Chapter Objectives 1. Appreciate the different responsibilities of the federal and provincial governments. 2. Explain the growth in government spending. 3. Relate which taxes are collected by each level of government. 4. Differentiate between the benefits-received and ability-to-pay approaches in tax equity. 5. Differentiate among progressive, proportional, and regressive tax systems. 6. Calculate marginal tax rates using your own figures. (Cont.)
Constitutional Framework A federalist system of government is one in which two levels of government have jurisdiction over each citizen. At the time of Confederation (1867) a powerful federal government was proposed. The federal government is allocated with matters of war, foreign relations, foreign trade, taxation, and other. Provincial governments are allocated matters of direct local importance, such as education, hospitals, and other.
Government in Canada: Structure and Employment The federal government is bicameral, meaning it has two chambers. • The House of Commons has 308 seats, members are elected by the Canadian population • The Senate has 105 seats, members are appointed by the political party with a majority of seats in the House of Commons (Cont.)
Government in Canada: Structure and Employment (Continued) • The Queen is the constitutional head of the government. • The Governor General is the representative of the Queen. • Only the ten provinces have power and are unicameral, that is they only have one legislative chamber. • The Lieutenant-Governor is the representative of the Queen in each province, and the Commissioner in the territories.
Government in Canada: Structure and Employment (Continued) Canada has a variety of local governments, including municipal, schools and other boards that comprise a large part of employment for Canadians.
Government Spending by Function Social services, the largest component of federal spending, include old age security, child tax benefit, employment insurance, social welfare assistance, and Indian programs. (Cont.)
Government Spending by Function (Continued) Health services, the largest component of provincial spending, fall into three categories: public-health, hospital insurance, and medical care.
Government Spending by Function (Continued) Education is the largest component of local government spending.
The Growth of Government Spending Government spending on goods and services accounts for approximately 20% of Canada’s total spending. Transfer payments have increased from almost 17% of total spending in 1930 to the current 40%. Adolf Wagner’s law of increasing state activity postulates that in industrialized economies government spending can be expected to grow at a faster rate than the total output of goods and services. (Cont.)
The Growth of Government Spending (Continued) The complexities of economic development require the establishment of a centralized authority. Greater urbanization necessitates more money being spent on law and order. Government becomes involved in trying to correct market imperfections and in financing large-capital projects. As the level of national income grows more money is allocated to cultural and welfare expenditures.
The Growth of Government Spending (Continued) Other factors not considered by Wagner were those associated with the political process itself. Another reason for increased government spending is military conflict. Also, an increase in government spending may result from an increase in tax revenue that government is receiving. Finally, when wage increases are above productivity increases then the cost of government services increase.
Sources of Government Revenue Constitutional Authority The federal government has unlimited taxing power while the provincial governments are restricted to direct taxation. A direct tax is a tax imposed on the person who is intended to pay the tax, such as an income tax. An indirect tax is a tax that is levied against one person in the expectation that it will be paid by another person, such as an excise tax. (Cont.)
Federal Personal income tax accounts for the largest component of federal revenue, only 17% comes from non-tax sources.
Provincial 60% of provincial revenue comes from taxes, the remainder comes from non-tax sources and transfers from federal government.
Local The major source of tax revenue for local government is property tax and transfers from other levels of government.
Theory of Taxation Taxes are imposed to provide revenue for government, and also to influence economic conditions. Two of the major principles of taxation are maintenance of social justice and consistency with economic objectives.
Social Justice Horizontal equity is a situation in which all people in the same circumstance are treated in a similar manner. For example, everyone who earns $40,000 per year pays the same tax. Vertical equity is a situation in which individuals differ in their circumstance and therefore are treated differently. The benefits-received approach to taxation proposes that individuals be taxed on the basis of the benefits they receive from government programs. Such as gasoline taxation and taxes on airplane tickets. (Cont.)
Social Justice (Continued) The ability-to-pay approach, whereby individuals are taxed based on their ability to pay taxes. For example those with a greater ability to pay should pay more. A major problem with this approach is how to measure one’s ability to pay. The three measures of wealth, income, and expenditure are used in Canada. Canadian income tax makes up approximately 45% and 20% of federal and provincial tax revenue, respectively.
Social Justice (Continued) A progressive approach to taxation is one in which the percentage of income an individual pays in taxes increases as the individual’s level of income increases. A proportional tax is one in which the percentage of income paid in taxes remains constant regardless of an individual’s level of income. A regressive tax is one in which the percentage of income paid in taxes decreases as the level of income increases. Property taxes are based on wealth and are regressive relative to one’s income.
Marginal Tax Rates The combined (federal and provincial) marginal tax rates for personal income tax are shown for the year 2005.
Consistency with Economic Objectives An increase in taxes tends to reduce spending and increase unemployment while reducing inflation. Government tax policy needs to be consistent with a desire for economic development. Government tax policy may be used to influence the allocation of resources.
Federal/Provincial Financial Arrangements The federal government makes annual payments to the provinces based on their population. Ontario, British Columbia and Alberta have a high per-capita income and a good industrial base which gives them a good tax base. A number of taxes overlap between the federal and provincial systems which may lead to a conflict in taxation policies. (Cont.)
Federal/Provincial Financial Arrangements (Continued) Under the federal/provincial taxation arrangements, the provinces would receive a percentage of the revenue collected by the federal government instead of a lump-sum payment. Under established program financing (on hospital insurance, medicare, and post-secondary education) the federal government gives a province a percentage of personal and corporate income tax revenue plus a cash payment.
Federal/Provincial Financial Arrangements (Continued) Equalization payments are made to provinces to ensure that the provinces can provide a reasonable level of public services without resorting to extremely high levels of taxation in order to get the money for these services. Stabilization payments are meant to ensure that provincial taxation revenues do not decline substantially from one year to the next. The government also provides statutory subsidies to the provinces.
Government Borrowing All levels of government borrow money in order to pay for expenditures. Governments borrow by issuing government securities with various maturity dates. Canadian chartered banks are the biggest buyers of government securities, others include pension funds, mutual funds, Canadians, foreigners, the Bank of Canada and others. (Cont.)
Government Borrowing (Continued) The net debt is equal to unmatured bonds less assets.