Are Canadians Paying Too Much in Taxes?

It’s tax season and people are looking more closely at their incomes and the amount of taxes they pay.

The Fraser Institute released their annual Consumer Tax Index report yesterday, claiming that the total tax bill of the average Canadian family now takes up 41.7% of their income. This seems like a big number, which they use to suggest that Canadians are overtaxed, but what does it actually measure?

The Fraser Institute calculates the average Canadian tax bill by taking the entire amount of tax revenue that the Canadian governments collect, including all personal and business taxes, import duties and resource royalties, and divided them by the number of Canadian households. This definition of a family’s tax bill does not correspond to what individual families actually pay and is way too broad to be meaningful.

The argument that the average Canadian family pays for all business taxes is simply not convincing. Even if individuals ultimately pay all business taxes, it’s not necessarily Canadians that pay them (think of all the stuff we export).

And it’s certainly not the average family that pays all business taxes. In fact, given how unequally distributed shareholder profits and investment earnings are these days, the average has become meaningless — it’s artificially pulled up by those with higher incomes and does not represent the experience of most families. The median family’s tax bill would be a lot better metric in this case.

When corporate income tax, natural resource royalties and other business taxes are excluded from the calculation, the average family’s tax bill comes out to 36% of family income. This includes personal income taxes, sales taxes, taxes on liquor, tobacco and fuel and payroll taxes.

Including CPP and EI premiums in the family’s tax bill is also misleading. These payments directly benefit the individual who makes them by making him/her eligible for certain payouts in the future — pension benefits when they retire or EI benefits when they lose their job. This makes them very different from taxes like income or sales tax, which go into general revenue and do not necessarily flow back to the particular taxpayer.

Even if we overlook these issues and accept the Fraser Institute’s numbers, knowing that a family pays 36% or 41.7% of its income on taxes still doesn’t answer the question of whether this is too much or too little. We need to take account of what Canadians get for their taxes to make that kind of judgment. The Fraser Institute report, however, completely misses this part of the equation in their report.

In fact, a large chunk of government’s tax revenues flow back to Canadians in the form of direct transfers, such as old-age pensions for our elders, EI payments for the unemployed, and child benefits for parents.

Interestingly, the Fraser Institute includes government transfers in their calculation of family income. You won’t find this out in this report, though – you need to look up a 2008 Fraser Institute book that is cited in the report to get at their definition of family income (or family cash income, as they call it). Well, I did, and I found that family cash income includes wages and salaries, but also unincorporated non-farm income, interest, dividends, private and government pension payments, old age pension payments, and other transfers from government.

Without getting into a discussion of what percentage of Canadian families receives income from dividends and other investments, and how meaningful averages are when the distribution is so unequal, let’s just note that old age pension payments and other government transfers account for a large share of the average family’s cash income. In 2007, the latest year for with Fraser Institute numbers are available, they estimated that the average family received $2,125 in old age pension and $8,344 in other government transfers, for a total of $10,469 or 16% of their “cash income” of $66,496.

On average, then, almost half of the family’s total tax bill came back to them in the form of direct transfers from government. The other half was used to pay for services like education, healthcare, policing, justice, road construction and repair that Canadian families used and benefited from. This doesn’t seem like such a bad deal, after all.

8 comments

  • “Including CPP and EI premiums in the family’s tax bill is also misleading” I liked the article but this is opinion.

    Since we know a sum of people who pay into EI, never once rely on it, and or never once receive these benefits after being unemployed eiither from losing much needed documents, being denied, and or If employers, and, or employees together, falsify Records of Employment or misrepresent earnings, the reason for separation, or hours worked. Then we have pensioners where those that die before said age requirement to collect, with that money accumulated going to a those who survive.

    Will result in over-taxation for whatever severity for that sum of groups of people. This however shouldnt be considered disbelief of the authors point. Just a reflection criticism.

  • I seem to remember when they used to publicize Tax Freedom Day – supposedly the day you stopped paying all your money to governments and got to keep it. That was usually around the end of June/beginning of July, meaning half your income went to taxes.

    To me that seems about right in a mixed economy. it means we spend half of our money individually and half of it collectively.

    If we’re down to 40% were undertaxed. No wonder we have a health care crisis.

  • I am wondering about all the taxes that have gone to wasteful scandals and bloated triple decker civil service? Never mind the trough frenzy headed by whoever is in power at any given time and all their friends.

  • The media make a big deal about scandals, but they represent a tiny fraction of government spending.

    Of course, when that is all the media talk about people get the impression that is all the government does. This make people lose faith in government even when it is overall functioning well.

  • @ rww – I think that this is same basic calculation that goes into their misleading Tax Freedom Day, except that they do it separately for all provinces, instead of using the total Canadian numbers.

  • There is always something a little funky about the Fraser Institute’s numbers. One of them, as you point out, is that resource royalties paid to a province are somehow counted as taxes paid by average families. But this also raises another question. When the Fraser Institute rates provincial tax-free days, Alberta always comes earlies — which on the one hand is unsurprising, because they do have lower taxes. But if resource royalties are indeed included in tax figures (which they shouldn’t be, but the FI does anyway), an Albertan tax-free day should be later. My guess is that there’s a thumb on the scale somewhere — royalties are sometimes included and sometimes not depending on what the PR of the moment requires.

  • “Including CPP and EI premiums in the family’s tax bill is also misleading. These payments directly benefit the individual who makes them by making him/her eligible for certain payouts in the future — pension benefits when they retire or EI benefits when they lose their job.”

    Interesting. Does this mean that Marc Lee’s oft-cited 2007 CCPA study, claiming that tax rates are higher for the lowest income decile than for the top 1%, is also misleading?

    The 2007 CCPA does the same thing as the Fraser study – it includes CPP and EI contributions as taxes. If it didn’t, it wouldn’t have reached the same conclusion.

  • I posted a comment on this already but it seems to have been caught in the filter. If including CPP and EI in taxes is misleading, does this mean that the 2007 CCPA tax-incidence study should be redone? Because it does just that.

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