Studies in Tax Policy, Fraser Institute, March 2013
64 Pages Posted: 16 Aug 2013
Date Written: March 19, 2013
The traditional definition of tax progressivity is being rewritten and this change could have serious ramifications for democratic decision-making. Up to now, tax progressivity has meant that, as an individual or household earned more income, they not only paid more in taxes but also paid a proportionately higher share of their income in taxes. The concept of tax progressivity is being fundamentally altered by government’s expansion of eligibility for tax credits that were initially targeted at low-income earners. The result is that rather than a progressively increasing tax burden, there is a fairly large and growing group of people who do not contribute to taxes in any meaningful way and another group of people, fairly small, that carry the overwhelming burden of taxes.
The new tax progressivity is not yet as pronounced in Canada as it is in the United States, but it has gained an entrance and there is a possibility of its expanding rapidly. If the benefits of tax credits like Canada’s Working Income Tax Benefit (WITB) and the United States’ Earned Income Tax Credit (EITC), continue to increase and their application expands to an even wider group of citizens, this program, coupled with others like Canada’s Child Tax Credit (CTC), may very well lead to a tax distribution similar to that observed in the United States today, where a growing number of households pay little or no income taxes.
Such a change in the distribution of taxes, creating a large percentage of earners and tax-filers with no income-tax liability, will then bring consequences similar to those in the United States today where large and persistent deficits are common and decisions on the cost of government are deferred to the future. The only way to encourage Canadians to consider the economic costs and benefits of government programs is to ensure that most Canadians, not just a few, are responsible for paying the price of government.
The key to avoiding such a situation is restraint in applying what should be narrowly targeted tax programs like the WITB so Canada can enjoy the benefits of these programs without incurring the political cost the United States has incurred by aggressively expanding them.
Suggested Citation: Suggested Citation
Clemens, Jason and Veldhuis, Neils and Murphy, Robert P., Tax Payers and Tax Takers: Is the Trend of Tax Progressivity in the US Emerging in Canada? (March 19, 2013). Studies in Tax Policy, Fraser Institute, March 2013. Available at SSRN: https://ssrn.com/abstract=2304985