Canada’s shift to a more regressive tax system, 2004 to 2022

Posted on May 9, 2024 in Equality History

Source: — Authors: , – Reports
April 30, 2024.  Marc Lee, DT Cochrane

Canada’s tax system is flat for most Canadians and regressive for the top 20 per cent of households.


This study looks at tax changes between 2004 and 2022, examining changes by the Paul Martin Liberal government, Stephen Harper Conservative government and Justin Trudeau Liberal government. It considers almost all sources of income, including corporate profits and other sources of income not normally counted in Statistics Canada’s tallies, and all taxes paid.

It finds that, overall, Canada’s tax system is only moderately progressive through the bottom half of the income distribution, and is regressive at the top of the distribution due to several sources of untaxed or lightly taxed income (such as capital gains, inheritances/bequests and employer-provided benefits) that predominantly go to top earners.

Since 2004, Canada’s tax system has become less progressive, with rates at the bottom of the distribution in 2022 as much as 4.7 percentage points of income higher for the bottom two deciles.

Excluding the top and bottom 10%, the tax system is relatively proportional (a flat tax structure). The average tax rate was little changed in 2022 (36.7%) compared to 2004 (36%), with the peak tax rates in the middle, at 43.8% and 43.5% respectively.

One positive development is that rates for the top 5% of households are somewhat higher in 2022 than 2004. Rates for the top 1% were also up by 2.8 percentage points in 2022 relative to 2004.

There was an overall reduction in federal taxes between 2004 and 2022, reflecting reductions in the GST and federal income tax between 2005 and 2008. An exception is the very top of the distribution, reflecting the 2016 addition of a new top income tax bracket. The mix of federal taxes is progressive up to the households in decile 7, then it flattens out and becomes regressive at the top.

Reductions in federal taxes have been offset or more-than-offset by increased provincial taxes for all groups in 2022 relative to 2004. The distribution of provincial taxes is more clearly regressive across the whole distribution, and has also become more regressive at the bottom. In 2004, provincial tax rate was fairly flat up to decile 5 then regressive, but by 2022, it was completely regressive.

The 2004 to 2022 timeframe can be divided in two eras: the tax-cutting budgets of the Martin and Harper governments and a gradual improvement in progressive taxation on some fronts under the Trudeau Liberal government—some of which was undermined by provincial tax increases.

Corporate tax cuts figured prominently during the first half of our timeframe. The Conservative government of the day reduced the general corporate income tax (CIT) rate in a series of steps, from 21% in 2007 to 15% in 2012.

Under the Harper government, the GST was lowered from 7% in 2005 to 5% in 2008. The rate for the lowest income tax bracket was reduced from 16% to 15% in 2005, and the basic personal amount (exempt from income taxation) was increased above the rate of indexation between 2005 and 2009.

The Trudeau government in 2016 introduced a new top personal income tax bracket of 33%, while the rate on the second lowest bracket was reduced from 22% to 20.5%. In that same budget, the Canada Child Benefit combined and bolstered previous child and child care benefits.

Taxation of the wealthiest is a central means to reduce inequality, provide adequate shared public infrastructure and services that benefit all, and create opportunities for all to live a decent life. A return to more progressive taxation would improve fairness, while also providing a lever to directly reduce income and wealth inequality. Despite the progressive personal income tax system, when we look at all taxes and income, the tax system is only moderately progressive at the bottom, flat through the middle and regressive at the top.











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