By Charles Lammam
and Ben Eisen
The Fraser Institute
“Like all Canadians, I am very concerned over allegations that some wealthy Canadians are not paying their fair share of taxes.” That’s a recent statement from Diane Lebouthillier, federal minister of national revenue. While Minister Lebouthillier was talking about real estate speculators, the notion that top earners don’t pay their “fair share” is a recurring narrative about Canada’s tax system. Of course, “fair share” is never actually defined. But the implication is that top earners are getting away without paying much tax.
The data tell a different story. In reality, Canada’s tax system is progressive, extracting proportionately more money from those on the higher end of the income scale.
But data alone cannot determine whether the distribution of the tax burden in Canada is “fair” because what’s fair is different to different people. One thing is certain – the notion that upper-earners face a lighter tax burden is false.
First, consider the personal income taxes paid by the top 10 percent of earners – the country’s high-skilled, educated workers including entrepreneurs, business professionals, engineers, doctors and lawyers. According to Statistics Canada data, in 2013, the top 10 percent of tax-filers earned 35 percent of Canada’s total income yet paid 54 percent of federal and provincial income taxes.
But that of course is just income taxes. Canadians pay a wide range of other taxes – some visible, many hidden – including payroll taxes, sales taxes, property taxes, fuel taxes, profit taxes, “sin” taxes on liquor and tobacco, and much more. When we account for all these taxes, our calculations find that the top 10 percent earns 32 percent of all income in Canada but pays 40 percent of all taxes. So again, the share of Canada’s total tax burden borne by upper-earners is significantly higher than their share of Canada’s total income.
Meanwhile, middle- and lower-income earners pay proportionately less. Consider that the bottom half of earners in Canada earn 22 percent of all income yet pay only 15 percent of all taxes.
The imbalance between lower and higher income groups, in terms of the percentage of income earned and total taxes paid, challenges the narrative that high-income earners don’t pay their “fair share” of taxes. What’s more, it flatly disproves the notion that upper-earners get off easy.
Another way to look at the issue is by considering the average tax rate of Canadians in different income groups. After accounting for all taxes imposed by the federal, provincial and local governments, Canadians in higher income groups pay a higher average tax rate. For the top 10 percent of earners, the average total tax rate is 56 percent – much higher than the average rate of the bottom 10 percent (just 13 percent).
For more context, look abroad. The top personal income tax rate in Canada (federal and provincial combined) now stands at 54 percent – high by international standards. In fact, Canada’ top personal income tax rate is sixth highest among 34 industrialized countries and second highest among G7 countries, behind only France.
A high and uncompetitive personal income tax rate is harmful to Canada’s economy. Why? Because top-earning Canadians can lose to taxes more than 50 cents of every extra dollar they earn in labour income, discouraging them from working, saving, investing and being entrepreneurial. While the intent of tax rates that increase rapidly as Canadians earn more income is not to stop people from working and being more successful, research shows they have that very effect.
Despite the reoccurring narrative, and recent musings by Minister Lebouthillier, Canada’s top earners already shoulder much of the country’s tax burden.
Charles Lammam and Ben Eisen are analysts at the Fraser Institute.