Canadian tax facts 2004

by Russil Wvong

Contents:

1. How much do Canadians pay in taxes?
2. What do our taxes pay for?
3. How large is the public debt?
4. Why is it so hard for politicians to keep the budget balanced?

Originally posted to the BlogsCanada E-Group weblog.

1. How much do Canadians pay in taxes?

According to the OECD, total government revenues for 2004--federal, provincial, and municipal--will be 41.3% of GDP, down from a peak of 44.5% of GDP in 1997 and 1998. This means that Tax Freedom Day is May 30 (since 41.3% of 366 is 151 days into the year.)

Why is this different from the Fraser Institute's Tax Freedom Day of June 28, which suggests that taxes are closer to 50% of income? When the Fraser Institute adds up taxes, it includes taxes on business earnings, which makes sense, since businesses are ultimately owned by individual Canadians. But when it adds up income, it doesn't include retained business earnings! This increases the Fraser Institute's reported ratio of taxes to income, resulting in a misleading number.

Jan Narveson asked the Fraser Institute about this and got the answer that the exact definition of income didn't really matter. I'm afraid this doesn't make sense, since what the Fraser Institute is publicizing is the ratio of taxes to income. I would suggest that if the Fraser Institute wants to argue that taxes are too high (which is certainly arguable), they should do so based on an accurate picture. They shouldn't be trying to bolster their argument with misleading information.

A secondary issue is cash transfers to individuals--CPP/QPP/OAS payments to seniors, EI payments, social assistance payments, etc. If we're trying to determine the impact of taxes on average income, should transfers to individuals be subtracted from taxes, since transfers increase average income? Or should they be considered part of spending?

Whenever the OECD and the Economist do country-by-country comparisons, they don't take transfers to individuals into account, so I'm inclined to say that transfers to individuals should be counted as spending, not subtracted from taxes. If we did subtract them from taxes, though, we would get a Tax Freedom Day of March 23. (In 2001, transfers to individuals were 10.5% of GDP: 116.743 billion / 1.107459 trillion.)

2. What do our taxes pay for?

There's a summary of all government spending for 2003 on the Statistics Canada website, broken down into categories.

To try to make them more comprehensible, I've translated them into per-capita numbers, based on a population of 31,629,700 in 2003. A billion dollars is about $30 per capita.

Roughly speaking, out of $15,000 in total spending per capita, there's $5000 for social services, $5000 for health and education, and $5000 for everything else, including $1500 for interest on the debt and $1200 for protection of persons and property (meaning military, police, legal system, firefighting). Here's the detailed breakdown.

3. How large is the public debt?

The public debt represents the accumulation of past deficits. According to the OECD, in 2003 total public debt was 75.6% of GDP, or $30,000 per capita, down from its peak of 100.8% of GDP in 1995.

Since 1998, there's been an overall surplus. In 2003, there was a surplus of 1.2% of GDP, or $460 per capita. We need to continue paying down the debt, because there's going to be a surge in health-care costs as the baby-boom generation reaches retirement age (around 2010).

4. Why is it so hard for politicians to keep the budget balanced?

The reason is that it requires a peculiar combination of economic caution and political risk-taking. Whenever the budget looks like it's getting out of balance, you need to raise taxes, cut spending, or both. In other words, you have to impose considerable pain on people. People get very angry when you do this, so you're risking your political future.

The key thing to remember is that it's impossible to have lower taxes and higher public spending at the same time. Public services are paid for by taxes, so the two have to be balanced. If you lower taxes, you eventually need to cut spending (and social services, health, and education account for the bulk of the budget, so you can't cut spending without cutting those). Conversely, if you increase spending, you eventually need to raise taxes. It's possible to temporarily put off balancing the budget by borrowing the difference, but as we found out during the 1970s and 1980s, that just aggravates the problem, because of compound interest: you have to pay interest on the money you've borrowed, and if you have to borrow the interest as well, the debt grows extremely quickly. Fortunately, the situation appears to be under control now.

References

John Richards, Retooling the Welfare State: What's Right, What's Wrong, What's To Be Done (1997). A good discussion of the Canadian welfare state--education, health, welfare--and how to manage it, starting from the assumption that voters will not accept further tax increases. An excerpt.

Edward Greenspon and Anthony Wilson-Smith, Double Vision: The Inside Story of the Liberals in Power (1996). A blow-by-blow account of how the Chretien government handled two major crises: the February 1995 budget and the "near-death experience" of the October 1995 referendum in Quebec. Public debt was 100% of GDP, interest on the federal debt was consuming 34% of revenue, and the deficit was $40 billion. The unemployment rate was 11.2%. Foreign investors were very close to deciding that Canada was no longer a good credit risk, triggering a huge financial crisis, as happened to Mexico in December 1994. The February 1995 budget was the turning point.

July 20, 2004