Apr 20, 2010

It’s not just about size: what makes up our tax bill matters


The Fraser Institute and the CCPA do not typically see eye to eye, but they seem to agree that personal income taxes take up a relatively small fraction of the average tax bill — about 13 – 14%.

According to the Fraser Institute’s recent report on the average Canadian family’s tax bill, the average family earned $69,175 in 2009 and paid $9,341 in personal income tax (see table 1 in their report). In other words, income tax took up only 13.5% of the average family income, pretty close to what Seth reported he paid this year.

Yes, personal income tax is not the only tax people pay. However, Canadians need to know that our tax system has changed considerably over the last fifteen years. Income tax became a lot smaller as a share of the total tax revenue collected by the government, while other taxes, such as consumption tax, now make up more of the tax revenue.

The bad news is that these indirect taxes are often regressive because they take up a higher share of incomes for lower-income households than from higher-income households.

In fact, personal income tax is the most progressive tax we have — the tax rate grows with income (according to income brackets) so people earning higher incomes typically pay a larger share of their incomes in tax.

Contrast this with flat taxes, for example, like BC’s MSP premiums. Everyone pays the same amount regardless of whether they earn $40,000 or $90,000 in a year, which is clearly cheaper for the higher earner than the lower earner.

Even taxes that seem proportional at first sight, like sales taxes which charge people the same percentage rate on their purchases, often end up costing more to those who earn less. Lower income people cannot afford to save much and they end up spending almost all of their incomes on daily purchases that are taxed, while higher income people save a much larger fraction of their incomes (and end up not being taxed on it).

These recent tax changes have had serious distributional impacts that cannot be captured by looking only at the average tax bill.

Studies that look beyond the average and consider the distribution of recent tax cuts by family income find that the biggest beneficiaries of tax cuts over the past 15 years have been the highest income earners. In 2005, taxpayers in the top 1% of the income ladder paid a smaller share of their income on taxes than the bottom 10%, according to a 2007 CCPA study by Marc Lee — even though the richest 1% are clearly in a better position to contribute to the greater good.

In short, recent tax system changes have eroded tax fairness in Canada.

Looking at the size of the average tax bill is the first step, but what matters more for the economic security of Canadian families is the kind of taxes that make up that tax bill and how equitable they are.

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