Check Your Understanding

Pg. 301

1.  Which of the following principals of taxation is the most fair – ability to pay or benefits received? Explain. Which principal is the easiest to implement? Explain.

Ability to pay principal provides fairness based upon means.

Benefits received provides fairness based upon usage fees

2.  For each of the five types of taxes collected by governments in Canada, determine whether each is an example of direct or indirect taxation. Also determine whether each is a progressive or regressive tax.

Type of Tax / Direct or Indirect / Progressive or Regressive
Personal income tax / Direct / Progressive
Corporate income tax / Direct / Progressive
Sales tax / Direct / Regressive
Excise tax / Indirect / Regressive
Property tax / Direct for homeowners
Indirect for renters / Regressive

3.  Use supply and demand graphs to explain how the elasticity of demand helps determine the effect of an indirect tax on the market price and on consumption.

4.  List the economic and political advantages and disadvantages of using each of the following methods to increase government revenue:

Personal income taxes, corporate income taxes, gasoline excise taxes, tobacco excise taxes, consumption/sales taxes

Method of Increasing government revenue / Economic Impact - Advantages / Economic Impact - Disadvantages / Political impact - Advantages / Political impact - Disadvantages
Personal income tax / Less spending can reduce price inflation / Less disposable income and consumer demand can slow growth / Does not add to government debt / Unpopular with voters
Corporate income tax / Distribution of income can be improved / Less profit is left for investment spending / Popular with voters / Unpopular with corporate investors and managers
Gasoline tax / Roads & highways can be improved and new projects undertaken / Transportation costs will increase for businesses, cutting profits / Roads & highways maintained by users; gas consumption discouraged / Increases the cost of living for most Canadians
Tobacco tax / Consumption is discouraged / Employment in tobacco related industries can decline / Consumption discouraged / Smugglers will bring untaxed, illegal tobacco into Canada
Sales tax / Consumer spending is discouraged / Aggregate spending decreases, which can slow down economic growth rate / Luxury goods can be taxed more than necessities / Lower-income Canadians are more adversely affected

5.  List and explain the tax reforms introduced since 1990. Explain the effect of the GST on the ability of Canadian firms to compete in global markets.

§  Marginal tax rates on personal income were reduced to allow Canadians, especially lower-income earners, to keep more of their income

§  Tax credits were increased for low-income earners to help offset the regressive nature of sales and property taxes

§  The GST (a consumption tax) replaced the FST (a manufacturing tax) to reduce production costs and increase the global competitiveness of firms

§  Alberta and Ontario lowered provincial income tax rates in order to stimulate consumer spending and economic growth