We pay taxes everyday — when we’re eating in restaurants, when we’re shopping, and even when we’re travelling. But how often do we stop and think about the real reasons we pay taxes? What types of taxes do we have to pay? And what is the tax system like in Canada?
What is it?
Tax is a fee charged by a government on a product, income, or activity, such that failure to pay is punishable by law. When tax is levied directly on personal or corporate income, it is called a direct tax. An indirect tax is levied on the price of goods and services. Direct taxation generates the most accountability and better governance, while indirect taxes usually have smaller effects.
The Four Rs of Taxes
A very popular theory of the purpose of taxes is called the Four R’s, which stands for revenue, redistribution, repricing, and representation.
1. Revenue — Taxes are the main source of government expenditure and are used to carry out many functions: to enforce law and public order, protect property, build infrastructure, provide public work and services (education, health care, pensions, transportation, and so forth), fund an army, organize the operation of the government itself, et cetera.
2. Redistribution — Wealthy people spend more money, so they pay more taxes. The government uses taxes to help the poorest residents of the country. The tax system transfers wealth from the richer sections of society to the poorer.
3. Repricing – Taxes are also used to discourage and encourage buying externalities, like cigarettes, alcohol, and carbon-based fuel (called a carbon tax).
4. Representation – American revolutionists often repeated the slogan, “No taxation without representation!” Taxpayers know the government is able to tax them, but accountability is mandatory.
The Tax System in Canada
Approximately 70% of the Canadian government’s income comes from taxation. Canadians pay personal income tax (40% of total tax revenue), corporate taxes (companies pay taxes on profit income and on capital), federal sales tax, provincial sales taxes (in all provinces except Alberta), property taxes (on residential, industrial, and commercial properties), excise taxes (taxes on goods such as gasoline and cigarettes), estate taxes, international taxes (taxes based on companies’ world-wide income), payroll tax (the Employer Health Tax), and health and prescription insurance tax (in all provinces except Alberta).
Canadians Not Satisfied
According to a BMO Tax Season Study, the majority of Canadians are looking for a more simplified tax system that reduces capital gains and adds more tax incentives for home ownership or renovations. They have various reasons for their dissatisfaction.
In 2010, Canadian families paid more on taxes than on food, clothing, and shelter combined, says a study released by the Fraser Institute. “The average Canadian family has seen its total tax bill increase by an astounding 1,686 per cent over the past 49 years. As a result, taxes have become the most significant item in family budgets,” noted Niels Veldhuis, Fraser Institute senior economist.
Canada’s property taxes as a proportion of the GDP are the second highest in OECD, accounting for 3.5% of the national GDP in 2009. Canadian taxes on income and profits are also above the OECD’s average as a percentage of the GDP.
The government deficit has a significant impact on the high tax spending. “Unless governments get spending under control and find a way to reduce their deficits, Canadian families face the spectre of increased taxation,” says Charles Lammam, Fraser Institute senior policy analyst.