Our Government Our Election

Objective
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 public discussion is income and wealth inequality. Following World War II, the significant economic growth of Western democracies was shared relatively equally between the poor and the rich. However, in the 1970s the richest few began taking a disproportionately larger share of the wealth. 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.

Though economic disparity in Canada is much less exaggerated than the world as a whole, Canada still suffers from a high degree of economic inequality.

According to Statistics Canada, in 2022, the wealthiest 20% of Canadian households held more than two-thirds of the country’s household net worth. The bottom 40% of households only held 2.6% of the country’s household wealth.

The news is not entirely bad. In the same year, Statistics Canada reported that the income gap between the rich and the poor narrowed ever-so-slightly.

Despite small bits of good news, economic inequality remains a real problem in Canada. According to the Bank of Canada, economic inequality exploded in the 1980s and 1990s. While inequality stabilised during the 2000s, the fact remains that the incredible shift of wealth seen in the 1980s and 1990s has never been corrected.

There will always be some degree of wealth inequality in liberal democracies. Nonetheless, many experts have identified substantial economic inequality as a serious problem. As discussed in Lesson 1.3, the more economic inequality in a society, the worse off that society becomes. Literacy, life opportunities, and even life expectancy become worse for the poor.

In fact, the growth of wealth disparity can contribute to a breakdown in mutual trust and social cohesion.

WEALTH AND 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 America’s loose political financing laws and greater income inequality. 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.

TAXATION FOR EQUALITY
Because economic inequality is harmful to democracy, how can government help mitigate it? Lesson 1.3 examined how public goods and services help to equalise 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 equal 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 2024, the very lowest income earners pay no provincial income tax whatsoever. Those who earn more than $18,491 pay 10.5% provincial tax on every dollar earned up to $52,057. The additional earnings between $52,057 and $148,734 are taxed at 12.5%. Finally, there is a top provincial tax bracket of 14.5% on any earnings over $148,734.

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%.

Progressive taxation makes Canada’s tax system more fair for everyone. The less income you have, the more of your total earnings go towards essentials such as groceries and shelter. The higher your earnings, the more “disposable income” you have for luxuries that are not necessary for life.

However, the tax system’s progressivity has been in a general decline for sixty years. In 1965, there were 17 income tax brackets. In 1987 there were 10. Today, when the federal and provincial income tax rates are combined, there are only seven.

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 is 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.

The reason a 70-80% tax rates generate optimal tax revenue is not because these rates siphon tax dollars from the wealthy straight to the government. Rather, these high rates change the incentives for corporate pay structures. Political economists such as Mark Blyth have explained this phenomenon well. They called this era—roughly from the close of World War II until the 1970s—the “Great Compression.”

During the Great Compression, tax rates on top earners were incredibly high. These high taxes meant that corporations had little incentive to provide ridiculously high pay for their top executives. Why hand out millions of dollars to a few executives when 80% of it would go straight to the government?

This changed the behaviour of corporations. It made sense for companies to more fairly-distribute salary across the company instead of see a few people’s paycheques mostly vanish in taxes. As a result, lower-paid employees were paid more.

At first, it would seem that paying all employees more would lower tax revenues: after all, low-and-middle class earners pay lower tax rates than the highest earners. However, this tax policy led to two things happening.

First, when the wages of low-and-middle income people went up, their tax bills went up. At the same time, because these people had more money in their pockets, they relied less upon public services and government supports.

Second, low-and-middle class earners tend to spend their money in the local economy. The flow of money locally generated more local tax revenue.

The result of 80% taxes on the highest earners? A rise in overall tax revenues and a flourishing middle class. Government revenues were boosted and government costs were reduced.

To be sure, no single tax policy can explain complex economic phenomena. Other characteristics of the Great Compression that contributed to the burgeoning middle-class were well-organised
labour unions that were largely focussed on working conditions and salaries. As well, the era was a time of heavy restrictions on foreign
investment, making it more difficult to move money outside of Canada.

Highly progressive taxes on the rich were only one component of the Great Compression.

Canada’s tax system has become less progressive in other ways as well. For example, there have been regressive changes to how 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. Capital gains are subjected to less taxes than labour.

Capital gains taxes were introduced following a 1972 Royal Commission. The commission reported that capital gains and wages should be treated the same, since both increase an individual’s economic power. Or as the commission’s chair simply put it, “a buck is a buck.”

At first, 50% of any capital gain was subjected to income tax. In 1987, two-thirds of any capital gain became subjected to income tax. In 1990, three-quarters of any capital gain was subjected to income tax. However, in 2000, tax laws were changed so that, once again, only half of the money earned as capital gains were taxed. More recently, in 2024 the law was changed again in a more progressive manner. Half of all capital gains remained taxable, but now two-thirds of any capital gain over $250,000 became taxable income.

Because the super-wealthy often earn considerable money 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 remarks that while he pays more taxes than his secretary, his secretary pays a higher rate of tax than he does.

That being said, not all changes to the income tax system have been at the expense of progressivity. In addition to recent changes to how capital gains are taxed, federal and provincial basic personal income tax exemptions have risen in recent years, increasing 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 in recent years. To claim that tax trends have been entirely for the benefit of the wealthy at the expense of the poor is not true.

These tweaks noted, the overall 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 that argument. Data from 2021 showed Canada’s top 1% of income earners paid 22.5% of total taxes. In fact, the top 10% of earners pay over half of all income taxes. Meanwhile, the bottom 20% of income earners pay less than 1% of all personal income taxes.

Of course, income taxes are only one part of the story of how each of us contributes taxes for public spending. When other types of personal taxes, such as sales taxes, payroll taxes, profit taxes, property taxes, fuel taxes, import duties, tobacco taxes, and liquor taxes are factored in, a 2023 study from the Frasier Institute found that the bottom 20% of earners took in 5% of the total income earned in Canada, and paid a 2% share of Canada’s total personal taxes. On the other end, the top 20% of earners took in 46% of all income earned in Canada, and paid 62% of Canada’s total personal taxes.

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. People with more wealth pay more taxes. How we came to this understanding can be partially explained through Canada’s political development.

CANADA’S HISTORY OF MUTUAL RESPONSIBILITY
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 and fled to current-day Canada. 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.”****

Many have argued, however, that this structural framework of Canadian conservatism has steadily drifted towards the American model in more recent times.

All of this helps explain not just Canada’s progressive taxation system, but also why Canada has traditionally been a more equal society than our neighbours to the south. Canada has high levels of economic inequality, but our unique political history has made us more economically equal than the United States.

Procedure
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 Were you happy working for the government until June 10? and "Tax freedom day?" Not really.
KEY QUESTIONS

• 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 to have lower taxes for less public services?

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

• 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 taxation 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.
KEY QUESTION

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

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

7. Further concepts about universality of public services are explored in "Absolute Freedom and Universal Health Care" in Albert Camus' The Plague: The Learning Resource.

* http://www.thenation.com/artic...
** http://journals.cambridge.org/...
*** Canadian Politics: Concise Fifth Edition, 2011
**** Radical Tories, 1984