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Lesson 1.4: Paying for Government Services

To understand how we pay for public goods and services, their relationship to taxation will be explored.

Teacher's Background Information: Progressive Personal Taxation
A recurring theme in recent public discussion has been income and wealth inequality. A central flashpoint for this discussion was the 2011 Occupy Wall Street protests, with their rallying call of “We are the 99%.” The basis of this slogan is that following World War II, all of society shared in the significant economic growth of Western democracies. However, in the 1970s the richest few began taking a disproportionately larger share. This shift has led to economic inequality not seen since the 1930s. Today, about half of the world’s wealth is owned by the richest 1% of people.

Although economic disparity in Canada is less exaggerated than in the world as a whole, recent data from Statistics Canada has shown our country continues to follow this trend. In 2017, the average total income of Canadians rose 2.5% compared to the previous year. In the same period, the average income of the top 1% rose 8.5%. The wealthiest Canadians did even better. Income for the top 0.1% rose 17.2%, while the top 0.01% raked in 27.2% more money in 2017 than in 2016.

Simply put, the earnings of the wealthiest Canadians are growing faster than anybody else’s earnings.

Not surprisingly, when the share of total income rises for the rich, so too does their share of society’s total wealth. According to Statistics Canada, by 2012 the top 10% of the population owned half of Canada’s wealth. In fact, the richest 87 families in Canada possess almost as much wealth as everyone in Newfoundland and Labrador, New Brunswick and Prince Edward Island combined. That’s nearly 1.5 million people.

While there will always be some degree of income and wealth inequality in market-based democracies, many experts have identified the concentration of wealth as problematic. As discussed in Lesson 1.3, when societies become more economically unequal, the well-being of everyone begins to disintegrate. Literacy, life opportunities, and life expectancy goes down for society as a whole.

Perhaps even more alarming from a democratic perspective is that the growth of economic disparity can lead to a breakdown in social cohesion.

Warnings that society could break down due to wealth inequality have come from the highest levels. For example, Janet Yellen—then the chair of America’s central bank—told an American senate hearing that growing inequality “can shape [and] determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.”* In other words, inequality undermines democracies.

Research backs up Yellen’s worries. For example, one study analysed nearly 1,800 public policies in the United States. The authors, Martin Gilens and Benjamin Page, concluded in part that "preferences of economic elites ... have far more independent impact upon policy change than the preferences of average citizens do. To be sure, this does not mean that ordinary citizens always lose out; they fairly often get the policies they favor, but only because those policies happen also to be preferred by the economically-elite citizens who wield the actual influence."**

Quite simply, the rich are more likely than the poor to get the laws that they want.

Such claims give reason for pause. That being said, one also must be careful not to directly transpose the American political experience with that of Canada. This is especially true given the loose political financing laws and greater income inequality in the United States. However, the broader point should not be missed: Every voice should count equally in a democracy, but steep economic stratification could result in laws and public policies that do not always reflect the wishes of the majority.

Because economic inequality is harmful to democracy, how have we used government to help mitigate it? Lesson 1.3 examined the role of public goods and services in equalising society. When everyone is provided with the same essential services, society becomes more equal.

For example, wealthy Canadians and poor Canadians use the same health care system. The rich cannot buy their way to the front of the line for treatment, because health care in Canada is rationed by your health needs, not by your ability to pay. Public health care makes society more equal.

Further, this shared experience helps contribute to our sense of mutual responsibility. Because the rich and the poor rely on the same health care system, everyone shares an interest in seeing it work well.

Nevertheless, wealthier citizens are better-able to financially contribute to the health care system, along with other public goods and services. It would be patently wrong to ask a poor widow to contribute the same amount of taxes for public services as a wealthy CEO. Reflecting this reality, income tax in Canada—the single-biggest source of government revenue—is levied in a progressive manner.

Progressive income tax means that the more a person earns, the higher the marginal rate of tax that they pay. In Saskatchewan in 2020, the very lowest income earners pay no provincial income tax whatsoever. Those who earn more than $16,000 pay 10.5% tax on every dollar earned over $16,000 up to $45,000. The additional earnings between $45,000 and $130,000 are taxed at 12.5%. Finally, there is a top tax bracket of 14.5% on any earnings over $130,000.

Canada’s federal income tax structure is very similar. When provincial income tax is combined with federal income tax, the top income tax rate in Saskatchewan is 47.5%.

Higher tax rates in each bracket are what makes Canada’s tax system progressive. However, the system’s progressivity has been in a general decline for fifty years. In 1965, there were 17 income tax brackets. In 1987 there were 10. Today there only are five.

Along with the reduction in tax brackets has come a reduction of tax rates, especially for the wealthy. It began in 1972 when the top rate was slashed from 80% to 60%. While 80% tax seems high, Nobel Prize-winning economist Paul Krugman has pointed to research that suggests that the ideal tax rate for top earners is between 70-80%, if the goal is to generate optimal tax revenue.

Curiously, 70-80% tax rates on top earners do not generate more tax revenue from the rich. Rather, high tax rates on the rich have been shown to increase tax revenues coming from the middle class. Political economists such as Mark Blyth have explained this phenomenon well.

Following World War II, tax rates on very high incomes reached upwards of 90%. Such high taxes reduced the incentive to pay people millions upon millions of dollars for their work. Why hand out multi-million dollar paycheques when most of it goes straight to the government? With less people being paid exorbitant sums, more money was left to pay better wages to middle and lower class workers. As a result, low-income earners were pushed into tax-paying middle-class wages, and middle-class workers started earning even better wages. Hence, overall tax revenue rose as the middle class flourished. This phenomenon was known as the great compression.

To be sure, factors such as well-organised labour forces and restrictions on foreign investment also contributed to the middling of salaries following World War II. However, highly progressive taxes on the rich were a key component.

Other ways Canada’s tax system has become less progressive is the nature in which income from capital gains is taxed. Generally speaking, the tax rates discussed above only apply to labour. When money is earned from selling property or investments, it is considered a capital gain. Unlike wages earned from labour, only half of the money earned as capital gains is taxed. (As recently as 2000, 75% of these earnings were taxable.) Because the super-wealthy often earn considerable sums from capital gains, their tax rate can be significantly less than the tax rates of working-class people. Even some billionaires, such as Warren Buffet, have remarked that capital gains tax exemptions are unfair: Buffet frequently complains that his secretary pays a higher tax rate than he does.

That being said, not all changes to the income tax system have been at the expense of progressivity. Federal and provincial basic personal income tax exemptions have risen in recent years, raising the amount of money a person can earn before having to pay income tax. As well, the federal government has slightly raised taxes on the highest income earners. So to claim that tax trends have been entirely to the benefit of the wealthy at the expense of the poor is not true.

Overall though, despite a few tweaks, the long-term trend of income taxes has been a story of declining progressivity. Nevertheless, some argue the system is still progressive enough. There may be merit to the arguments that the rich contribute a fair share. Data from 2010 showed that in Canada the top 1% of income earners paid 21.2% of all the country’s personal income tax revenue. The Top 10% paid 54.8%. Meanwhile, the bottom 50% contributed 4% of the country’s entire income tax revenues.

Regardless of where one stands on the issue of income tax progressivity, the fact remains that government must generate revenue to pay for public services. Canada’s progressive taxation demonstrates that our society has a degree of mutual responsibility, and as such those with more financial ability pay more. How we came to this conclusion can be partially explained through Canada’s political development.

Rand Dyck explained in Canadian Politics that the logic guiding Canada’s relatively strong sense of mutual responsibility can be traced back to the United Empire Loyalists. Loyalists opposed the American Revolution, so they fled to British North America. As Dyck wrote, “[t]hey saw society not as a mass of grasping, ambitious, ‘free’ individuals, but as an organic community in which all people had their place and did their respective part to contribute to the welfare of the whole.” This belief in our responsibility to society as a whole may seem left-wing, but it actually links back to the roots of Canadian conservatism. According to Charles Taylor, Canadian conservatism descended from the British Tory tradition, influenced by the French along with the ex-American Empire Loyalists. Together, this dynamic created a conservatism that was wholly different than the United States’ libertarian-based conservatism. “Unlike the caricatured capitalist,” wrote Taylor in the early 1980s, “Canadian conservatives believe in an organic society and the mutual obligations among all classes. Which is why... they embrace the principle of social justice and even the welfare state.”*** That said, many have argued that this framework of Canadian conservatism has slowly been replaced by a more American libertarian model over the past thirty to forty years.

All of this helps explain Canada’s progressive taxation, but also why Canada has traditionally been a more equal society than our neighbours to the south. Rallying calls for the 99% have certainly been made and heard across Canada. Given rising income inequality, these calls are not without merit. Even so, because of Canada’s unique political history our situation—at least right now—is more level than that of the United States.

1. With the class, compile a list of goods and services that the students have made use of in the past 24 hours. Determine which are public goods and services.

2. Explain that taxes pay for public services. To consider differing views on the role of taxes in paying for public services, lead classroom reading of Trudeau Government has failed to produce promised tax relief and "Tax freedom day?" Not really.

  • Are taxes a cost to society or an investment in society?
  • Generally speaking, lower taxes mean less public services. Would you be willing to forgo public services for lower taxes?
  • What would be the consequences of your decision?

3. Use the overhead Government of Saskatchewan Revenue to break down sources of public money.

  • Can taxes be used to change the behaviour of citizens? Think about carbon taxes, liquor taxes, and taxes on junk food, for example.
  • Should certain sectors or certain groups contribute more taxes? Less? Think about corporations or high-income earners, for example.

4. Using teacher’s background information, narrow the discussion to the idea of progressive income tax to help inform a class discussion of Universality vs. Means Testing.

5. To move towards considerations of the role of elected officials and of the purpose of elections, lead class discussion of the responsibilities of governments when using public money.

  • If citizens are unhappy with how public dollars are spent, what recourse do they have?

6. Discussion around the concepts of taxation and public expenditure may be illustrated with the activity “Taxes and Public Expenditure: Springfield’s Bear Patrol” in Learning About Law with The Simpsons.


*** Radical Tories, 1984

Were You Happy Working for the Government and Tax Freedom Day


Government of Saskatchewan Revenue


Universality vs. Means Testing


What is Revolution?