18.2 Evaluating the Tax System

We have described several individual taxes in Canada, and in each case
noted the tax’s possible effects on behaviour as well as its progressivity.
The overall tax system, however, is a complex combination of these
various taxes. More important than evaluating each individual tax is
evaluating the system as a whole. Economists focus on two key aspects of
a tax system—efficiency and equity. Efficiency matters because
governments strive to raise tax revenues in a manner that imposes the
least overall cost on society. Equity matters because, as we saw in
Chapter 16 , governments often strive to redistribute resources toward
low-income people. A natural challenge when designing an overall tax
system is to raise the revenue required to finance necessary public
expenditures while at the same time improving equity and achieving as
efficient a system as possible. We begin by exploring how taxation can
affect equity.

Taxation and Equity

Debates about income distribution and tax policy usually involve the
important but hard-to-define concept of equity. Equity (or fairness) is a
normative concept; what one group thinks is fair may seem outrageous to
another. Two principles can be helpful in assessing equity in taxation:
equity according to ability to pay, and equity according to benefits received

