Canadians' consumer tax burden is not as onerous as it sounds
Hidden deep in the bowels of the Fraser Institute in Vancouver, there is an elaborate contraption known as “the Canadian Tax Simulator.” It generates the data for “the Canadian Consumer Tax Index,” an annual report that supposedly tells us how much tax is paid by the average Canadian family.
The latest report was released just before the income tax filing deadline of April 30. Taxes, we were told, are shockingly high as a proportion of family income, and now loom larger than spending on the necessities of life.
The Fraser Institute’s key finding was that “in 2012, 42.7 per cent of an average family’s income went towards taxes (including all types of taxes imposed by federal, provincial and local governments).”
The methodology used to reach that conclusion is somewhat opaque, but the reported results are highly questionable.
According to the latest OECD statistics, Canadian taxes from all sources amounted to just 31 per cent of GDP in 2011, which presumably means that the average family pays that amount in taxes as a share of income – if one assumes, as does the Fraser Institute, that all taxes are borne by households. The OECD calculation is obviously well below the Fraser Institute number, to the tune of more than 10 percentage points of GDP.
The difference may be because the Fraser Institute is counting as “taxes” government non-tax revenues such as income from public investments and commercial operations, as well as revenues from user fees and charges. Total Canadian government tax and non-tax revenues combined amounted to 37.5 per cent of GDP in 2011 according to the OECD (see Annex Table 26 here), in the same ballpark though still a bit lower than the Fraser Institute number.
As noted, the Fraser Institute includes in its calculation of the average family tax bill all taxes – including taxes paid by businesses such as corporate income tax, business property taxes and natural resource levies. This is done on the grounds that such taxes are ultimately passed on to households.
Most economists would agree that taxes on business are shifted to a modest degree onto workers in the form of lower wages and onto consumers in the form of higher prices. But the major impact is on profits and thus on the investment returns of higher-income taxpayers.
A recent mainstream study for the United States, conducted by the Urban Institute and the Brookings Institution, found that 79 per cent of the revenues from the corporate income tax are borne by the top 20 per cent of income earners. The average family does not face a significant tax burden because of taxes levied on profits.
The Fraser Institute says that 29.1 per cent of the taxes paid by the average family are accounted for by personal income taxes. But they fail to make clear that income taxes as a share of income are still quite progressive, meaning that high-income families pay much more than low-income families.
Statistics Canada’s Survey of Household Spending provides data for income taxes paid as a share of total family spending by income group. Dividing families into quintiles (or five groups of equal size), the personal income tax “burden” measured as a share of spending rises from just 1.2 per cent for the bottom quintile to 5.0 per cent for the next quintile, 10.2 per cent for the middle income group, 15.3 per cent for the next group and 27.8 per cent for the top quintile.
The key point is that personal income taxes are a trivial share of spending for the bottom 40 per cent of families, and loom large only for families at the higher end of the income spectrum.
The Fraser Institute uses 1961 as a base year, leaving the impression that taxes have been soaring as a share of family income since then. In point of fact, based on the same OECD data, taxes have slipped by more than five percentage points of GDP since their peak 15 years ago, in 1998.
One can also note that the “tax burden” in 1961 was low because, back in those glorious days of small government, Canadians had no Medicare, no Canada Pension Plan, no Guaranteed Income Supplement to old age pensions, and only a tiny post-secondary educational system.
In short, taxes paid by an average family, the price we pay for a civilized society, are far more modest than the widely publicized calculations of the Fraser Institute would suggest.
Andrew Jackson is Senior Policy Adviser to the Broadbent Institute.
This article originally appeared in the Globe & Mail's Economy Lab.