A ‘fair share’ fairy tale

‘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 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 per- sonal income taxes paid by the top 10 per cent 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 per cent earned 35 per cent of Canada’s total income yet paid 54 per cent 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 per cent earns 32 per cent of all income in Canada but pays 40 per cent of all taxes.

Meanwhile, middle- and lower- income earners pay proportionately less. Con- sider that the bottom half of earners in Canada earn 22 per cent of all income yet pay only 15 per cent 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 per cent of earners, the average total tax rate is 56 per cent — much higher than the 13 per cent average rate of the bottom 10 per cent.

For more context, look abroad. The top personal income tax rate in Canada (federal and provincial combined) now stands at 54 per cent — high by international standards. In fact, Canada’s 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 topearning 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 tax rates that increase rapidly as Canadians earn more income aren’t intended to stop people from working and being more successful, research shows they have that very effect.

Despite the reoccurring narrative, and recent musings by Lebouthillier, Canada’s top earners already shoulder much of the country’s tax burden.

CANADA’S TOP PERSONAL INCOME TAX RATE IS SECOND HIGHEST AMONG G7 COUNTRIES, BEHIND ONLY FRANCE.