Morneau must clarify his definition of a ‘fair share’ of taxes
The Trudeau government has talked a lot about “tax fairness” while pushing for major changes to Canada’s personal income tax system including a tax rate hike on top earners. Indeed, “tax fairness” was a prominent theme in this year’s budget and, more recently, when Finance Minister Bill Morneau (above right) proposed changes to how small businesses are taxed.
Critically, however, Morneau has never defined what “fair share” means. Instead his government’s rhetoric has helped fuel a general impression that the country’s top earners are getting away with paying very little tax.
In reality, however, Canada’s top earners pay a disproportionate and growing share of the country’s taxes. If Ottawa wants to justify its tax changes on the basis of fairness, then it must clarify its definition of “fair share.”
This may help. An objective way to assess fairness is to compare the share of total taxes paid by top earners to the share of total income they earn. If these shares equal, then this signals a fair distribution of taxes.
While Minister Morneau seems preoccupied with income taxes, to properly measure the share of taxes paid by top earners we must look beyond income taxes. Canadians pay a myriad of other federal, provincial, and local taxes including payroll taxes, sales taxes, property taxes, fuel taxes, carbon taxes, profit taxes, import taxes, alcohol taxes, and more. A complete assessment of tax fairness must account for all these taxes.
Unfortunately, no government agency reports how much Canadians pay in total taxes.
However, using the Fraser Institute’s tax simulator, we’re able to measure the distribution of total taxes. It turns out that the top 20 per cent of income-earning families in Canada is the only group that pays a disproportionate amount of taxes relative to the income they earn. Specifically, 55.6 per cent of all federal, provincial, and local taxes are paid by the top 20 per cent of income earning families, while this same group earns 49.1 per cent of the country’s total income.
By contrast, Canadian families with lower levels of income pay proportionally less in total taxes than they earn in income. For instance, the bottom 20 per cent pays 1.8 per cent of all taxes while earning 4.1 per cent of total income.
But what about the vaunted top one per cent?
Minister Morneau has targeted the one per cent as part of his tax fairness agenda. And this group features prominently in discussions of tax fairness and inequality. So let’s look at the amount of taxes these Canadians pay.
Canadian families in the top one per cent pay 14.7 per cent of all federal, provincial and local taxes, which is almost 40 per cent higher than their 10.7 per cent share of total income earned. In fact, the top one per cent paid approximately the same amount of taxes as the bottom half of Canadian families (14.6 per cent), who collectively earn 20.2 per cent of the country’s income.
Not only does the top one per cent pay a disproportionate share of the Canada’s taxes, their share has increased over the past two decades. In 1997, the top one per cent paid 11.3 per cent of all taxes. Today, again, that share is 14.7 per cent.
By the objective fairness standard of paying taxes proportional to the share of income earned, raising taxes on Canada’s top earners can’t be justified. If Morneau is using a different definition of fairness, he should explain exactly what that is.