Textbook Notes (363,264)
Canada (158,281)
Economics (319)
ECON 110 (192)
Chapter 18

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Queen's University
ECON 110
Ian James Cromb

Chapter 18: Taxation and Public Expenditure Taxation in Canada Progressive Taxes  When the gov’t taxes one income group in society more heavily than another, it influences the distribution of income o The effect of income on the distribution can be shown in terms of progressivity  A Progressive tax takes a larger percentage of income from high-income people than from low-income people  reduces inequality of income  A Proportional tax takes amounts of money from people in direct proportion to their income – ie. Everyone pays 10% of their income  A Regressive tax takes a larger percentage of income from low-income people than it does from high-income people  increases inequality of income  Average Tax Rate: The percentage of income the person pays in taxes  Marginal Tax Rate: The percentage of the next dollar earned that the person pays in taxes The Canadian Tax System Personal Income Taxes  This tax is paid directly to the gov’t – calculation of income includes all types of income o Then a number of deductibles are removed and left with taxable income  A tax bracket is a range of taxable income for which there is a constant marginal tax rate o Pay “x” rate for first “y” dollars, then “z” rate for next “w” dollars, and so on Corporate Income Taxes  This is a proportional tax rate applied to corporate profits o Includes return on capital and economic profits Excise and Sales Tax  An excise tax is a tax levied on a particular commodity o Tobacco, alcohol, and gasoline have excise taxes placed on them o Considered regressive since these goods make up a greater proportion of total expenditure for low-income groups than higher-income groups  A sales tax applies to the sale of most goods and services o Slightly regressive because poorer families tend to spend a larger proportion of their incomes than richer families Property Tax  Taxing the value of existing property creates two problems o Someone has to assess the current market value of property o Sometimes the owners have low income and have difficulty paying the taxes  Rich people tend to live in bigger houses and therefore pay more property taxes – but as a fraction of their income, poorer people are paying more  mildly regressive tax Evaluating the Tax System Taxation and Equity  There are two principles that are helpful in assessing equity in taxation o Ability to Pay, and according to Benefits Received The Ability-to-Pay Principle  Vertical Equity concerns equity across income groups and focuses on comparisons between individuals or families with different level of income o Requires progressive taxation  Horizontal Equity concerns equity within a given income group and is concerned with establishing just who should be considered equal in terms of ability to pay taxes The Benefit Principle  According to this principle, taxes should be paid in proportion to the benefits that taxpayers derive from the expenditure o Ex. High taxes on cigarettes since smokers require more healthcar
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