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The Progressive Economics Forum

It’s Not Just About Size: What Makes Up Our Tax Bill Matters

The Fraser Institute and the CCPA do not typically see eye to eye, but they seem to agree that personal income taxes take up a relatively small fraction of the average tax bill — about 13 – 14%.

According to the Fraser Institute’s recent report on the average Canadian family’s tax bill, the average family earned $69,175 in 2009 and paid $9,341 in personal income tax (see table 1 in their report). In other words, income tax took up only 13.5% of the average family income, pretty close to what Seth reported he paid this year.

Yes, personal income tax is not the only tax people pay. However, Canadians need to know that our tax system has changed considerably over the last fifteen years. Income tax became a lot smaller as a share of the total tax revenue collected by the government, while other taxes, such as consumption tax, now make up more of the tax revenue.

The bad news is that these indirect taxes are often regressive because they take up a higher share of incomes for lower-income households than from higher-income households.

In fact, personal income tax is the most progressive tax we have — the tax rate grows with income (according to income brackets) so people earning higher incomes typically pay a larger share of their incomes in tax.

Contrast this with flat taxes, for example, like BC’s MSP premiums. Everyone pays the same amount regardless of whether they earn $40,000 or $90,000 in a year, which is clearly cheaper for the higher earner than the lower earner.

Even taxes that seem proportional at first sight, like sales taxes which charge people the same percentage rate on their purchases, often end up costing more to those who earn less. Lower income people cannot afford to save much and they end up spending almost all of their incomes on daily purchases that are taxed, while higher income people save a much larger fraction of their incomes (and end up not being taxed on it).

These recent tax changes have had serious distributional impacts that cannot be captured by looking only at the average tax bill.

Studies that look beyond the average and consider the distribution of recent tax cuts by family income find that the biggest beneficiaries of tax cuts over the past 15 years have been the highest income earners. In 2005, taxpayers in the top 1% of the income ladder paid a smaller share of their income on taxes than the bottom 10%, according to a 2007 CCPA study by Marc Lee — even though the richest 1% are clearly in a better position to contribute to the greater good.

In short, recent tax system changes have eroded tax fairness in Canada.

Looking at the size of the average tax bill is the first step, but what matters more for the economic security of Canadian families is the kind of taxes that make up that tax bill and how equitable they are.

Enjoy and share:


Comment from Erin Weir
Time: April 21, 2010, 5:31 am

“personal income tax is the most progressive tax we have”

That is mostly true, but check out Figure 5 in Marc’s 2007 study. Personal income tax loses its progressivity among the top 5% of incomes (because it exempts much investment income.)

Meanwhile, corporate income tax is the only tax that is progressive for the top 5% (because it applies to investment income.) A more accurate statement might be that income tax, both personal and corporate, is the progressive part of our tax system.

Comment from Paul Tulloch
Time: April 21, 2010, 7:03 am

that’s right Erin, a good point that gets overlooked. And I can say this- I have worked with a lot of tax data but sadly that is all I can say.

It would be an interesting study. I wonder if we could get the Canadian Tax Federation to sponsor us on a study of the top 20% of income tax returns. You wanna write up the research proposal or should I? lol.

Comment from Marc Lee
Time: April 21, 2010, 9:35 am

But Erin and Iglika, Gordonian economics would dictate that we cannot tax corporations’ income nor can we tax the richest among us; and don’t even think about setting wage floors in the labour market or subsidizing education. Those policies will turn us into an economic basket case. The best we can hope for is transferring income from the middle class to the poor.

Then again, perhaps I’ve just read one too many posts over at WCI …

Comment from Iglika Ivanova
Time: April 21, 2010, 11:41 am

@ Erin: I should have clarified that I was only looking at taxes on families (income earners and consumers). Since you agree that we should not just lump corporate income tax into the family tax bill, we’re left with the personal income tax as the most progressive tax on family income.

I agree that income tax has become less progressive over time, but it remains progressive at almost all income levels.

Comment from Ogada Jarateng
Time: August 1, 2010, 4:17 pm

I keep wondering if it is ignorance or deliberate for our governments at all levels to focus mainly on taxes as source of government revenues. Are there alternatives? do we even want to look for alternatives?. How about budget caps? how about citizens having a say on the budget and actually ticking off some stuff of the list? military hardware, foregin aid, pet projects,

Comment from Travis Fast
Time: August 2, 2010, 9:58 am

Heh Heh, Marc,

What, you did not know that the liberty of the rich was the bell-weather for the rest of us? Sheesh stop going to WCI and read instead a first-rate Scottish apologist for the bourgeoisie: Locke.

Comment from Stephen Gordon
Time: August 2, 2010, 2:49 pm

Gordonian economics would dictate that we cannot tax corporations’ income nor can we tax the richest among us; and don’t even think about setting wage floors in the labour market or subsidizing education. Those policies will turn us into an economic basket case. The best we can hope for is transferring income from the middle class to the poor.

Then again, perhaps I’ve just read one too many posts over at WCI …

Wow. Just wow. Tell me, Marc, is it the moral obligation of progressives to simply believe that whatever proposals you pull out of your butt must necessarily be effective? That it’s somehow poor form to check them against available data?

These are matters of analysis and of data. If you disagree with with the conclusions, at least have the intellectual integrity to say why.

Because right now, I’m about to put you in the same bin as Neils Veldhuis.

Comment from Travis Fast
Time: August 3, 2010, 7:07 am

In response to Stephen Fieldhouse

Major worthwhile Canadian policy initiatives of last 30 years:

Liberalized trade and investment (check)
Conservative monetary and fiscal regime (check)
Flattened personal tax structure (check)
Decreased taxes on capital (check)
Privatisation of crown corps (check)
Reduction in labour standards regulation (check)
Relative reduction of the reservation wage (check)

Increased inequality and a dismal trend rate in productivity growth.

Yep, it really is Marc who ought to be losing sleep over the disconnect between his analysis and the data.

Stunning, just stunning.

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