Question 14.9: In this example, we redo Example 12-1, in which we calculate...
In this example, we redo Example 12-1, in which we calculated the federal and provincial taxes payable by a Manitoban earning \$107,000 a year. Let us now suppose that 5\% inflation has occurred, but that tax rates, break points, and personal exemptions have not changed.
INDIVIDUAL TAX IN MANITOBA (2017, 5\% INFLATION)
A Manitoban has a taxable income of \$112,350 (= \$107,000 × 1.05). Find the following:
(a) Total taxes payable
(b) Average tax rate
(c) Marginal tax rate
(d) After-tax income in real 2016 dollars
Data
Taxable Income \$112,350
| 2017 Federal Individual Rates | tax per Level | ||||
| On the first | \$ 45,282.00 | 15\% | \$ 6,792,03 | ||
| from | \$45,282.00 | to | \$ 90,563.00 | 20.5\% | \$ 9,282.60 |
| from | \$90,563.00 | to | \$112,350.00 | 26\% | \frac{\$5,664.62}{\$21,739.52} |
| Less Nonrefundable Tax Credit | \$11,474.00 | 15\% | \$ 1,721.10 | ||
| Basic Federal Tax= | \$ 20,018.45 | ||||
| 2017 Manitoba Provincial Tax | |||||
| On the first | |||||
| \$31,000.00 | 10.8\% | \$ 3,348.00 | |||
| from | \$31,000.00 | to | \$67,000.00 | 12.8\% | \$ 4,608.00 |
| Above | \$67,000.00 | 17.4\% | \frac{\$7,890.90}{\$15,846.90} | ||
| Less Nonrefundable Tax Credit | \$9,134.00 | 10.8\% | \$ 986.47.47 | ||
| Total Federal & Provincial Taxes Payable= | \$ 34,878.85 | ||||
| Average Tax Rate = Total Federal & Provincial Taxes Payable/Taxable Income = | 31.0\% | ||||
| Tax Rate = Tax Payable on Next Dollar = 26\% + 17.4\% = | 43.4\% | ||||
| After-tax income (actual dollars) = \$77,471.15 | |||||
| After-tax income (real dollars) = \$73,782.04 | |||||
Comparing these results with those from Example 12-1, we see that as a result of inflation, the Mani-toban’s average tax rate has increased from 30.4\% to 31.0\%. In this particular example, the marginal tax rate has not increased; however, the marginal rate will increase as soon as inflation pushes the Manitoban’s salary past the next break point. The purchasing power of his or her after-tax income has dropped from \$74,443 to \$73,782. So for individuals, one effect of inflation is an effective increase in taxes.