aggregate level

Not only the aggregate level of taxes but also the type of taxes imposed vary from jurisdiction to jurisdiction. In fact, there is considerable variation in the reliance that individual jurisdictions place on particular tax fields.

Governments across the world rely on five primary sources of tax revenue: personal income taxes, corporate taxes, sales and excise taxes, property and wealth taxes, and payroll taxes (typically as contributions for social security and other social benefits). In Canada, all five forms of taxes are used to finance public services, which will be discussed in some detail below and in more extensive detail in later parts of this book.

Canadian governments rely foremost on personal income taxes as a source of revenue, as figure 1.5 demonstrates. These taxes are assessed on individual incomes, which are composed of taxable worker earnings and income from savings, including interest, dividends, and capital gains. Personal income taxes as a share of the GDP have grown from 10 percent in the early 1970s to as high as 15 percent by 1990, because governments ramped up personal taxes to deal with rising deficits. As federal, provincial, and territorial governments returned to improved fiscal health after 1995, they reduced personal income taxes to about 12 percent of the GDP in 2008.

The second most important source of revenue for Canadian governments is sales and excise taxes. These revenues include general sales taxes (such as provincial sales taxes, the harmonized sales tax [HST], and the goods and services tax [GST]), as well as various specific duties on fuel, alcohol, cigarettes, carbon emissions, and other products. As a share of the GDP, sales and excise taxes have changed little over the years, generally fluctuating from around 8.5 percent (in 1970) to as low as 7 percent (in 2008) and as high as 9.3 percent (in 1989). Yet, as discussed in more detail later, Canadian governments have extensively reformed their sales tax regimes in the past two decades. The federal government replaced the manufacturers’ sales tax with the GST on January 1, 1991. In the years that followed, a number of the provinces have also adopted a value-added tax coordinated with that of the federal government (the HST) so that over two-thirds of Canada’s economic activity is carried on in provinces with fully integrated and modern value-added sales tax systems. Despite these significant changes, the percentage of sales and excise taxes to GDP has moved slightly downward in recent years, because the federal government reduced its GST rate from 7 percent to 5 percent.