SOC101Y
University of Toronto
2013-14
Robert Brym
Online Mini-Lecture #5
How the Tax System Reinforces Inequality
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Important terms
 A tax is regressive if the tax rate is the same for people regardless of
their income. For example, when you buy a chair, HST is 15 percent
regardless of your income.
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Important terms
 A tax is regressive if the tax rate is the same for people regardless of
their income. For example, when you buy a chair, HST is 15 percent
regardless of your income.
 A tax is progressive if the tax rate is higher for people with higher
income. For example, when paying income tax, people might pay X
percent on their first $A,000 of taxable income, X+Y percent on their
next $B,000 of taxable income, and X+Y+Z percent in their next
$C,000 of income.
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Important terms
 A tax is regressive if the tax rate is the same for people regardless of
their income. For example, when you buy a chair, HST is 15 percent
regardless of your income.
 A tax is progressive if the tax rate is higher for people with higher
income. For example, when paying income tax, people might pay X
percent on their first $A,000 of taxable income, X+Y percent on their
next $B,000 of taxable income, and X+Y+Z percent in their next
$C,000 of income.
 For progressive taxes, the marginal tax rate is the rate paid on the
last block of taxable income. In the example above, the marginal tax
rate is X+Y+Z percent.
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It pays to be rich; wealthier people tend to earn
more of their income from sources that are
taxed at lower rates
Source
Salaries, wages
% taxed
Who is taxed
100 Employees
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It pays to be rich; wealthier people tend to earn
more of their income from sources that are
taxed at lower rates
Source
Salaries, wages
Dividends
% taxed
Who is taxed
100 Employees
83 Owners of Canadian stock
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It pays to be rich; wealthier people tend to earn
more of their income from sources that are
taxed at lower rates
Source
Salaries, wages
Dividends
Capital gains1
% taxed
Who is taxed
100 Employees
83 Owners of Canadian stock
50 Owners of capital
1To
arrive at taxable capital gains, capital losses from previous years are subtracted from current capital
gains.
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It pays to be rich; wealthier people tend to earn
more of their income from sources that are
taxed at lower rates
Source
Salaries, wages
Dividends
Capital gains1
Offshore tax havens2
% taxed
Who is taxed
100 Employees
83 Owners of Canadian stock
50 Owners of capital
0 Owners of capital
1To
arrive at taxable capital gains, capital losses from previous years are subtracted from current capital
gains.
2Mainly Barbados, Cayman Islands, Luxembourg, Ireland, Bermuda. Excludes real estate and other nonfinancial assets. Subject to bankers’ fees.
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It pays to be rich; wealthier people tend to earn
more of their income from sources that are
taxed at lower rates
Source
Salaries, wages
Dividends
Capital gains1
Offshore tax havens2
Inheritance3
% taxed
Who is taxed
100 Employees
83 Owners of Canadian stock
50 Owners of capital
0 Owners of capital
0 Heirs of owners of capital
1To
arrive at taxable capital gains, capital losses from previous years are subtracted from current capital
gains.
2Mainly Barbados, Cayman Islands, Luxembourg, Ireland, Bermuda. Excludes real estate and other nonfinancial assets. Subject to bankers’ fees.
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3Subject to probate fee.
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RRSP Benefits Increase with Income
Income class
Taxable income
Marginal tax rate1
RRSP deposit
Reduction in taxable
income
Tax saving2
low
$0
0%
$0
$0
middle
$20K
25%
$1K
$1K
high
$100K
50%
$1K
$1K
$0
$250
$500
1Tax
rate on the last unit of taxable income.
2RRSP deposit times marginal tax rate.
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RRSP Benefits Increase with Income
Income class
Taxable income
Marginal tax rate1
RRSP deposit
Reduction in taxable
income
Tax saving2
low
$0
0%
$0
$0
middle
$20K
25%
$1K
$1K
high
$100K
50%
$1K
$1K
$0
$250
$500
1Tax
rate on the last unit of taxable income.
2RRSP deposit times marginal tax rate.
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RRSP Benefits Increase with Income
Income class
Taxable income
Marginal tax rate1
RRSP deposit
Reduction in taxable
income
Tax saving2
low
$0
0%
$0
$0
middle
$20K
25%
$1K
$1K
high
$100K
50%
$1K
$1K
$0
$250
$500
1Tax
rate on the last unit of taxable income.
2RRSP deposit times marginal tax rate.
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Q: Moe has $10,000 taxable income and a
marginal tax rate of 15%. Sam has $20,000
taxable income and a marginal tax rate of
25%. Moe and Sam put $1,000 in their
RRSPs. What are Moe’s and Sam’s tax
savings, respectively?
A: $150 and $250
 Moe’s $1,000 RRSP deposit results in a $150
tax saving ($1,000 x 15%)
 Sam’s $1,000 deposit results in a $250 tax
saving ($1,000 x 25%).
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