Is the Canadian tax system really fair?

Small business owners are actually getting the short end, a recent study suggests

Is the Canadian tax system really fair?
Recently proposed tax changes — which, according to Finance Minister Bill Morneau, are needed to stop high-income Canadians who take “unfair” advantage of tax perks — have had small-business owners in an uproar. And it’s hardly surprising, especially given the results of a recent study comparing taxes and transfers.

“Unfortunately, few finance ministers are brave enough to talk plainly about what people actually pay in taxes and receive in government transfers,” said Paul Boothe, a Fellow of the Institute for Competitiveness and Prosperity, in a column published by Canadian Business. “The reason is that many people might be surprised and unhappy with the level of taxation and the amount of redistribution built into our system.”

Boothe cited data from a recent study by the University of Calgary’s School of Public Policy. The proponents took tax and transfer data from 2008, and analysed how much people paid in taxes and how much they received in transfers from the government. Statutory tax rates and benefits from government transfers were determined for each income class; the authors worked with total income levels, which include wages and salaries, interest, dividends, and government transfers.

Based on the 2008 data from the study, Boothe said, the 20% of adults (Canadians aged 20 years old and above) with the lowest income paid an average tax rate of 17.3%; tax rates got progressively larger for each quintile, reaching 34.9% for the highest-income group.

Boothe then moved on to look at net tax rates — tax rates determined by treating government transfers as negative taxes. According to his analysis, the lowest-income group was taxed at a -47.7% rate, while the highest-income group would have borne taxes amounting to around 34% of their income. “Thus the progressivity of the tax system rises dramatically [with transfers],” he said.

“We are told that the incorporation of professionals like doctors, lawyers and consultants has risen significantly in recent years and that this has caused a significant erosion of the personal tax base,” he said. “Perhaps [this is] because federal and provincial governments have increased taxes on high income earners to the point that those taxpayers no longer think the system is fair.”

Boothe acknowledged that the study used dated information and statistics, but went on to consider a more updated case for Ontario. In 2008, the marginal tax rate in the province was 21.1% for the lowest tax bracket (up to $40,700 of taxable income) and 46.4% for the highest one (above $126,300).

This year, the lowest income bracket (up to $42,200) is charged a 20.1% marginal tax rate, while the highest bracket (above $220,000) has gone up to 53.5%.

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