2.2 Describe the differences between a regressive, progressive and flat tax. Provide some examples of each in Canada.
Cynara Almendarez and Sukhman Bhathal
Regressive taxes are applied uniformly, and they do not change based on an individual’s level of income. A regressive tax system affects low-income taxpayers more than high-income taxpayers because it takes a higher percentage of their earnings.
A great example of a regressive tax is the 5% Goods and Services Tax (GST). For example, say a doctor earns $175,000 annually and a retail worker earns $30,000 annually. They both purchase a laptop for $1,000, and are charged $50 GST ($1,000 X 5%). Although the $50 GST amount is the same for both the doctor and the retail worker it is a higher percentage of the retail workers overall income. This is known as a regressive tax because it has a larger percentage impact on lower income individuals.
![The GST for the retail worker's income is calculated as [($50/$30,000) x 100]](https://ecampusontario.pressbooks.pub/app/uploads/sites/4359/2019/04/2019-03-14-7-1-300x135.png)
![The GST for the doctor's income is calculated as [($50/$175,000) x 100]](https://ecampusontario.pressbooks.pub/app/uploads/sites/4359/2024/07/2019-03-14-7-300x143.png)
Progressive taxes are the opposite of regressive taxes. Progressive taxes increase based on your taxable income. Canada has a progressive income tax system; therefore, high-income taxpayers pay a progressively higher percentage of tax than low-income taxpayers. Using our previous example, because of the doctor’s higher annual income, the doctor will have to pay more taxes than the retail worker based on Canada’s federal tax rates of 2023.
| Tax Rate | Tax Brackets | ||
|---|---|---|---|
| 15% | up to | $53,359 | |
| 20.50% | $53,360 | to | $106,717 |
| 26% | $106,718 | to | $165,430 |
| 29% | $165,431 | to | $235,675 |
| 33% | $235,676 | and over | |
The doctor will have to pay $37,799 in taxes (an average tax rate of 21.6%) while the retail worker will only have to pay $4,500 of taxes (an average tax rate of 15%). Progressive taxes get progressively higher as your taxable income increases.
| Tax Rate | x | Taxable income in tax bracket | = | Taxes Payable |
|---|---|---|---|---|
| 15% | x | $53,359 | = | $8,004 |
| 20.50% | x | $53,358 | = | $10,938 |
| 26% | x | $58,713 | = | $15,265 |
| 29% | x | $9,570 | = | $2,775 |
| $175,000 | $36,983 | |||
| Tax Rate | x | Taxable income in tax bracket | = | Taxes Payable |
|---|---|---|---|---|
| 15% | x | $30,000 | = | $4,500 |
| $30,000 | $4,500 | |||
A flat tax system applies the same tax rate regardless of an individual’s income. For example, if the tax rate is set at 15%, a taxpayer earning $20,000 pays $3,000 (15%) and someone making $300,000 pays $45,000 (15%) worth of taxes. Canada does not have a flat tax system, but at one point, the province of Alberta had a flat provincial tax system from 2001 to 2015. Flat taxes are sometimes referred to as proportional taxes.
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References and Resources:
- Article – “Canadian Income Tax Rates for Individuals – Current and Previous Years” (Author: Government of Canada)
- Article – “Alberta government may consider bringing back flat tax system, Kenney says”(Author: Tyler Dawson)
- Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.1.1
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“Describe the differences between a regressive, progressive and flat tax. Provide some examples of each in Canada.” from Introductory Canadian Tax by Cynara Almendarez and Sukhman Bhathal is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
