On Monday, the Carney government narrowly passed its first budget, which among other things seeks to ensure that “everyone is paying their fair share [of taxes]”—a commitment that, in the past, has meant raising taxes on successful entrepreneurs, businessowners and professionals, all people we need more of to fuel Canada’s economy.
But in fact, as noted in a new study, Canada’s tax system is already among the most “progressive” in the industrialized world—meaning the tax system places a relatively larger burden on successful high-earning individuals compared to most other developed countries. Canadians should understand that the progressivity in our tax system has real economic, social and democratic consequences, particularly as governments (both federal and provincial) push for even more progressivity.
Tax progressivity is the degree to which a jurisdiction designs its tax system—through features like income tax rates, income brackets, sales taxes rates and more—to impose a higher tax burden on people as they earn more income.
According to the study, Canadian provinces ranked between 2nd-most (Newfoundland and Labrador) and 17th-most (Saskatchewan) progressive among 45 high-income jurisdictions (including all 10 provinces) in the OECD in 2023 (the latest year of comparable data). Simply put, governments across Canada maintain some of the most progressive tax systems in the industrialized world.
And yet, governments across the country and of all political stripes continue to shift more of the tax burden onto high-earning workers, entrepreneurs, businessowners and investors by cutting bottom income tax rates, raising or leaving top income tax rates untouched, and cutting sales tax rates. But of course, this shift carries real consequences that proponents rarely acknowledge.
First, tax progressivity acts as a drag on the economy and the overall wellbeing of Canadians. A progressive tax system imposes higher tax rates on those earning higher incomes, which discourages people from moving for a new job, working more hours, starting a business or investing their savings. Why? Because taxes reduce the reward people receive for engaging in these behaviours that help grow the economy. Moreover, having one of the most progressive tax systems in the industrialized world also makes it hard for Canada to attract and retain professionals including doctors and engineers, entrepreneurs (who start and build businesses), and investors to finance new and existing businesses. A Canada with more professionals, entrepreneurs, businessowners and investors benefits all Canadians through a more robust and prosperous economy.
Next, consider the idea of fairness, which is a driving motivation for many proponents of raising taxes on higher-income earners. In Canada, the top 20 per cent of income-earning families already pay the majority of all taxes (56.9 per cent) despite earning 47.8 per cent of total income in the country. No other income group pays a larger share of taxes than their share of income. If we’re to judge what’s fair based on paying a share of taxes that’s proportional to your share of income, greater progressivity would actually make Canada’s tax system less fair.
Finally, consider how progressivity affects democracy and democratic decision-making. By design, a progressive tax system excludes some share of the population from paying a meaningful amount of taxes, which are the direct cost of government programs. But when government excludes a significant (and growing) share of the population from any meaningful direct cost for government spending, it incentivizes people to demand more programs regardless of the merits. In other words, people who have no skin in the game will be less concerned that government programs are needed, effective and well-functioning.
In a 2022 poll, for instance, Canadians were asked about their support for national daycare, pharmacare and dental care. When the question attached no direct costs to each program, the majority (69 per cent, 79 per cent and 72 per cent, respectively) of respondents supported all three programs. However, when the question attached an increase in the GST to each program, support plummeted to less than half (36 per cent, 40 per cent, and 42 per cent, respectively). Clearly, the presence or absence of direct costs has a considerable impact on people’s demand for government. A functioning democracy requires engagement by citizens, but such engagement becomes skewed when significant shares of the population face little to no costs for their democratic decisions.
Canada has one of the most progressive tax systems in the industrialized world, and Canadians should know that the push for greater progressivity has real consequences for their economic wellbeing, fairness in the tax system and the functioning of our democracy.
Grady Munro and Jason Clemens are economists at the Fraser Institute.