Trump says Canadians would pay ‘much lower taxes’ as Americans. He’s wrong.

“A lot of people in Canada are liking becoming our beautiful, cherished 51st state. They’ll have to pay much lower taxes.”

— President Donald Trump, remarks to the media, Feb. 25

“They [Canadians] wouldn’t be paying for these tariffs. They’d have much lower taxes if they were part of this great country.”

— White House press secretary Katherine Leavitt, remarks at a news briefing, March 6

Trump has made it clear that he thinks Canada, a NATO member that shares a 5,500-mile border with the United States, should give up its sovereignty and become the 51st state. One of his main arguments is that it makes financial sense.

Not only would he not impose tariffs — which he wrongly claims are paid by Canadians when in fact they are largely paid by American importers and consumers — but he and his press secretary argue that Canadians would face “much lower taxes” if they joined the United States.

Are they right?

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The Facts

First, we confirmed with the White House that Trump and Leavitt were not simply suggesting the elimination of tariffs would mean lower taxes. A White House official said they were referring to income tax rates and sent us a link to an article on an independent Canadian news website, The Hub, that said “Canada’s marginal tax rates are much higher than America’s.”

What are marginal tax rates? That refers to the tax imposed on each additional dollar of income. Both the U.S. and Canadian systems are progressive, meaning tax rates get higher as a person’s income increases. Canada starts at 15%, and the U.S. starts at 10 percent — but the top American rate is 37%, compared with 33% for Canadians.

In other words, a person making $750,000 in the United States would be paying a 37% rate in the U.S., compared with 33% in Canada. The United States also levies an additional 3.8% tax on investment income once income is above $250,000. So the marginal income-tax rate, in effect, could be above 40% in the United States.

The Hub article combines both state (or, in the case of Canada, province) and federal income taxes to calculate the marginal rates. Because Canadian provinces have higher income tax rates than U.S. states (some of which have zero income taxes), they all rank higher than the state with the highest marginal rate — California. The article quoted University of Calgary economics professor Trevor Tombe as saying that marginal tax rates, especially at higher incomes, were a factor in wealthy earners seeking to work in the United States.

But it’s very difficult to compare the tax systems of different nations on an apples-to-apples basis.

Canada, for instance, does not permit a deduction for mortgage payments, a somewhat sacred cow in the U.S. system. Canada also has a universal health care system — which is administered at the provincial level, one reason the provinces have higher tax rates. The United States has no such health care system except for Medicaid (for the poor) and Medicare (for the elderly). Instead, Americans must fork over their own money for health insurance or get health coverage through their employer (which in effect is part of their income, though untaxed).

In other words, marginal rates tell only part of the story. Tax deductions can mitigate those rates — or they can help pay for things, such as health insurance, that are not provided in another country.

Cristina Enache, global tax economist at the nonpartisan Tax Foundation, said the overall tax burden (the ratio of taxes to gross domestic product) is much higher in Canada than the United States: 34.8% versus 25.2%. (This figure includes corporate taxes, so it’s broader than just individual taxes.) Excluding health care spending in each country, she calculated the average tax burden in the U.S. would be 18.96%, while in Canada it would be 22.48%. That’s a difference of 3.5 percentage points, including corporate taxes.

Tombe said that perhaps the most relevant and authoritative comparison at the individual level was a report, “Taxing Wages,” that is released annually by the Organization for Economic Cooperation and Development (OECD), which includes the world’s wealthiest nations. “This is a good comparable measure across countries that is relevant for most individuals,” he said.

The OECD focuses on what it calls the “tax wedge.” This is a more sophisticated measure than the marginal tax rate because it includes income taxes and payroll taxes (for programs like Social Security) and also subtracts cash benefits that people receive from the government. In essence, it measures the difference between the labor costs to the employer and the corresponding net take-home pay of the employee.

Going through the 2023 report — which measures the tax wedge across many income categories — it’s clear that both the United States and Canada have relatively low tax rates in the OECD. The average tax wedge among OECD nations is 34.8% of labor costs — and Canada stands at 31.9% and the United States at 29.9%. By comparison, the highest level was reached by Belgium, at 52.7%, followed by Germany (47.9%), Austria (47.2%) and France (46.8%).

The United States and Canada were also close in the tax wedge for single earners and for one-earner couples with children; both gave a similar tax preference to families. The biggest difference between the two countries was on the taxes imposed on two-earner couples with children. Canada and the United States were still below the OECD average, but Canada’s tax wedge was 28.8% and the United States was 24.6%.

“While Canadian taxes are slightly higher than the U.S., the difference is minor and both countries have tax rates below the OECD average,” Tombe said.

The Pinocchio Test

Trump and Leavitt claim that Canadians would pay “much lower taxes” if they joined the United States. That’s a stretch. While marginal rates are higher in Canadian provinces than in American states, Canadians presumably would have to give up government-provided health insurance. Moreover, when assessed by the OECD, there’s not much difference between overall taxes at the individual level in Canada and the United States. Canada is slightly higher, even with better benefits, and both countries have relatively low tax rates compared to their peer group. The overall tax burden gets higher in Canada when corporate taxes are included, but Trump was talking about individual taxes.

It’s not quite Four Pinocchios, but the White House claim is mostly false.

Trump earns Three Pinocchios.

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