Summary
While most Canadians think the country has a progressive tax system due to income tax brackets, when all taxes are considered, the tax system is flat for most Canadians and regressive for the top 20 percent of households, argues a new report by the Canadian Centre for Policy Alternatives (CCPA) and Canadians for Tax Fairness. This research affirms the urgent need for tax fairness measures like the increased capital gains inclusion rate for the ultra-wealthy announced in this month’s federal budget.
In Canada’s Shift to a More Regressive Tax System, 2004 to 2022, CCPA Senior Economist Marc Lee and Economist DT Cochrane, formerly with Canadians for Tax Fairness (C4TF) examine changes to Canada’s tax system by federal and provincial governments, when all taxes and sources of income are considered (including corporate income and taxes, employer-provided benefits, and inheritances and bequests).
The study, co-written and co-published by CCPA and C4TF, looks at tax policy between 2004 and 2022, examining changes made by the Paul Martin Liberal, Stephen Harper Conservative and Justin Trudeau Liberal governments.
A key finding is that the overall tax system has been getting less progressive for low-income households. Households in the bottom 20 per cent in 2022 paid a much larger share of income in total taxes than they did in 2004. While federal taxes have fallen for most groups, provincial taxes have increased.
Among the highest-earning Canadians, those at the top of the income distribution, there have been some modest increases in income taxes, including the federal Liberals’ addition of a new top income tax bracket in 2016. However, the overall pattern is regressive—meaning the highest-income households now pay less as a share of income—due to the low taxation or non-taxation of key sources of income, such as capital gains, inheritances, and bequests.
“We’ve gone through a nearly 20-year period when inequality has soared,” said Lee. “If we really mean to make a dent in income inequality, untaxed income for the highest-income households is the elephant in the room.”
This report proposes three tax reform recommendations that would bring more fairness to the system and improve income inequality by raising much-needed revenue the federal government could use to benefit all Canadians.
1. Increase the progressivity of the income tax system: Ensure high-income Canadians pay their fair share.
2. Enact an annual wealth tax: Include large inheritances and gifts in the recipient’s taxable income. A one percent tax rate for net wealth above $10 million would raise an estimated $32 billion in the first year alone.
3. Raise corporate income taxes and bring in a windfall profits tax: A one-time windfall profits tax was brought in federally for the banking and life insurance sectors for the 2021 tax year. Ongoing windfall taxes can guard against excessive profiteering and make the Corporate Income Tax more progressive overall.
“A fairer tax system will help Canadians confront many of the challenges we face,” says Cochrane. “Raising taxes on the wealthiest individuals and most profitable corporations is essential to building a more just economy.”
Canada’s shift to a more regressive tax system, 2004 to 2022 is available here.
