An income tax is levied on the amount of money that a person earns in a given year, tax revenues are collected and used to support government expenditures. In Canada income tax is collected at the provincial and federal level. In Canada and most other countries, the amount of income tax one pays is determined by how much money they make per annum.
Generally, those who have a similar ability to pay taxes, meaning they make a similar amount of money, will contribute same amount in taxes. This group of people with a similar ability to pay is commonly known as a tax bracket. Each bracket is a range of income that is assigned a certain tax rate. There are a number of brackets or groups that are assigned different rates according to their ability to pay, generally the more money one makes, the more they pay. Note that governments can adjust an income by providing deductions for children, mortgages etc. to reflect a person's ability to pay taxes.
In the table below, those who have an annual income of between $45,282 and $90,563 will pay a rate of 18% whereas those in the top bracket making over $200,000 per annum pay a rate of 33%. The government assessed that people with an annual income falling within one of these brackets have a similar ability to pay. It is obvious that a person making $45,282 per annum does not possess the same ability to pay as one making $200,000+ per annum as they have less disposable income. Determining the amount that each group will pay is related to vertical equality. It should be noted that everyone pays 15% on the $45,282, and then pays 18% on money made over that amount, so someone making $46,000 doesn't pay 20.5% on their entire income.
Tax Bracket Taxable Income Range
Percent of Income
Bracket 1 $0- $45,282 15% Bracket 2 $45,282 - $90,563 20.5% Bracket 3 $90,563 - $140,388 26% Bracket 4 $140,388 - $200,000 29% Bracket 5 $200,000+ 33%
Note: These rates are for the 2016 year and are only the federal tax, not the provincial. This is called the marginal tax rate, because it's how much extra is paid for every extra dollar earned.
As stated above those in "Bracket 1" have less of an ability to pay than those in "Bracket 5", those in the higher brackets will be expected to pay a larger share of their incomes in taxes (as seen in Table 1). The larger amounts paid at the top of the spectrum will be redistributed (more so than smaller amounts) through government spending. This is done to ensure that all members of a society have a same ability to pay for essentials such as food, electricity, healthcare and others.
How Does The Money Get Distributed?
The government does not simply collect money from the rich and give a check to the less prosperous in society. To ensure a certain level of prosperity, the government can use the tax dollars to provide health services, educational support, and other forms of support which reduce or eliminate the need for people to pay for those services.
Services such as education and especially healthcare can be extremely expensive. The scale of the government allows for healthcare to be cheaper and therefore less of a burden to tax payers in lower brackets. Having access to very cheap or free services such as healthcare and education allow for greater prosperity in society overall, a healthy population is more efficient than one where people constantly miss work due to illness. Education is widely regarded as a positive externality meaning the more people that are educated and the higher the level of their education, the greater the benefit to society.
Importance of Income Tax
In Canada, income taxes generate a large revenue stream. In for the 2015 fiscal year, the revenues for personal income tax were $135.7b amounting to 48% of collected revenues. Corporations and non-residents of Canada also pay tax on the money they earn, when added together this number climbs to $181b and 64.2% of collected revenues.
- Wikimedia Commons. [Online], Available: https://en.wikipedia.org/wiki/Canada_Revenue_Agency#/media/File:Connaught_Building.JPG
- J.Black, N. Hashimzade, and G. Myles. (2009) "Income Tax." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-1535?rskey=HDEmAV&result=1, 2009 [Aug 10, 2016]
- Canada Revenue Agency. "Canadian income tax rates for individuals." [Online], Available: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html, Apr. 20, 2016. [May, 20, 2016].
- J.Black, N. Hashimzade, and G. Myles. (2009) "Equity." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-1025?rskey=cI89kE&result=1, 2009 [May 20, 2016]
- A. Goolsbee, S. Levitt and C. Syverson. ‘’Microeconomics’’. New York: Worth Publishers, 2013, pp. 658-649.
- Government of Canada- Department of Finance. Annual Financial Report of the Government of Canada Fiscal Year 2014–2015. [Online], Available: https://www.fin.gc.ca/afr-rfa/2015/report-rapport-eng.asp, Sept. 14, 2015 [Aug 10, 2015]
- Created internally by a member of the Energy Education team from the data at Government of Canada- Department of Finance. Annual Financial Report of the Government of Canada Fiscal Year 2014–2015. [Online], Available: https://www.fin.gc.ca/afr-rfa/2015/report-rapport-eng.asp, Sept. 14, 2015 [Aug 10, 2015]
- Created internally by a member of the Energy Education team from data at Government of Canada- Department of Finance. Annual Financial Report of the Government of Canada Fiscal Year 2014–2015. [Online], Available: https://www.fin.gc.ca/afr-rfa/2015/report-rapport-eng.asp, Sept. 14, 2015 [Aug 10, 2015]