Top 20 Percent of Canadian Families Pay Nearly Two-Thirds of Taxes: Fraser Institute

A person looks at a Canada Revenue Agency homepage in Montreal, on Aug. 16, 2020 (The Canadian Press/Graham Hughes)

The top 20 percent of income-earning families in Canada pay nearly two-thirds of the country's taxes, according to new research from the Fraser Institute.

"In short, Canada’s tax system disproportionately taxes the top 20 percent of families whether we are analyzing personal income taxes or all types of taxes," said the report titled Measuring Progressivity in Canada’s Tax System, 2023.

The report noted that in 2016, the federal government added a new top federal income tax bracket, raising it from 29 to 33 percent on income over roughly $200,000. That year, a new lower tax rate was created for Canadians making between $45,282 and $90,563.

The report said the policy of raising taxes on higher-income earners to ensure all Canadians pay their share is "largely based on misperceptions" as the share of taxes paid by high-income earners "greatly exceeds their collective share of income."

According to the Fraser Institute’s Canadian Tax Simulator, the bottom 20 percent of family income range is under $59,270 per year, the second quintile pays between $59,271 and $104,048, the third quintile pays $104,049 to $159,040, the fourth pays $159,041 to $243,799, and the top 20 percent range is above $243,799. The quintiles have average tax rates of 2.4, 8.1, 12.7, 16.2, and 24 percent, respectively.

The report found that the bottom 20 percent of families pay only 0.7 percent of all federal and provincial income taxes and receive 5.1 percent of the total family income in Canada, meaning the total income is over seven times larger than their share of income taxes paid.

Comparable ratios were seen with the second quintile (4.6 percent of taxes paid to 10.1 percent of total family income in Canada), the third quintile (11.3 percent of taxes paid to 15.7 percent), and the fourth quintile (21.5 percent of taxes paid to 23.5 percent of total family income.)

The top quintile is the only one that pays more in income taxes than its share of total reported income, paying 6.9 percent compared to 45.7 percent of total family income in Canada. "Put differently, although this income group earns a large portion of total family income, it is paying more than its share of income taxes when measured on a proportional basis," the report said.

Lower Productivity and Tax Evasion

Similar results were seen when additional taxes like sales, payroll, profit, property, fuel, tobacco, and liquor taxes were added to the assessment. The first quintile pays 2 percent of all taxes compared to 5.1 percent of total family income in Canada, the second pays 7.6 percent compared to 10.1 percent, the third pays 14.3 compared to 15.7, the fourth 23.1 compared to 23.5, and the top earners pays 53.1 percent compared to 45.7 percent.

When all taxes are added together, the bottom quintile has a tax rate of 18.5 percent, the second has a rate of 35, the third has 43.2, the fourth has 45.9, and the final has 54.2 percent.

The report said that while raising taxes on top earners can increase government revenue, the approach ignores the economic consequences and associated behavioural responses of taxpayers, which harms the country's productivity. Tax increases can discourage productive economic activity by making Canada a less attractive place to live and work for highly skilled people like doctors, scientists, managers, and software engineers, the report argued.

According to the report, Canada has the seventh-highest top combined personal income tax in the Organisation for Economic Co-operation and Development, comprised of 38 members. It added that further tax increases would only serve to heighten Canada's disadvantage compared to the United States, which has lower taxes for top-income earners.

"Migration from Canada to the United States by high-income and skilled STEM workers is a major potential source of foregone income tax revenue, especially over the life-cycle of these highly skilled workers," the report said.

"Canada’s proximity to and economic integration with the United States amplifies the behavioural response of taxpayers when facing new or higher taxes, as Canadians have an attractive jurisdiction to relocate to as an alternative."

Higher taxes may also result in Canadians modifying their behaviour by working less, shifting some of their compensation from taxable income to other benefits, and shifting their incomes to other tax jurisdictions.

"Any of the described behavioural responses ... can affect the tax base and ultimately lead to lower tax revenues than the government anticipates. For this reason, it is critical to factor in the behavioural responses of taxpayers when policymakers are contemplating changes to the tax system, including changes that take the form of higher income tax rate," the report said.