The progressivity of a tax involves an important distinction between the
average tax rate and the marginal tax rate. The average tax rate is the
percentage of income that the individual pays in taxes. The marginal tax
rate is the percentage of the next dollar earned that the individual pays in
taxes. Progressivity of a tax requires an average tax rate that rises with
income; we will see in this chapter that such progressivity can be
achieved with either rising or constant marginal tax rates.
Progressive taxes play an important role in an overall tax and expenditure
system designed to redistribute some income toward lower-income
individuals. Since a progressive tax collects more from high-income
individuals than it does from those with low incomes, a progressive tax
system can achieve more redistribution than can proportional or
regressive ones. Let’s now go on to examine the various elements of the
Canadian tax system.