SUMMARY - The Weight on Workers: Is Canada's Tax System Structurally Broken?

An analysis of federal revenue composition, operational bloat, and the case for rebalancing Canada's tax mix

The Numbers That Tell the Story

On February 25, 2026, economist Jack Mintz — a member of the Order of Canada and president's fellow at the University of Calgary's School of Public Policy — stood before a Canadian Club Toronto audience and delivered a blunt assessment: "We've relied way too much on personal taxes."

The data backs him up. According to the Government of Canada's own Annual Financial Report for fiscal year 2024–25, federal revenue totalled approximately $510 billion. The breakdown reveals where the burden falls:

Revenue Source	Amount (2024–25)	Share of Total
Personal Income Tax	$234.3 billion	45.9%
Corporate Income Tax	$97.0 billion	19.0%
GST	$52.5 billion	10.3%
EI Premiums	$31.5 billion	6.2%
Carbon Pricing Proceeds	$13.6 billion	2.7%
Non-Resident Income Tax	$13.5 billion	2.6%
Other Taxes & Duties	$19.4 billion	3.8%
Other Revenues	~$48 billion	~9.5%

Nearly half of all federal revenue comes directly from individual taxpayers. The OECD confirms that Canada's personal income tax as a share of total tax revenue runs approximately 12 percentage points above the OECD average. Meanwhile, Canada's social insurance contributions (CPP, EI) sit roughly 10 percentage points below the OECD average.

As Mintz put it: "Not only do we rely too much on income taxation, personal and corporate, but we, compared to other countries, don't rely enough on payroll and the goods and services tax."

The Spending Side: Where Does the Money Go?

The 2025–26 Main Estimates lay out federal expenditure at approximately $487 billion in planned spending:

• Transfer payments (to provinces, individuals, organizations): ~60.5%, or $294.8 billion
• Operating and capital expenditures: ~29.4%, or $143.1 billion
• Public debt charges: ~10.1%, or $49.1 billion

The operational cost question centres on that $143 billion middle category — and the workforce behind it.

The Public Service Expansion

Between 2006–07 and 2024–25, the federal public service expanded from approximately 335,000 full-time equivalents (FTEs) to an estimated 445,000 — a net increase of over 110,000 positions. The Canadian Federation of Independent Business (CFIB) highlights a structural imbalance: between 2013 and 2023, federal employment surged 36%, while private sector employment grew only 13% and Canada's population increased by 15%.

The Parliamentary Budget Officer's analysis of 2025–26 departmental plans projects the number of FTEs at around 445,000 — and notes that even planned reductions would still leave the workforce well above its pre-pandemic peak of 382,000 in 2019–20.

Budget 2025, the Carney government's first, acknowledged this trajectory and committed to reducing the public service by roughly 40,000 positions over four years, targeting a headcount of 330,000 by 2028–29. The Comprehensive Expenditure Review aims to save $13 billion annually by 2028–29 through reduced operating costs. Whether these targets are achievable remains an open question — the PBO has noted that in each of the past three years, projected FTE reductions were subsequently revised upward.

The "Wrong Mix" Argument

Mintz's core thesis is not that Canadians pay too much tax in total — it's that we pay it through the wrong channels. The economic literature broadly supports the view that different taxes carry different "deadweight losses" — the economic activity lost over and above the revenue collected.

The hierarchy of economic harm (from most to least distortionary) generally runs:

1. Corporate income taxes — discourage investment and capital formation
2. Personal income taxes — discourage work effort, savings, and labour mobility
3. Payroll taxes — somewhat distortionary but fund specific benefits
4. Consumption/sales taxes (GST/VAT) — least distortionary; tax spending, not production

Canada's tax structure is heavily weighted toward the top two categories and underweight on the bottom two — the inverse of what most economists would design from scratch.

The Marginal Rate Trap

Research by University of Calgary economist Trevor Tombe has calculated that marginal effective tax rates for Canadians — which include the clawback of income-tested benefits — can be punishing. For a family with two children in Ontario earning around $50,000, the effective marginal rate reaches as high as 75%, meaning that for every additional dollar earned, the family retains only 25 cents. For individuals, the rate climbs rapidly to around 50% by $50,000 income.

The Macdonald-Laurier Institute has described this as a "middle-class family penalty" and a "success penalty" that discourages additional work, investment, and entrepreneurship precisely among the demographic cohorts Canada needs most to drive productivity growth.

The Counterarguments: Why Personal Taxes Dominate

Proponents of the current structure, or those who resist a major shift, raise several points worth considering:

1. Progressivity and Fairness

The Fraser Institute's 2025 analysis found that the top 20% of income-earning families already pay 64.5% of all personal income taxes and 56.9% of total taxes. The bottom 20% pay just 0.7% of personal income taxes. Any shift toward consumption taxes would, without substantial offsetting measures, be regressive — hitting lower-income Canadians harder as a proportion of their income.

2. Political Toxicity of Consumption Tax Increases

The GST has been political poison since Brian Mulroney introduced it in 1991. Stephen Harper won two elections partly on promises to cut it (from 7% to 6% to 5%). Reversing that trajectory is politically fraught, even if economically sound. As Deloitte Canada's Fatima Laher noted at the same event as Mintz: "The minute you say 'reform,' people basically go back into their shell."

3. GST Base Erosion Is Self-Inflicted

Canada has progressively narrowed the GST base through exemptions. The latest carve-out — removing GST from new housing for first-time buyers — further erodes the revenue capacity of a tax that economists broadly agree is efficient. Each exemption reduces the argument for keeping the rate low by reducing how much revenue it generates.

4. Payroll Taxes Have Their Own Costs

While Mintz and others suggest higher payroll taxes (particularly to fund healthcare, as many European nations do), employer-side payroll taxes can suppress hiring and wage growth. Canada's existing CPP and EI contributions already add meaningful labour costs, and the recent CPP2 expansion (a second tier of contributions on income between $71,300 and $81,200) has drawn criticism from small business owners.

What Could Be Done Differently?

Several concrete proposals have emerged from economists, think tanks, and professional associations:

A. Raise and Broaden the GST

CPA Ontario's tax reform analysis estimates that a single percentage point increase in the federal GST rate (to 6% from 5%) could generate approximately $10 billion in additional federal revenue. This could be paired with enhanced GST credits for low- and middle-income households to maintain progressivity.

Mintz has gone further in provincial contexts, proposing that Alberta adopt an 8% harmonized sales tax combined with the 5% federal GST, which could be structured as revenue-neutral — dramatically raising personal income tax exemptions to $57,250 per individual, effectively removing 70% of Albertans from provincial income tax rolls entirely.

B. Dedicated Healthcare Payroll Levy

Many OECD countries fund their healthcare systems through dedicated social insurance contributions rather than general income tax revenue. Canada's healthcare spending is the single largest category of provincial expenditure and a growing share of federal transfers. A transparent, dedicated payroll levy could both stabilize healthcare funding and reduce the burden on personal income tax — though it would face stiff opposition from employers and labour groups.

C. Comprehensive Tax Reform Commission

The last major review of Canada's tax system was the Carter Commission in the 1960s. TD Economics notes that Canada's track record on tax and regulatory reform "leaves much to be desired." Both Mintz and TD have called for a new royal commission or expert panel to fundamentally redesign the system, rather than the "dozens of targeted tax cuts" that accumulate complexity without improving competitiveness.

D. Reduce Operating Costs Before Seeking New Revenue

Budget 2025 commits to balancing operational spending within three years. If the government can achieve its $13 billion in annual savings by 2028–29 and reduce the public service to 330,000, that represents a meaningful reduction in the tax burden required. However, Deloitte's analysis notes that the expenditure review "has achieved significantly less than the 15% reduction target on operating expenditures" to date.

The Competitiveness Clock Is Ticking

TD Economics frames this as a survival issue: Canada's combined tax and regulatory burden is among the largest barriers to business investment, and the country's traditional cushion — deep economic integration with the United States — "can no longer be relied upon" in an era of trade conflict.

Canada ranks 13th on the Tax Foundation's 2025 International Tax Competitiveness Index. The country's top combined marginal personal income tax rate exceeds 53% in several provinces, compared to Switzerland's 36%. Mintz has pointed out that wealthy Canadians are increasingly taking up residence in lower-tax jurisdictions — a direct consequence of the tax structure.

But competitiveness is only one dimension. Any rebalancing must also contend with equity, democratic legitimacy, and the practical question of whether Canadians will accept paying differently even if they don't pay more in total.

Questions for Discussion

1. Should Canada raise the GST by 1–3 percentage points and use the revenue to reduce personal income tax rates? Would enhanced GST credits adequately protect lower-income Canadians?
2. Is a dedicated healthcare payroll levy a viable alternative to funding healthcare through general tax revenue? How should it be split between employers and employees?
3. Has the federal public service grown beyond what is justified by population growth and service demand? Is 330,000 the right target, or should it go further?
4. Should Canada convene a new Royal Commission on Taxation to fundamentally review the system for the first time in six decades? What should its mandate include?
5. Alberta remains the only province without a provincial sales tax. Does Mintz's revenue-neutral HST proposal deserve serious provincial debate?
6. In the context of U.S. trade disruption, does rebalancing toward consumption taxes give Canada a competitive advantage (since VAT/GST exempts exports) that tariff-dependent economies lack?

Sources: Government of Canada Annual Financial Report 2024–25; OECD Revenue Statistics 2025; Parliamentary Budget Officer FTE Analysis 2025–26; 2025 Canadian Federal Budget; CFIB Federal Public Service Report; CPA Ontario Tax Reform for Growth; Fraser Institute Measuring Progressivity 2025; Macdonald-Laurier Institute Canada at a Crossroads Vol. 3; TD Economics Tax and Regulation Analysis; Yahoo Finance Canada reporting on Jack Mintz remarks, February 25, 2026.