Canadians should be wary about ‘fair share’ tax rhetoric
During the federal election campaign, several political parties called for tax increases to ensure high-income workers pay their “fair share.” However, this type of rhetoric involves little discussion of actual facts about who pays taxes.
In 2016, the Liberals raised the top personal income tax rate from 29 per cent to 33 per cent to improve tax fairness. Five years later, the Liberals and the NDP (the Liberals potential partner in today’s minority government) have proposed further tax increases.
While the Liberal platform includes taxes on luxury goods and a new “minimum tax rule” for high-income workers, the NDP plan calls for increasing the top personal income tax rate from 33 per cent to 35 per cent, implementing a wealth tax and raising taxes on capital gains. If these parties work in tandem, Canadians could see some combination of these tax increases.
However, these proposed tax increases to improve “fairness” ignore basic facts about the current distribution of taxes in Canada. In a recent study, we found that the top 20 per cent of income-earning families pay nearly two-thirds of all federal and provincial income taxes (63.2 per cent) while earning less than half of the country’s total income (44.1 per cent). These families are the only income group in Canada that pay a larger share of income taxes relative to their share of income.
In fact, all other Canadian families with incomes below the top 20 per cent pay a smaller share of personal income taxes relative to their share of total income. For example, the bottom 20 per cent of income-earning families pay 1.0 per cent of personal income taxes while earning 5.5 per cent of total income.
Why? Mainly because of Canada’s system of progressive income taxes where individuals are taxed at increasingly higher rates as their income increases. For example, the marginal federal tax rate is 15 per cent on individual incomes up to $49,020, while income that exceeds $216,511 is taxed at more than double that rate (33 per cent). Many low-income families also do not pay any personal income taxes because their tax credits and deductions are greater than their taxes owed.
Canadians also pay a myriad of federal, provincial and local taxes in addition to personal income taxes, including payroll taxes, sales taxes, property taxes, fuel taxes and many others. Even after including all taxes, high-income families still pay a disproportionate share of Canada’s taxes.
In fact, the top 20 per cent of income-earning families pay more than half (54.7 per cent) of all federal, provincial and local taxes while, again, earning less than half of all income (44.1 per cent). Clearly, the rhetoric that higher-income Canadians pay little in taxes is not based in reality.
Finally, calls to raise taxes on high-income workers typically overlooks the economic consequences. Put simply, people respond to incentives. So when governments raise or introduce new taxes, they reduce incentives for important economic activity including entrepreneurship, investment and innovation because the financial benefits from engaging in those activities are reduced. We shouldn’t use the tax system to penalize the very activities we need and want more of—particularly during the COVID recovery.
While there can be reasonable debate over the structure of Canada’s tax system, Canadians should be wary of misguided rhetoric about implementing tax increases as policy solutions.