‘Fair Share’ Income Tax Debate Long on Rhetoric, Low on Facts

August 17, 2021 Updated: August 18, 2021

Commentary

As Canadians prepare to elect their next federal government, there are growing calls to raise taxes on high-income earners in Canada, based on the belief that they don’t pay their “fair share.” Unfortunately, political rhetoric on taxes typically involves little discussion of actual facts about the distribution of taxes paid by different income groups.

In a new study, we measure the distribution of personal income taxes in Canada and find that the top 20 percent of income-earning families actually pay the vast majority of income taxes. Specifically, the top 20 percent pay nearly two-thirds of all federal and provincial income taxes (63.2 percent) while earning less than half of the country’s total income (44.1 percent). These families are the only income group in Canada that pay a larger share of taxes than the share of income earned.

Indeed, all other Canadian families with incomes below the top 20 percent pay a smaller share of personal income taxes relative to their share of total income. For example, the bottom 20 percent of income-earning families pay 1.0 percent of personal income taxes while earning 5.5 percent of total income.

Why? Because Canada’s progressive income taxation system taxes individuals at higher rates, by both the provincial and federal governments, on income above certain thresholds. For example, the current marginal federal tax rate is 15 percent on individual incomes up to $49,020, while income that exceeds $216,511 is taxed at more than double that rate (33 percent). At the same time, many low-income families do not pay any personal income taxes because their tax credits and deductions are greater than the amount of taxes owed.

In addition to income taxes, Canadians also pay a myriad of federal, provincial and local taxes including payroll taxes, sales taxes, property taxes, fuel taxes, profit taxes, import taxes, and many others. When we expand the analysis to include the distribution of all taxes, the data demonstrate that high-income Canadian families still pay a disproportionate share of the country’s taxes.

Specifically, the top 20 percent of income-earning families pay more than half (54.7 percent) of all federal, provincial and local taxes while, again, earning less than half of all income (44.1 percent). And these high-income families are the only income group that pays a larger share of total taxes relative to their share of collective income. Comparatively, the bottom 20 percent of income-earning families pay 2.3 percent of total taxes while earning 5.5 percent of all income.

Clearly, the rhetoric that higher-income Canadians pay little in taxes is not based in reality.

Finally, calls to raise taxes on high-income earners typically overlook the economic consequences. Put simply, people respond to incentives. When governments raise or introduce new taxes, they reduce incentives for important economic activity such as entrepreneurship, investment, and innovation because the financial benefits from those activities are reduced. We shouldn’t use the tax system to penalize the very activities we need and want more of in Canada.

Tax hikes on top earners also reduce Canada’s competitiveness with other industrialized countries, particularly the United States. Raising taxes on high-income earners makes Canada a less attractive place to live and work for high-skilled people such as doctors, scientists, and software engineers.

While there can be reasonable debate over the structure of Canada’s tax system, policy discussions about taxes—during the campaign and beyond—should be rooted in evidence, not rhetoric.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Jake Fuss
Jake Fuss
Jake Fuss is a senior economist at the Fraser Institute.
Tegan Hill
Tegan Hill
Tegan Hill is an economist at the Fraser Institute.