The purpose of this problem is to consider how effective marginal tax rates are affected by various clawbacks, payroll taxes, and surtaxes.
a. Consider a family of four (two children, age 10 and 12, and one wage earner with a dependent spouse) whose net income places it in the range of the GST and Child Tax Benefit claw backs—net income = $44,800—and whose taxable income places it in the 22 percent federal tax bracket. (Ignore provincial taxes.)
i. Suppose the taxpayer’s income increases by $2,500. Given a 22 percent tax rate, by how much does the tax liability increase, given the GST and Child Tax Benefit claw backs?
ii. The earned income of the taxpayer is subject to both CPP and EI premiums. How do these payroll taxes alter the effective marginal tax rate that applies to the additional $2,500?
iii. Combine your answers from parts (i) and (ii) to find the effective marginal tax rate. (Divide the change in tax liability by the $2,500 change in income.)
b. Now consider a different family (same composition with a single wage earner) with $117,000 in salary income. Suppose this taxpayer receives another $2,500 in before-tax salary income.
i. Assuming a 26 percent federal marginal tax rate, what is the change in tax liability, given the GST and Child Tax Benefit claw backs and the EI and CPP payroll taxes (again ignoring provincial taxes)?
ii. Determine the effective marginal tax rate for this taxpayer.