ECON 208 Lecture Notes - Lecture 18: Taxation In Canada, Old Age Security, Proportional Tax
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Chapter 18: Taxation and Public Expenditure
18.1: Taxation in Canada
The affect of a tax on the distribution of income can be summarized in terms of
the progressivity of the tax.
What fraction of the person’s income is paid in tax, and how does this fraction
change as income changes?
Consider an income tax:
The average tax rate is the total tax paid divided by the total income.
The marginal tax rate is the tax rate paid on the next dollar of income.
An income tax is:
•Progressive if the ATR rises as income rises
•Regressive if the ATR falls as income rises
•Proportional if the ATR is constant as income rises
A lump-sum tax collects the same dollar amount from every individual
regardless of their income.
Most income-tax systems achieve their progressivity by having marginal tax rates
that rise with income.
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The Canadian Tax System
Personal income taxes are paid directly to the federal government by
individuals (except in Quebec)
The federal corporate tax is a proportional tax on profits – as of 2012 it was
•There are also provincial corporate taxes
Several excise taxes are levied on specific commodities:
•Gasoline, alcohol, cigarettes, etc.
Provincial sales taxes exist in all provinces except Alberta.
The federal GST was introduced in 1991, for several reasons:
•Income taxes discourage saving
•GST does not distort relative prices
•GST follows the trend in most other developed nations using value-added
Property taxes are levied by municipalities, and are their most important
Fig 18-1: The Operation of the GST
18.2 Evaluating the Tax System
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