In Canada, just like most of the other Organization for Economic Co-operation and Development (OECD) member states, income inequality has been on the rising trend in the previous decades. Coupled with the rising income, inequality is the ineffectiveness of the tax-transfer system. This is attributable to both competitions experienced internationally that eventually drive down the upper-income tax rates and the decentralization of revenue collection to the province (Broadway, 2013 p.1). Several measures have been enacted to address the issues of income inequality in the tax system, including the changes in the treatment of capital income, changes in unemployment and the structure of the labor market, and finally, the implications of the changes in the provincial social protection programs. All the above have helped in reducing the automatic responsiveness of the tax-transfer system to income-shock as witnessed in both the top and bottom income distribution (Broadways, 2013 p.1).
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There have been several changes in the income tax system most of which have been the middle and upper-income classes selectively. Among others are the retirement saving incentives, education savings incentives, and targeted tax credits. It is therefore important to note that well-developed labor market policies and institutions are in a better position to lower the rate of inequality. In fact, a relatively raised minimum wage narrows the division of labor income. The rules of the game that reinforce the trade unions also have a propensity to reduce inequality resulting from the labor earnings by bringing forth a more standardized income distribution method. Income inequality can also be reduced through confirmed job security through the slighter wage distribution (OECD, 2012, p.182-183).
Tax and transfer systems contribute much to the overall lowering of income inequality in most of the OECD member states, and three-quarters of this reduction is attributable to the transfers (OECD, 2012, p.182-183). Of the other taxes, personal income tax appears to be progressive in nature as compared to the property tax, consumption taxes, and charity, which appear to be more regressive. Therefore, the progressive nature of these taxes can be improved by reducing the tax expenditure targeting the high-income groups. It is worth noting that tax does not only have an impact on the distribution of income but also has effects on the GDP per capita of any country by influencing both productivity and labor use (Johansson et al, 2008).
It is therefore clear that a comprehensive tax reform stands a chance of acceptance by both the rights and the leftist, but this is only possible if both the business community and the public are made aware of such benefits derived from the comprehensive tax reforms. Further, in order to boost the economic advantage of Canada, the cuts in the personal tax should be enhanced to the whole population. Massive tax cuts always lead to increased spending, in addition, this tax increase is the only way to ensure that both the rich and the poor share the burden. In a bid to reduce income inequality, the tax system should only raise revenue where it will cause minimal pain. The general notion is that when you tax the rich, it causes less pain to them than when you tax the poor. This principle simply suggests that tax rates should be progressive, that is, the more the income, the more one should be taxed holding all other factors constant (Corak, 2013, p.5). In conclusion, therefore, the only way the tax system can be made progressive is the introduction of a higher tax category for top earners.
Broadway, R. (2013). Submission to the House of Commons Standing Committee on finance. New York, NY: Queens University Publication.
Corak, M. (2013). Tax policy for equality and social mobility-Submission to the House of Commons, Standing Committee on Finance. Web.
Johansson, A. Heady C, Arnold J, Brys B, and Vartia Lal. (2008). Taxation an Economic Growth. OECD Economics, Department Working Papers, No. 620, France: OECD Publishing.
OECD (2012). Economic Policy Reforms 2012: Going for Growth, OECD Publishing. Web.