While a thorough consideration of principles of taxation is beyond the scope of this book, it is important for those in education to have some basic understanding of taxation, since this is how public schools (and, to a considerable extent, private schools in Canada) are financed. It is impossible to discuss educational expenditures without a sense of where the money comes from. There is no agreement on an ideal tax system any more than there is agreement on the ideal education system. People disagree quite strenuously about such matters as the kinds of taxes that should be levied, and who should pay how much. Decisions about how many and what kinds of taxes to levy are political decisions made by governments.

In recent years there has been a great deal of discussion about whether Canadians pay too much tax. Business groups and some media outlets, among others, have argued strenuously that tax rates in Canada must be reduced. Some political parties have made tax reduction a central part of their program, and virtually all parties feel compelled to be very cautious about any possible increases in taxes. Most provinces and the federal government have reduced some of their taxes in response to these concerns and total taxes in Canada have declined as a share of our overall economy. However, in comparison with other industrialized countries, Canada’s total taxes are moderate. All taxes as a percentage of the overall economy (Gross Domestic Product) in Canada in 2019 were 30.5% percent, which put us 28th among 36 countries—just above the United States and Australia but lower than most of Western Europe (OECD, 2020).

Total tax burden also depends on which taxes are being levied and who pays them. As Table 5.4.1 shows, the different levels of government in Canada rely on different kinds of taxes to generate revenue. For the country as a whole, income tax is by far the most important, although property taxes are still important for municipal government.

Table 5.4.1

Main Revenue Sources of Canadian Governments (2019)

Notes.

• Municipal includes school districts.
• Transfers are from one level of government to another – e.g., federal to provincial; provincial to municipal.
• Taxes (federal) includes taxes on income, profits and capital gains, property, goods and services, international trades and transactions.
• Taxes (provincial and municipal) includes payroll and workforce, property, goods and services and any other taxes levied by the province.
• Other includes property income, sales of goods and services, fines, penalties and forfeits, voluntary transfers and miscellaneous revenue.

Sources.

• Statistics Canada. Table 10-10-0016-01  Canadian government finance statistics for the federal government (x 1,000,000)  https://doi.org/10.25318/1010001601-eng
• Statistics Canada. Table 10-10-0017-01  Canadian government finance statistics for the provincial and territorial governments (x 1,000,000). https://doi.org/10.25318/1010001701-eng
• Statistics Canada. Table 10-10-0020-01  Canadian government finance statistics for municipalities and other local public administrations (x 1,000,000). https://doi.org/10.25318/1010002001-eng

In considering taxation, it is important to think not just about a single tax, but to keep in mind the entire flow of revenues from people to governments, and vice versa. In Canada, as in other industrialized countries, government is inextricably bound up with the entire operation of the economy. There can hardly be a person in Canada who does not receive some substantial portion of their income from public funds, either directly or indirectly. Hundreds of thousands of Canadians work for one of the levels of government, or work in services (e.g., health care or education) that are almost entirely funded by governments. Teachers are, of course, among this group; their salaries are paid from tax revenues. Millions of people receive payments from government through such programs as family allowance, pensions, or employment insurance. Many others receive benefits through taxation incentives such as deductions for retirement savings, investments of various kinds, charitable or political contributions, and tuition fees. Many private companies derive much of their revenue from supplying goods or services to government, whether these take the form of consulting, supplies, equipment, office space, construction, or the many other items that governments purchase. And all of us benefit from the services that government supplies (education, health care, transportation, law and order, environmental protection, and so on).

Thus, people and companies not only pay taxes but benefit from them as well, a point that is often ignored when concerns are raised about taxation levels in Canada (Mackenzie & Shillington, 2009). The question is not simply one of who pays taxes, although this is very important, but of how much one pays in relation to how much one benefits, taking into account that many benefits are indirect. It may be reasonable to believe that a given distribution of taxation is wrong, that the money raised is not spent as well as it could be, that the wrong people are paying, or that the wrong people are benefiting, but these questions should involve consideration of the total picture rather than just a small part of it.

Approaches to Taxation

Governments are generally seen to have three approaches to taxation available to them. They can tax income (how much we take in), wealth (how much we have), or consumption (how much we spend). Income tax is, of course, an example of the first of these. Taxes on inheritances, property, and capital gains are examples of the second, and provincial sales taxes or the Goods and Services Tax (GST) or Harmonized Sales Tax (HST) are examples of consumption taxes. Governments typically use some combination of the three approaches.

In Canada, there is a general belief that taxation should be based on ability to pay. We have generally accepted (though not always put into practice) the principle that those who have more should contribute proportionately more. This concept is termed progressive taxation. Thus, the rate of income tax goes up as income rises, meaning that higher-income earners should pay a larger proportion of their income in taxes. Most Canadians believe that our tax system should shift money from those with more to those with less, although there is much disagreement on the extent to which this should be done. However, the application of the principle of progressive taxation depends a great deal on the particular form of taxation. This is because wealth, income, and consumption are distributed quite differently among people.

Income tax is still the single biggest source of government revenue. In Canada, in 2018, the top 10 percent income group in Canada earned an average of $169,700 while the bottom 10 percent earned an average of $36,400 (Statistics Canada, Table 11-10-0055-01). This distribution has been getting more unequal in Canada for many years now, with the top 10% getting a larger and larger share of total wealth. Governments can compensate for inequalities in income by raising tax rates for those with higher incomes, and by offering tax deductions or credits for those with lower incomes. Tax money is also distributed directly to those with lower incomes through various social programs. This redistribution can make a difference, resulting in a substantial transfer of income to poorer families. However, the distribution of income in Canada is getting more unequal, even with taxes and government transfers.

The distribution of wealth is far more unequal than the distribution of income. In 2019 the median net family worth (assets minus wealth) in Canada was some $329,900 (Statistics Canada, 2020). The higher the level of education of the head of the family the higher the average family wealth. Families headed by a single parent had the lowest average net worth of less than $83,100, and tended to have low incomes. In 2019, 69.8% of families held a median debt load of $79,000 owing on such things as mortgages, lines of credit, credit cards, student loans or vehicle loans (Statistics Canada, Table 11-10-0016-01). Family wealth also varied greatly across the country, with the average family in Ontario having an average net worth of $434,500 compared to those in New Brunswick with an average net worth of $185,000 (Statistics Canada, 2020).

There have been some important changes in family assets in recent years. In 2019, half of families had at least one person in the family with an employer-sponsored pension plan, that contributed to a median net worth of $633,300 (though they also carried higher median debt loads). Of course, this means that half of families do not have this option, and contributed to median net worth of only $91,200 (Statistics Canada, 2020). Finally, debt from student loans has increased steadily over the years; in 2019, the value of student loans held by all families was $27 billion (Statistics Canada, 2020). Because most wealth is not in the form of annual income, a change in patterns of wealth would require higher taxation of assets, not income. For example, recently Canada has implemented greater taxes on inheritances, which is one of the most common ways in which people become wealthier.

Property tax, which is a form of tax on wealth, is particularly relevant because in many provinces it is an important source of funds for education, either through a provincial or a local property tax. Some people argue that property tax is unfair, especially to farmers, senior citizens, and others on fixed incomes. Farmland may produce very little annual revenue but have a high value if sold and thus be taxed at a rate that stretches the farm family’s income. Moreover, because farms occupy large amounts of land, even a relatively low tax per hectare may mean a high total tax bill. Most people see this as unfair taxation, even though the land does represent wealth. On the other hand, an individual or business may generate substantial revenue yet pay little tax because of various deductions and reinvestment provisions. Property tax can thus be a way of taxing wealth that would otherwise avoid taxation. Many provinces try to deal with this quandary by providing programs of tax rebates that reduce or refund property taxes to target groups such as farmers, seniors, or others with low incomes.

Property tax is also a good example of the intermeshing of various taxes, since property owners who rent out their property for income can deduct the cost of property taxes from their taxable income, and thus pay less income tax than those who live in their own homes. On the other hand, profit from the sale of one’s own home is not taxed, whereas profit from the sale of a revenue property is subject to capital gains tax. What, then, is the real impact of a particular level of property tax? The answer is that it depends very much on circumstances.

Consumption taxes are different again. One might assume that the less money one has, the greater the share one would spend on goods and services, and therefore the harder hit one would be by consumption taxes such as sales tax. This is the belief behind the program of federal tax credits and rebates for the GST and HST. On the other hand, proponents of sales taxes argue that they actually bring in more revenue from the wealthy because they create revenue from previously untaxed services such as travel, eating out, and even the services of tax accountants.

As we have seen, each form of taxation has advantages and disadvantages, and each is based on a certain view of what constitutes fairness. Most economists believe that some combination of all three forms of taxation is needed to achieve the best balance and greatest degree of fairness, but the reality is that people will always argue about how we should organize our tax system.