# from one of the nutters



## Larry6417 (Jan 27, 2010)

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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## steve41 (Apr 18, 2009)

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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## steve41 (Apr 18, 2009)

Heres one I ran recently... Check out the tax rate on the second page....

Tax over time projection

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


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## Larry6417 (Jan 27, 2010)

steve41 said:


> 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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## steve41 (Apr 18, 2009)

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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## Larry6417 (Jan 27, 2010)

steve41 said:


> That example includes the effect of the OAS&GIS clawbacks.


Do you also include clawback of the Working Income Tax benefit (WITB) or GST supplement? If not, then your model is incomplete.


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## MoneyGal (Apr 24, 2009)

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?)


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> 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?)


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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## MoneyGal (Apr 24, 2009)

Ahhh! CC, are you agreeing with me, or refuting my point! I can't even tell at this point.


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## steve41 (Apr 18, 2009)

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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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> Ahhh! CC, are you agreeing with me, or refuting my point! I can't even tell at this point.


I was agreeing with you. Time to go get a cup of coffee


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## MoneyGal (Apr 24, 2009)

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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## steve41 (Apr 18, 2009)

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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## steve41 (Apr 18, 2009)

OK... here's my 'peer-reviewed', 'science is settled' white paper.

$25K wage earner
$50K wage earner
$75K wage earner
$100K wage earner
$150K wage earner
$200K wage earner

(sorry I didn't merge them into a single file)


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## MoneyGal (Apr 24, 2009)

But I can't see your calculations! How is this a "science is settled" proposition?


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## steve41 (Apr 18, 2009)

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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## steve41 (Apr 18, 2009)

OK.... Those above PDFs are now replete with numbers.

Steve


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## cardhu (May 26, 2009)

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 … 


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 … 

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. 

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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## steve41 (Apr 18, 2009)

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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## Larry6417 (Jan 27, 2010)

cardhu said:


> 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.




cardhu said:


> 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?




cardhu said:


> 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.




cardhu said:


> ... 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.
> [/LIST]


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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## Ben (Apr 3, 2009)

Larry6417 said:


> 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?


CPP contributions are forced savings, not taxes. Taxes are spent by the government. CPP contributions are (hopefully) squirreled away for my future use.


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## MoneyGal (Apr 24, 2009)

CPP is something more than forced *savings* - it is forced (or involuntary; means the same thing but sounds slightly less harsh!) contributions to what converts, at retirement, to a lifetime payout annuity (with a bunch of additional side programs and features like survivor benefits, a disabled contributor's pension, death benefits, etc.) 

If it was simply forced savings you'd end up with a pool of savings. Given that your contributions are annuitized, this is something different than simply a pool of savings...


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## Ben (Apr 3, 2009)

MoneyGal said:


> CPP is something more than forced *savings* - it is forced (or involuntary; means the same thing but sounds slightly less harsh!) contributions to what converts, at retirement, to a lifetime payout annuity (with a bunch of additional side programs and features like survivor benefits, a disabled contributor's pension, death benefits, etc.)
> 
> If it was simply forced savings you'd end up with a pool of savings. Given that your contributions are annuitized, this is something different than simply a pool of savings...


A good clarification of my comment - agreed.

The point, however, is that CPP is not a tax.


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## steve41 (Apr 18, 2009)

My take is to treat CPP as a tax, if only because the wage earner has no control over his CPP (&EI) witholdings, and that in retirement, while you can opt for different CPP trajectories (between 60 and 70), the CPP will come to you in any event. Savings on the other hand (rsp, nonreg, realestate, tfsa.....) can be drastically adjusted by the individual (within limits)

In those above studies, 'tax' includes the cpp withholdings. I guess if you decide to leave the waged-salaried system, you could argue CPP was not a 'tax', I chose to call it a tax. Semantics.


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## Ben (Apr 3, 2009)

steve41 said:


> My take is to treat CPP as a tax, if only because the wage earner has no control over his CPP (&EI) witholdings, and that in retirement, while you can opt for different CPP trajectories (between 60 and 70), the CPP will come to you in any event. Savings on the other hand (rsp, nonreg, realestate, tfsa.....) can be drastically adjusted by the individual (within limits)
> 
> In those above studies, 'tax' includes the cpp withholdings. I guess if you decide to leave the waged-salaried system, you could argue CPP was not a 'tax', I chose to call it a tax. Semantics.


It is semantics, and not worth going around in circles about. For your modelling purposes, it can make sense to model it as a 'tax'.

Outside of a modelling context, however, I wouldn't call it a tax. Taxes tend to come off your paycheck and get spent by the government in the short-term. CPP comes off your paycheck, and you get future direct financial return.

But, yes, semantics.


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## cardhu (May 26, 2009)

Larry, there is no straw man…

CD Howe’s introduction to the report, on its website, claims that _“according to a study released today … many – *perhaps most* – Canadians”_ would do better with TFSA than RRSP … the “perhaps most” part is false, or at least cannot be supported by the data presented … its true that the authors of the report itself used more moderate language, leaving their conclusions at “many” rather than “most” … but CDHowe presented this report to the world as if it does something that it clearly does not do … 

The conclusions of the report are meaningless to the majority of Canadians for several reasons, the “single-person” model is just one of them … the real problem is its reliance on marginal rates … the CD Howe report was specifically comparing TFSA vs RRSP as savings vehicles, but it was doing so using a method that is doomed to failure … armed only with marginal rates, it is not possible for most people, married or single, to draw meaningful conclusions in such a comparison. 

The effects of income-tested clawbacks on various social benefits are something people should be aware of, but these METRs are not a panacaea … they are mildly interesting, and they have their uses in certain circumstances, but they are too often used as a crutch … a shortcut … using them as a proxy for the real tax burden faced on withdrawal from RRSP may be simple, but it is wrong most of the time. 



> Also, once couples split income, they still face individual marginal tax rates.


They face individual tax rates … it would still be possible, of course, to assemble a table of METRs for them, but that table would bear no resemblance to the tables shown in the CDHowe report, and would be of limited use in evaluating the “TFSA vs. RRSP” question … just as the CDHowe report is of limited use to singles. 



> How do you define "tax"? If you define it as a fee/ levy on income, then CPP contributions are a "tax."


For the purpose of this discussion, income tax plus (on a selective basis) various effects (both positive and negative) on income-tested social benefits. 

The fact that contributions levels are tied to income is a red herring … many things are tied to income, such as contributions to employer pension plans, contributions to employer GRSPs, contributions to RRSPs … are all of these “taxes” as well? … and if they are, then are benefits/withdrawals received from these to be treated as “tax refunds”? … when you start down an absurd path, you can get to all kinds of fun places. 



> Please explain your rationale for saying that CPP contributions aren't taxes.


Simple … they aren’t taxes … they are contributions to a pension plan … it was foolish of the CDHowe to include them.



> Does this mean that US social security taxes aren't taxes?


Irrelevant. 



> 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.


You missed the point … an METR is still a marginal rate … it is the “M” that is the problem, not the “E” … marginal rates of any kind are not sufficient to judge the effectiveness of RRSPs, because RRSP withdrawals are not taxed at marginal rates, or even E marginal rates.



> By "tax rate," do you mean average tax rate?


No, I mean the _actual_ tax burden … the amount of tax _actually_ attributable to the RRSP withdrawal, including whatever social benefit clawbacks _actually_ apply. 



> The CD Howe report was specifically comparing TFSA vs RRSP as savings vehicles.


Yes, and they were doing a lousy job of it, because they were basing their conclusions on marginal rates … RRSP withdrawals are taxed as ordinary income, not at marginal rates, and not at marginal effective rates … the difference can be significant.



> I think MTR and METR are very important measures when comparing the two.


An all-too-common mistake … RRSP withdrawals are taxed as ordinary income, not at marginal rates … I agree that ETRs are important, but METR can lead to erroneous conclusions… you cannot attribute more than ALL of the tax owing (including E) in any particular year, to an RRSP withdrawal, and yet that is exactly what the use of marginal rates so often does. 



> 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


An all-too-common mistake … you cannot measure the tax burden of all RRSP withdrawals by a marginal rate, “E” or otherwise, and you cannot judge an RRSP by the back-end tax alone … even if the _actual_ tax burden did equal the METR upon withdrawal, which it usually would not, in the situation you describe an RRSP would be (by far) the better choice, if the METR at contribution was 70%.


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## cardhu (May 26, 2009)

steve41 said:


> My take is to treat CPP as a tax


Steves, how CPP is dealt with in a programming context is irrelevant to the question at hand … for the specific purposes of doing what CDHowe attempted to do with their report, CPP is not a tax and should not be included in METR. 

It is a bit more than semantics, as it produces distortions in the data, and erroneous conclusions.


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## steve41 (Apr 18, 2009)

Back to that article from CDHowe....

My complaint isn't the METR, it is that the take-away message, "tax rates are (can be) higher in retirement" is simply wrong headed.

I submitted 6 ordinary planning scenarios, varying the wage-earner's salary from 25K per year to $200K per year, In no way could any of those results imply tax rates were anything but lower, post retirement.

I could have changed the retirement age back to 60 or 55, moved the horizon ahead from 95 to 100, indexed his salary higher than inflation, forced a lower ATI target post retirement.... it wouldn't have made a difference. The 'saving for retirement/die-broke' paradigm simply won't result in a higher tax rate post retirement.

In fact, when you examine the RRSP strategy and project a companion TFSA strategy... side by side, the RRSP is so close to the TFSA, that it is almost a dead heat.

If you include the TFSA income in the calculation of GIS, then the RRSP actually outperforms the TFSA.


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## Larry6417 (Jan 27, 2010)

*More semantics!*

Some of the debate here relates to a basic misconception about the CPP. Even though it's called a pension plan, for most of its existence the CPP was a social insurance plan, not a pension. By "pension plan" (or forced savings) I mean contributions/taxes are saved and invested on behalf of the individual. Not so! CPP contributions were used to fund the benefits of retirees. In 1997 contribution/tax rates were boosted so that the excess (the amount not needed to pay retirees) could be saved and invested. 

Let's review the definitions proposed in this thread:

Gov't spending = tax

Forced savings = not-tax/ pension

These definitions lead to problems almost immediately. By "gov't spending" do we mean direct gov't spending or indirect spending i.e. income redistribution? Much (most?) of what the federal gov't takes in isn't spent directly (e.g. wages for civil service) by the gov't; it's redistributed and spent by others (e.g. social benefits). If we consider both direct gov't spending and income redistribution to be "tax," then almost 100% of "contributions" prior to 1997 were "tax." Even after 1997, a significant portion is "tax" (i.e. used to pay present benefits) while the rest is forced savings (i.e. pension). I'm not sure of the exact breakdown. If we consider income redistibution as "not-tax" then CPP contributions were never tax, even though they were not forced savings i.e. not pension prior to 1997.

After thinking about this...my head hurts. Don't misunderstand me. I think we need more CPP, not less. Many people are not saving enough on their own. Forcing people to save through the CPP ensures that the "ants" who save don't have to pay too much for the "grasshoppers" who didn't. I believe in the KISS principle. If the gov't takes money out of my pocket, then it's a tax - less money for me to spend or invest. That money can be spent wisely or foolishly by the gov't. Forced saving is a wise choice, but it's still a tax.


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## steve41 (Apr 18, 2009)

FWIW... removing CPP (withholdings pre retirement and pmts post retirement) doesn't change the _"tax rates lower in retirement"_ results in those six prior studies.


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## Larry6417 (Jan 27, 2010)

steve41 said:


> Back to that article from CDHowe....
> 
> My complaint isn't the METR, it is that the take-away message, "tax rates are (can be) higher in retirement" is simply wrong headed.
> 
> ...


I think we disagree because your lowest-income scenario is 25K annually. If you look at the CD Howe report, the highest METRs (marginal effective tax rate i.e. including clawback of social benefits) are at very low levels of income. 

For example, someone making $8,000 annually would pay no income tax (and would likely be the beneficiary of social benefits) pre-retirement. Therefore, any tax or clawback of benefits for that individual represents a higher METR post-retirement compared to pre-retirement.
See www.servicecanada.gc.ca/eng/isp/oas/pdf/tabrates2010.pdf

At low levels of income GIS is clawed back substantially.


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## Larry6417 (Jan 27, 2010)

cardhu said:


> You missed the point … an METR is still a marginal rate … it is the “M” that is the problem, not the “E” … marginal rates of any kind are not sufficient to judge the effectiveness of RRSPs, because RRSP withdrawals are not taxed at marginal rates, or even E marginal rates.


RRSP withdrawals aren't taxed at marginal rates!?! Wow, thanks for the tip! So a person at a MTR of 50% won't pay $500 for a $1,000 withdrawal from an RRSP! Does this come from "Tax Tips for Penury"?



cardhu said:


> No, I mean the _actual_ tax burden … the amount of tax _actually_ attributable to the RRSP withdrawal, including whatever social benefit clawbacks _actually_ apply.



See above. 

I'm still not sure what tax rate you're referring to. In fact, I'm not sure you know what tax rate you're referring to.




cardhu said:


> Yes, and they were doing a lousy job of it, because they were basing their conclusions on marginal rates … RRSP withdrawals are taxed as ordinary income, not at marginal rates, and not at marginal effective rates … the difference can be significant.


Of course RRSP/RRIF withdrawals are taxed as ordinary income. Ordinary income is taxed as ordinary income. RRSP withdrawals, like ordinary income, have both average and marginal tax rates. Think of the two as conjoined twins. You can't send the marginal tax rate to Calgary while the average tax rate stays in Winnipeg.




cardhu said:


> An all-too-common mistake … RRSP withdrawals are taxed as ordinary income, not at marginal rates … I agree that ETRs are important, but METR can lead to erroneous conclusions… you cannot attribute more than ALL of the tax owing (including E) in any particular year, to an RRSP withdrawal, and yet that is exactly what the use of marginal rates so often does.


Actually, RRSP withdrawals are taxed at MTR and average tax rates. As previously posted, average tax rates are lower than MTR for ordinary income as well as RRSPs. No difference, aside from pension credits/income-splitting. 



cardhu said:


> An all-too-common mistake … you cannot measure the tax burden of all RRSP withdrawals by a marginal rate, “E” or otherwise, and you cannot judge an RRSP by the back-end tax alone … even if the _actual_ tax burden did equal the METR upon withdrawal, which it usually would not, in the situation you describe an RRSP would be (by far) the better choice, if the METR at contribution was 70%.



So you can't measure tax burden by MTR? So a person at an MTR of 50% isn't worse-off than a person at a marginal tax rate of 32%? Also, a RRSP withdrawal at an METR of 70% is far better than a METR of 0% (with a TFSA)? Have you actually thought about that? Your arguments are beyond entertaining and illogical. They've reached the truly bizarre. A person withdrawing $1,000 (from a RRSP) at a MTR of 50% will have only $500 after tax. To have the same after tax amount, a person must withdraw from a TFSA... $500. Also, the TFSA won't trigger clawback of social benefits while the RRSP withdrawal will. The question is: how does the RRSP compare to the TFSA in accumulating wealth after-tax? The RRSP uses pre-tax dollars while the TFSA uses after-tax dollars. The CD Howe report concluded that the clawback of social benefits made the TFSA superior in many (perhaps most) cases.


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## steve41 (Apr 18, 2009)

Do you honestly think that a single, earning $8000 a year even remotely belongs in a discussion regarding tax rates? Welfare or negative income tax, maybe, but surely the cohort represented by wage earners between the limits of $25K and $200K represents the most significant portion of the population.

Naturally, any wage earner earning less than the $10382 minimum will have a zero tax rate pre retirement, but reducing that $25K amount to $12500 annually still results in a higher pre retirement tax rate. (6% pre, 0% post)

If the CD Howe paper served any purpose, it underscored the need to simplify the tax code. Not to remove its progressive nature (flat tax), but to eliminate the erratic effect of the "METR" caused by the conflicting and overlapping credits, surtaxes and thresholds as well as the overlapping of the fed and prov brackets brought about when TONI was introduced.


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## Larry6417 (Jan 27, 2010)

steve41 said:


> Do you honestly think that a single, earning $8000 a year even remotely belongs in a discussion regarding tax rates? Welfare or negative income tax, maybe, but surely the cohort represented by wage earners between the limits of $25K and $200K represents the most significant portion of the population.
> 
> Naturally, any wage earner earning less than the $10382 minimum will have a zero tax rate pre retirement, but reducing that $25K amount to $12500 annually still results in a higher pre retirement tax rate. (6% pre, 0% post)
> 
> If the CD Howe paper served any purpose, it underscored the need to simplify the tax code. Not to remove its progressive nature (flat tax), but to eliminate the erratic effect of the "METR" caused by the conflicting and overlapping credits, surtaxes and thresholds as well as the overlapping of the fed and prov brackets brought about when TONI was introduced.


Are you saying there aren't people who make only $8,000? If it's a small enough number we can ignore them? In that case, perhaps you should also exclude people making more than 250 K annually.I didn't say that the number of people affected was large. I merely responded to your assertion that MTR (or METR) cannot be higher post retirement.


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## steve41 (Apr 18, 2009)

Let's get back to that statement that the CD Howe paper (and a lot of other 'nutters') love to spout..... "Income tax rates can be higher post retirement than pre retirement". Can we please put this puppy out of its misery?


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## Larry6417 (Jan 27, 2010)

steve41 said:


> Let's get back to that statement that the CD Howe paper (and a lot of other 'nutters') love to spout..... "Income tax rates can be higher post retirement than pre retirement". Can we please put this puppy out of its misery?


Are you switching back to marginal tax rates only from marginal effective tax rates? Of course, MTRs will be the same or lower post-retirement (unless people have done exceptionally well investing). You previously said that your calculations included social benefits clawbacks.


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## steve41 (Apr 18, 2009)

For me, only the effective tax rate matters. That % which, when multiplied by your gross taxable income, results in your tax payable. The T1 algorithm in other words. It is not a rate, it is a formula. 

MTRs or METRs are part of the tax (T1) calculation, but it is the effective tax rate that has meaning. Average tax rate, marginal tax rate, METR... these can be quantified, but the T1 is what rules the day. 

Talk of a 70% or 0% tax rate is nonsense IMHO. Walk into a bar (high end country club or workingmans' bar) and ask for a show of hands... "Who here had a tax rate of 70% or 0% last year?"

Good luck with that.


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## MoneyGal (Apr 24, 2009)

But Steve: if you walked into a bar and asked ME what my MTR or even my METR is for last year, I'd give you the correct answer. I am sure you think I am a "nutter," but METR is extremely relevant to my personal situation, because of child tax benefits.


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## steve41 (Apr 18, 2009)

I said tax rate, not marginal tax rate or METR. If you examine those prior studies I posted, you will find that they check out. You can take the numbers and submit them to a T1.... they include OAS and GIS clawbacks, age credits, Ontario's Health Care Levy... pretty much the entire tax code.

I did not cherry pick those examples.... 15K salary, 25K, 50K 75K, 100K, 150K, 200K. Each one of those projections showed an unequivocal truth.... the effective tax rate in retirement is lower than it is pre-retirement.

I've invited you to pick another example. I'm waiting.


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## Larry6417 (Jan 27, 2010)

steve41 said:


> I said tax rate, not marginal tax rate or METR. If you examine those prior studies I posted, you will find that they check out. You can take the numbers and submit them to a T1.... they include OAS and GIS clawbacks, age credits, Ontario's Health Care Levy... pretty much the entire tax code.
> 
> I did not cherry pick those examples.... 15K salary, 25K, 50K 75K, 100K, 150K, 200K. Each one of those projections showed an unequivocal truth.... the effective tax rate in retirement is lower than it is pre-retirement.
> 
> I've invited you to pick another example. I'm waiting.


You've already been provided with two examples of the importance of social benefits clawbacks. You dismiss them because they conflict with your precious notions. You previously claimed that you considered clawbacks as part of your model. You're backtracking!

I don't think another example would help. You're welcome to wait as long as you want.


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## steve41 (Apr 18, 2009)

Again, those 6 plans I posted contained GIS and OAS clawbacks as well as CPP, EI withholding, age credits, the full progressive (fed & prov) T1 formulation. Examine the numbers, it is all there.


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## cardhu (May 26, 2009)

Larry said:


> I'm still not sure what tax rate you're referring to.


Congratulations, Larry ... admitting you have a problem is the first step.



> _Some of the debate here relates to a basic misconception about the CPP._


Yes, there are some misconceptions floating about ... CPP benefits are formula-driven benefits that are directly tied to one’s history of pensionable earnings, the same pensionable earnings on which contributions are based ... while the benefit formula may differ from that of most employer pensions, it is still a pension ... but this is a debate that likely isn’t going to be resolved here, and it doesn’t need to be ... at the end of the day, it doesn’t matter whether someone prefers to “think” of CPP contributions as a “tax” ... it doesn’t change anything in this discussion. 

You have to understand the context, Larry ... you see, CD Howe was specifically attempting to compare TFSA vs RRSP as savings vehicles ... so regardless of whether or not you think of CPP contributions as a “tax”, they do not belong on a table of METRs in that analysis ... CPP contributions have no bearing whatsoever on the comparison of TFSA vs. RRSP as savings vehicles ... CD Howe was foolish to include them and your arguments in defense of their inclusion make no sense. 



> _ So a person at a MTR of 50% won't pay $500 for a $1,000 withdrawal from an RRSP! _


That person would include the $1000 among their reported income for the year. The amount of tax attributable to that withdrawal depends on circumstances. 

I agree that marginal rates have their uses, but this notion that RRSP/RRIF withdrawals must always be “the last dollar earned” is utter nonsense … it makes sense in some cases, but in many (perhaps most) others it does not … in any event, it is only an interpretive tool ... no such sequence actually exists – that is not how the tax system works ... any such “sequence” is imaginary, and rearranging that imaginary sequence makes not one iota of difference to the final tax bill.

People should be aware of their MTRs and METRs, of course ... they are useful in some (but not all) decision-making, but unfortunately many people seem to think that’s all they need to know ... the problem is that the marginal tax rate, which is the default crutch so many people lean on, often leads to misleading and/or outright impossible conclusions. 



> _ So you can't measure tax burden by MTR? _


You can measure it however you want to measure it, but if you rely solely on MTR, or METR, your measurement will be wrong a lot of the time ... I guess it comes down to whether or not you’re willing to settle for poor analysis and weak conclusions ... if that’s what floats your boat, then carry on. 



> _ a RRSP withdrawal at an METR of 70% is far better than a METR of 0% (with a TFSA)? Have you actually thought about that? Your arguments are beyond entertaining and illogical. They've reached the truly bizarre. _


My arguments are perfectly logical, and correct ... you, on the other hand, are busy railing against something that nobody has said ... feel free to read what I _actually_ wrote before launching another rant. 



> _ The question is: how does the RRSP compare to the TFSA in accumulating wealth after-tax? The RRSP uses pre-tax dollars while the TFSA uses after-tax dollars. The CD Howe report concluded that the clawback of social benefits made the TFSA superior in many (perhaps most) cases.
> _


That indeed is the question ... unfortunately, the CD Howe report comes up well short of providing a useful answer ... armed only with marginal rates, it is not possible for most people, married or single, to draw meaningful conclusions in such a comparison ... therefore, CD Howe’s claim is unfounded ... 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 ... MTRs and METRs have their uses in certain circumstances, but are too often used as a crutch … using them as a proxy for the real tax burden faced on withdrawal from RRSP may be simple, but it is wrong most of the time.



> _ Wow, thanks for the tip! _


You’re welcome.


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