Why do we pay taxes?
Governments provide many things that individuals couldn’t easily provide for themselves: roads, schools, hospitals, police, fire services, parks and national defence. These are paid for mainly by taxes: money collected from people and businesses.
The U.S. Supreme Court Justice Oliver Wendell Holmes Jr. once wrote that "taxes are what we pay for civilized society."
Types of taxes
| Tax | What it’s based on | Canada | United States |
|---|---|---|---|
| Income tax | money people and businesses earn | federal and provincial | federal and most states |
| Sales tax | purchases | GST (5% federal), PST, or combined HST (13–15%) | state and local sales taxes; no federal sales tax |
| Property tax | value of homes and land | municipalities | local governments |
| Payroll taxes | wages | Canada Pension Plan, Employment Insurance | Social Security and Medicare |
| Excise taxes | specific goods | gasoline, alcohol, tobacco | gasoline, alcohol, tobacco |
| Corporate tax | business profits | federal and provincial | federal and most states |
| Tariffs | imported goods | yes | yes |
How tax rates work
Progressive tax
With a progressive tax, people with higher incomes pay a higher percentage. Income taxes in Canada and the United States are progressive, using tax brackets.
Simplified example:
| Income range | Tax rate on that part of income |
|---|---|
| first $50,000 | 15% |
| $50,001–$100,000 | 20% |
| above $100,000 | 26% |
Someone earning $60,000 pays 15% on the first $50,000 and 20% only on the next $10,000, not 20% on everything.
Proportional (flat) tax
Everyone pays the same percentage.
Regressive tax
Lower-income people pay a larger share of their income. Sales taxes can be regressive, because people with less money spend more of their income on taxed goods. Governments may offset this with credits, such as Canada’s GST/HST credit.
Where tax money goes
Governments spend on:
| Area | Examples |
|---|---|
| Health | hospitals, doctors (Canada’s medicare); Medicare and Medicaid (U.S.) |
| Education | public schools, colleges, universities |
| Social programs | pensions, child benefits, employment insurance, social assistance |
| Public goods | roads, bridges, parks, national defence, police, fire |
| Debt interest | interest on money governments have borrowed |
| Transfers | federal money to provinces, states and cities |
| Other | environment, research, foreign aid, the justice system |
Public goods are available to everyone, and one person using them doesn’t stop others from using them, like national defence or street lights.
Budgets, deficits and debt
Each year, governments create a budget showing expected revenue and spending.
- Surplus: revenue is greater than spending
- Balanced budget: revenue equals spending
- Deficit: spending is greater than revenue
- Debt: the total amount owed from past deficits
Governments often run deficits during recessions or emergencies, such as the COVID-19 pandemic, to support people and the economy. Debates continue about how much debt is too much.
Debating taxes
People disagree about taxes based on values and evidence:
- How much should governments provide?
- Should taxes be more progressive?
- Do lower taxes encourage growth and investment?
- Do higher taxes allow better services and reduce inequality?
- How should taxes be designed to protect the environment, such as carbon pricing?
Try it yourself
- Look at a receipt. What taxes were added, and what percentage?
- Calculate the tax on $70,000 using the simplified bracket example.
- Research your province’s or state’s budget. What are the three largest spending areas?
- Debate: "Governments should raise taxes to improve public services."
Answer to 2: 15% of $50,000 = $7,500; 20% of $20,000 = $4,000; total = $11,500.
Quick recap
- Taxes pay for public goods and services.
- Main taxes include income, sales, property and payroll taxes.
- Progressive taxes charge higher rates on higher incomes.
- Governments spend on health, education, social programs and infrastructure.
- Deficits add to debt, and tax policy involves trade-offs and values.