Putting fairness back into Canada’s tax system

November 26, 2007

Earlier this year, Warren Buffett, one of the richest people on the planet, remarked that his secretary, who makes a lot less money than her boss, actually pays a higher rate of tax. Buffett went so far as to call on the US Congress to stop giving major tax breaks to rich people like him.

It would be easy to dismiss this as just another example of the follies of the Bush administration. But a closer look at tax rates in Canada reveals a strikingly similar story.

Calculating the overall tax bill means looking at all the different kinds of income Canadians bring in (what we earn from our jobs, inheritances, employer-provided benefits, the stock market and other investments), as well as all the different taxes that get paid (including income, sales, payroll, property and corporate taxes).

In 1990, Canada’s overall tax system was more progressive, meaning families with higher income contributed relatively more through higher tax rates, to help pay for the things that benefit all of us: health care, education, roads, buses and subways.

Truth be told, things flattened out from the middle of the income distribution to the top – families at the top paid about the same share of their income in taxes as families in the middle.

But by 2005, the system has become far less progressive at the bottom of the distribution, and at the very top it has become regressive. Staggeringly, the top 1% pay total tax rates as much as six percentage points of income lower than families in the middle.

As a number of studies have found, the richest 1% of Canadians are getting the lion’s share of market income gains from a decade of remarkable economic growth. Yet, astonishingly, the richest 1% of families also now pay a lower tax rate than the poorest 10%.

A key reason why the most affluent Canadians are getting off the hook so easily is that more of their income tends to come from sources that are not taxed at all (such as inheritances) or only lightly taxed (such the capital gain from selling stocks).

Historically, income taxes have been an important tool for making sure those at the top pay a fair share, due to brackets that tax income at progressively higher rates.

But Canadian politicians’ mania for tax cuts is a big part of the problem. Rather than leaning against greater inequality, the tax system is now reinforcing the growing gap between the rich and the rest of us. Tax cuts have been unleashed into the system at exactly the time when pre-tax incomes surged for the richest 10% of Canadian families.

It’s a question of fairness. Most tax cuts have been aimed at income taxes, the progressive part of the overall tax system. Cutting income taxes reduces the progressive nature of the tax system, unless tax cuts are deliberately targeted to those with low and modest incomes – and they have not been.

Moves to a flat income tax, as advanced by right-wing commentators, would inevitably lead to a system that is fully regressive when all taxes are considered. Low-income families would pay higher total tax rates than families further up the income ladder.

That would be wholly unfair, and completely unsustainable. So what do we do?

First, we should acknowledge that there is scope for raising income taxes at the top of Canada’s income distribution, so that our tax system once again passes the test of fairness. Canada is nowhere close to hitting tax rates that would have adverse economic consequences.

Second, Canada’s preferential treatment of capital gains is unwarranted, and they should be taxed fully as any other form of income. As Bay Street accountant Kenneth Carter commented after holding a Royal Commission on taxation in the late 1960s, “a buck is a buck is a buck.”

These basic measures would go a long way towards restoring fairness to Canada’s tax system. They would also address growing income inequalities.

Don’t just take my word for it – listen to one of the world’s wealthiest men. His warning is well worth heeding, no matter which side of the border you live on.

Marc Lee is a senior economist with the BC Office of the Canadian Centre for Policy Alternatives (www.policyalternatives.ca) and the Chair of the Progressive Economics Forum (progressive-economics.ca). This piece is based on a recent CCPA study, Eroding Tax Fairness: Tax Incidence in Canada, 1990 to 2005.