually, the report clearly states that considering marginal tax rates (MTR) only isn't sufficient. People also need to take into account the effect of clawbacks of social benefits.


... this is an all-too-common mistake ... it is the tax rate that matters, not the marginal tax rate, and not the marginal effective tax rate

t is quite a simple matter to face a tax burden on RRSP withdrawals, that is far far less than ones’ marginal rate.
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By "tax rate," do you mean average tax rate? Everyone's average tax rate (tax / income expressed as a %) is lower than his MTR (% last dollar is taxed at), even at the lowest MTR. In AB the lowest MTR is 32%, so the average tax rate must be lower than the MTR because there's an untaxed portion of income. The CD Howe report was specifically comparing TFSA vs RRSP as savings vehicles. I think MTR and METR are very important measures when comparing the two. For example, if the MTR (or METR) is 50% with an RRSP but 0% with a TFSA, that's awfully important to know when deciding how to invest incremental income
 
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