Contrary to rhetoric, high-income families pay most taxes in Canada
Some politicians want to increase taxes on high-income earners in Canada. They claim that the “ultra-rich” don’t pay their fair share. However, the data tell a different story.
In a recent study, we measured the distribution of taxes paid by Canadian families across various income groups and found that the top 20 per cent pay nearly two-thirds of all federal and provincial income taxes (61.4 per cent) while earning less than half of the country’s total income (44.6 per cent). These higher-income families comprise the only income group in Canada that pays a larger share of taxes relative to its share of total income.
All other Canadian families with incomes below the top 20 per cent pay a smaller share of personal income taxes than their share of income earned. The bottom 20 per cent of income-earning families pay less than one per cent of all personal income taxes despite earning more than five per cent of Canada’s collective income.
Why? Because of Canada’s progressive income taxation system. In such a system, both the federal and provincial governments tax individuals at higher rates when their income exceeds certain thresholds.
A simple example illustrates the effect. At the federal level, the current marginal tax rate is 15 per cent on individual incomes below $50,197. Income that exceeds $221,708 is taxed at more than double that rate (33 per cent). Moreover, some low-income families do not pay any personal income taxes because their tax credits and deductions are greater than the amount of taxes they owe.
On top of income taxes, Canadians also pay other federal, provincial and local taxes such as payroll taxes, sales taxes, property taxes, fuel taxes, profit taxes and many more. When the analysis includes the distribution of all taxes, the data show that high-income Canadian families still pay a disproportionate share of taxes.
In particular, the top 20 per cent of income-earning families pay more than half (53.0 per cent) of all federal, provincial and local taxes. Again, this occurs while these families earn less than half of total income in Canada.
Again, the top 20 per cent of families are the only income group that pay a larger share of total taxes relative to their share of collective income. In contrast, the bottom 20 per cent of income-earning families pay slightly more than two per cent of total taxes while earning roughly five per cent of total income.
Clearly, the data bear little resemblance to the political rhetoric about high-income Canadians paying little in taxes.
Calls for tax increases on high-income earners also ignore the negative consequences of such hikes. Taxpayers respond to incentives. If a government raises or implements new taxes, it reduces incentives for people to participate in entrepreneurship, investment and innovation because there’s less of a financial benefit from engaging in those activities. Raising taxes on Canadians would also further inhibit Canada’s competitiveness with other advanced countries around the world. Higher relative tax rates make it difficult to attract and retain high-skilled workers including doctors, scientists and engineers.
Discussions about Canada’s tax system must involve data and evidence rather than conjecture. There are many ways to improve the current tax structure, but blindly throwing darts at the board is not one of them.