Measuring Progressivity in Canada’s Tax System, 2023

Summary

• There is a common misperception in Canada that top income earners do not pay their share of taxes and that increasing taxes on this income group is an effective way to generate significant additional government revenue.
• However, high-income families already pay a disproportionately large share of all Canadian taxes. Indeed, the evidence shows that the top 20 percent of income-earning families pay nearly two-thirds (61.9 percent) of the country’s personal income taxes and more than half (53.1 percent) of total taxes.
• In contrast, the bottom 20 percent of income-earning families are estimated to pay only 0.7 percent of all federal and provincial personal income taxes and 2.0 percent of total taxes in Canada. This is, in part, due to the progressivity of Canada’s tax system, where the share of taxes paid typically increases as income rises.
• Raising taxes on high income earners ignores the economic consequences of tax rate increases and the associated behavioural responses of taxpayers when faced with higher tax rates or new taxes. In response to a tax increase, many taxpayers will change their behaviour in ways that reduce their taxable income through tax planning, avoidance, or evasion that results in governments raising less revenue than anticipated.
• Tax increases also reduce Canada’s competitiveness with other industrialized countries, particularly the United States. Specifically, increasing taxes on top income earners makes Canada a less attractive place to live and to work for highly skilled people such as doctors, scientists, managers, and software engineers.