taxation Unit 4 – Lesson 3

Taxes – All levels of government Federal, Provincial and Municipal Governments collect taxes to meet their expected expenditures (i.e., to help meets its fiscal policy targets). Some of these expenditures are used to meet transfer payments (social security, unemployment benefits, subsidized housing, child benefits), service debt, provide emergency social services, provide public goods (roads, bridges, parks). The government has the legislative powers to determine the tax level and tax options at any given time and for any given period.

Persistent Deficit The most troubling fact about fiscal policy in recent decades has been a large and persistent deficit in the federal budget. At present our debt is approximately $ 7 Billion. It is important that Canadian citizens understand how this deficit came about as well as understand the implications to any changes that may occur to the present debt level.

What can be done to reduce the deficit? Governments would have to reduce spending, or increase taxes, or both. The hard part is deciding which spending programs should shrink and whose taxes should be increased. Most people are all in favour of reducing the deficit, but few are eager to see programs we benefit from curtailed or the taxes we pay increased.

Taxation and the Canadian Citizen The main purpose of taxes is to finance state activity, promote income equity and to influence conditions in various markets. Currently, taxes represent close to 1/3rd of GDP.

Types of taxes –Direct or Indirect? This is a tax paid directly to the government by the persons on whom it is imposed. Examples include some income taxes, some corporate taxes, and transfer taxes such as estate (inheritance) tax and gift tax. There are three main types of direct taxes as it relates to personal income: Progressive income tax  where the tax rate takes a proportionally higher percentage from higher income earners Regressive tax rate where the tax rate takes a proportionally lower percentage from the higher income earners Proportional tax  where the tax rates takes a constant percentage from all income earners

Example of Direct Taxes Progressive tax Regressive tax Proportional Tax Taxable income $20,000 $90,000 $60,000 Tax rate 10% 27% 6% 12.5% Tax payable $2,000 $24,300 $3,600 $2500 $7500

Indirect Taxes Indirect tax This is a tax that is borne solely by the consumer such as sales tax or a value added tax (VAT). It is collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). For shoppers in Ontario we have to pay a provincial sales tax (PST) as well as a Goods and Services Tax (GST). The same is true for all other provinces but their PST levels may vary.

Types of Taxation The Canadian Government use five main types of taxes to generate revenue needed to implement its fiscal policy.   Personal income taxes are paid as a percentage of income from wages and salaries, interest earnings and dividends from investments, capital gains and transfer payments. Corporate income taxes are paid as a percentage of a company’s annual profit. Sales taxes are paid on the purchase and consumption of goods and services by the consumer. Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. Property taxes are payable to local government on the value of buildings and land.