Measuring Effective Tax Rates on Human Capital: The Canadian Case

Kirk A. Collins and James Byron Davies ()
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Kirk A. Collins: University of Ottawa

No 20025, University of Western Ontario, RBC Financial Group Economic Policy Research Institute Working Papers from University of Western Ontario, RBC Financial Group Economic Policy Research Institute

Abstract: This paper analyzes the impacts of a wide range of tax provisions on the incentive to invest in human capital, and shows how these effects can be quantified using effective tax rates, or ETRs. The approach is illustrated using data for Canada. For individuals with median earnings, ETRs on the human capital formed in first-degree university study are sizeable, although not as large as for physical capital in Canada. When the expenditure side and its direct subsidies are also taken into account, the net effective tax rate on human capital becomes negative. The taxation of human capital is far from uniform. ETRs vary by income level, gender, part-time vs. full-time study, whether students have loans, number of dependants, and use of sheltered savings plans. Workers at higher percentile levels of the earnings distribution throughout life may face ETRs substantially higher than those for low-income workers, as a result of progressive income taxation.

Date: 2002
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