Using Taxation-Based Policy Instruments

… a core concept used in Implementation and Delivery and Atlas107

Concept description

Leslie Pal (reference below) describes when taxation-based policy instruments may be the appropriate policy response.

Tax expenditures

Pal writes (p. 142):

“Tax expenditures accomplish much the same thing as contributions or subsidies, but through the mechanism of reducing taxes for specific activities and thereby increasing the benefits. Perhaps the most publicly visible tax expenditure in Canada is the Registered Retirement Savings Program (RRSP), where interest in special accounts is tax free and contributions are tax deductible, though the device is used routinely to support everything from small businesses to investments in high technology and research.”

Trends in taxation in Canada

Pal describes (pages 155-58) the major changes in Canadian tax policy in the last decades:

“Canadian governments tackled their deficits in the 1990s by cutting some expenditures, but they also benefited from increased tax revenues. As Purchase and Hirshhorn (1994) show, total tax revenues in Canada “increased from 31.3 percent in 1983 to 37 percent in 1992” (p. 36). Moreover, while corporate taxes actually declined in this period, “taxes on individuals have increased sharply” (p. 37). Federal government revenues were $116 billion in 1993–94; in 2000–2001 they were $162 billion; and in 2002–03, they were $177 billion. In 2007–08, they were projected to total $245.5 billion, up 4 percent from 2006–07, and up 10.5 percent from 2005–06 (Department of Finance, 2008, pp. 199–202). While most Canadians welcomed the eradication of government deficits in the 1990s, they were not entirely pleased with the high taxes they had to pay to achieve it. Taxes did begin to decline from that period, but even in 2007 the federal government admitted: “Personal and corporate income taxes as a percentage of GDP are higher in Canada than in all other G7 countries” (Department of Finance, 2007a, p. 19). As we noted above, all three major national parties favour tax reductions of some sort, with the key difference being their magnitude and incidence, and the Conservative government has moved aggressively to cut both corporate and personal income taxes, not to mention the GST, a signature slash. By 2012, the federal corporate tax rate had been reduced to 15 percent, one of the lowest among the G-7. Personal federal income tax was projected to rise from 7.0 percent of GDP in 2010-11 to 7.4 percent in 2016–17 (Department of Finance, 2011b).

“A countertrend to reduced income taxes is an increase in user charges and service fees. The deepest reasons for this are also the murkiest, and perhaps the most controversial: as citizens become more resistant to redistributive government, they become more resistant to redistributive (general) taxation. Fees and charges seem to link services more directly to beneficiaries. Through user charges and service fees, special benefits enjoyed by only a minority of citizens are paid for in whole or in part by that minority. In the 1990s, studies showed that user fees accounted for as much as 17 percent of Ontario’s government revenues and that reliance on them, by at least Ontario municipal governments, was increasing (Sproule-Jones, 1994, p. 7). A June 2000 report of the federal Standing Committee on Finance noted that while user charges contributed a negligible amount to Ottawa’s revenues (about 2.4 percent), some 391 of them were spread over 47 departments and agencies (Standing Committee on Finance, 2000). The government had encouraged departments to rely more on user charges and cost recovery in its 1997 Cost Recovery and Charging Policy, which was changed to the External Charging Policy in 2003. In 2003, there were “400 external charging programs in 47 departments and agencies resulting in thousands of different fees” (Treasury Board of Canada Secretariat, 2003). In 2004 the External Charging Policy was superseded by the User Fees Act and an accompanying Policy on Service Standards for External Fees. In 2008, these were supplemented by a Guide to Establishing the Level of Cost-Based User Fee or Regulatory Charge. The intent behind all these new policy frameworks was to improve “accountability, oversight, and transparency in the management of user fee activities” (Treasury Board of Canada Secretariat, 2007a). In 2005–06, federal government revenue from user charges was $1.9 billion, spread out across 51 departments (Treasury Board of Canada Secretariat, 2007b).

Carbon taxes

“The latest taxation twist has been carbon taxes, linked to new and more aggressive action to counter climate change caused by greenhouse gas emissions. As we noted earlier, a tax – used as a policy instrument and not simply to raise revenue – is a device to make targeted behaviours more expensive and hence, less attractive. In this broad sense, a tax (as a charge that is a disincentive) can be levied on almost anything, assuming that it cannot be easily evaded. Carbon taxes have an additional quality in that they are designed to both expose and levy the costs of externalities on those who produce them. A company that pollutes the air or water does not usually have to take into account the cost of this external effect on others when it prices its products.

“In February 2008, British Columbia was the first North American jurisdiction to levy a full, revenue-neutral carbon tax – a tax not focused on one type of emission. It followed Quebec, with its 2007 tax on hydrocarbons. The idea is not new: Finland has had a carbon tax since 1990, Sweden since 1991, the United Kingdom since 2001, and New Zealand since 2005 (Carbon Tax Center, 2011); Australia introduced a plan in 2011 for a carbon tax and eventually a market-based emissions trading scheme (“Pushing for a Carbon Tax,” 2011a). It is the carbon in fossil fuels that contributes to climate change, and proportions of carbon in different fuels are known quite precisely (e.g., coal emits more carbon than natural gas). This knowledge is the platform for taxing emissions or developing other measures such as cap and trade.

“The B.C. carbon tax was a trendsetter in several respects (British Columbia, 2008). The tax hit all fossil fuels, initially at a rate of $10 per tonne of greenhouse gas emissions, tripling by 2012. The tax was to be revenue neutral, meaning that whatever was raised would be returned to taxpayers. This point is an important one since a carbon tax is regressive – it hits low-income consumers of gas, oil, and electricity the hardest. The B.C. budget introduced a low-income Climate Action Tax Credit of $100 per adult and $30 per child (paid quarterly) and promised to reduce both personal and corporate income taxes. On top of this, it introduced a Climate Action Dividend of $100 in June 2008 for each provincial resident to offset the lifestyle changes that they were being asked to make. The government projected revenues from the carbon tax of $1.85 billion over three years, all of which it said would be returned to taxpayers through off-setting tax reductions and credits.”

See also: Pal’s Classification of Policy Instruments.

Atlas topic, subject, and course

Designing the Delivery Model (core topic) in Implementation and Delivery and Atlas107.


Leslie Pal (2014), Beyond Policy Analysis – Public Issue Management in Turbulent Times, Fifth Edition, Nelson Education, Toronto. See Beyond Policy Analysis – Book Highlights.

Page created by: Ian Clark, last modified 12 April 2017.

Image: Energy Matters, The proposed US carbon tax – a recipe for disaster, at, accessed 1 April 2017.