Chapter 18 – The Economic of Environmental Protection
Progressive tax: a tax that takes a larger percentage of income at high levels of income.
Proportional tax: a tax that takes a constant percentage of income at all levels of
Regressive tax: a tax that takes a lower percentage of income at high levels of income.
Average tax rate: the ratio of total taxes paid to total income earned.
Marginal tax rate: the fraction of an additional dollar of income that is paid in taxes.
Tax bracket: a range of taxable income for which there is a constant marginal tax rate.
Since a progressive tax takes a larger share of income from high-income people than it
does from low income people, progressive taxes reduce the inequality of income. A
regressive tax increases the inequality of income.
Although the main purpose of the tax system is to raise revenue, tax policy is potentially
a powerful device for income redistribution because the progressivity of different kinds
of taxes varies greatly.
The most important taxes in Canada are the personal income tax, the corporate income
tax, excise and sales taxes (including the nationwide GST), and property taxes.
The progressivity of a tax is determined by how the average tax rate (taxes paid divided
by income) changes as income changes. If the average tax rate rises as income rises, the
tax is progressive. If the average tax rate falls as income rises the tax is regressive.
Vertical Equity concerns equity across income groups; it focuses on comparisons between
individuals or families with different levels of income. This concept is central to discussions of
the progressivity of taxation.
Horizontal Equity concern equity within a given income group; it is concern with establishing just
who should be considered equal to whom in terms of ability to pay taxes.
Ability to pay is the principle that taxes should vary according to an individual's level of wealth
Benefits received is a concept of tax fairness that states that people should pay taxes in
proportion to the benefits they receive from government goods and services
Direct burden: for an individual tax, the amount of money that is collected from taxpayers
Excess burden: the allocative inefficiency or deadweight loss generated by a tax
Excise taxes and income taxes impose costs in two ways. By taking resources from market
participants (consumers, firms, workers), they impose a direct burden. By reducing the volume
of specific market transactions, they also generate a deadweight loss—this is the excess burden
of the tax.
An efficient tax system is one that minimizes the amount of excess burden (deadweight loss) for
any given amount of tax revenue generated. Evaluating the tax system involved evaluating the efficiency and progressivity of the entire
system, rather than of individual taxes within the system. For a given amount of revue to be
raised, efficiency and progressivity can be altered by changing the mix of the various taxes used.
The total Canadian tax structure is roughly