Additional Funds for the Healthcare System in Canada: The Distributional and Economic Impact of Alternative Revenue-raising Schemes

by Michael McCracken, Paul Jacobson, Michelle Lasota, Dovile Zitikyte | Mar 15, 2012
Full Report (PDF, 943 KB)

Key Messages

  • Raising revenue for government spending is the ultimate responsibility of the Department of Finance at each level of government. It is critically important for ministries of health and healthcare associations to help shape decisions about healthcare financing.
  • Additional funds for health services, where required, can come from reducing spending in other areas, from offloading the responsibility to the private sector, or from removing subsidies, all of which are beyond the scope of this paper, or it can come from increasing existing tax rates, or introducing new taxes or fees.
  • In principle, increasing fees on major users of the health system is not desirable—it discourages people from promptly seeking care, which can mean greater expense when they eventually do seek care, and at the same time results in little revenue, given that many of these users may be old, poor and unable to work. As well, the costs of implementing and administering the fees may result in little net revenue.
  • When considering a change in taxation there are several issues to consider. First, a change in taxation by one level of government may have unintended consequences on the balances of other levels of government. Coordination between different levels of government about the application of or change in taxation may mitigate such concerns.
  • Second, it is important to consider how a change in taxation can influence the overall progressivity of the tax system. The Canadian tax system contains a mix of commodity and payroll taxes, which are usually regressive (higher income people pay a smaller proportion of their spendable income as tax than do lower income people); and income taxes which are progressive, (people with higher incomes pay a larger share of their income as tax than do lower income people). Income taxes in Canada are progressive enough to more-than-offset the regressive effects of other taxes. It is important to consider how the type and level of the tax will influence this balance. Note that payroll taxes can be made more progressive by raising the upper limit for income subject to tax.
  • The macroeconomic impacts show that increases in taxes reduce output and employment and raise government fiscal balances. If the improvement in balances is used to increase spending on healthcare (or other needs), the positive effects from that increased spending are usually large enough to morethan- offset the initial weakness from the tax increases.
  • Earmarking taxes sounds like a way to offer a predictable revenue source, but in practice, may limit the ability to argue for increased funding when required and is vulnerable to changes in behaviour, e.g. a tobacco sales tax.
  • Financing the health system through increased progressive taxation has much appeal, reflecting the pooling of risk for the population and ensuring fairness in that those with higher incomes pay more. There is an added benefit if the taxation reduces inequality of income, since health outcomes are better in jurisdictions with less inequality.