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Asking if Canadians Spend Too Much on Taxes Misses the Point

10/08/2015 08:16 EDT | Updated 10/08/2016 05:12 EDT
Gianni Diliberto via Getty Images
Midsection of mother and daughter stacking coins at table

"There are lies, damned lies and statistics" is the well-worn phrase, but nothing better sums up the recent Fraser Institute scare mongering about taxes being the single largest budget item of Canadian households.

"Your family's largest expense may surprise you," the ideological-driven think tank wrote, with taxes as the punchline. This perspective was picked up in headlines across the country with few media outlets taking the time to look critically at how the finding was reached.

The truth is, as catchy as the headlines may be, it is alarmist spin.

Of course, if you divide all household expenditures into a number of different categories like food and transportation, but leave all the different levels and types of taxation lumped together in a single category, the Fraser Institute finding is neither false nor surprising. If, instead, we also lumped all of Canadians' (non-tax) spending together, the resulting discretionary amount is a larger portion of household budgets than the taxes the Fraser Institute claims we pay.

But there is more obfuscating magic in their figures. On the one hand, the Fraser Institute assigns the taxes paid by corporations to individuals and families, but they don't assign the corresponding corporate profits to anyone. This inconsistency inflates their tax rate numbers.

Let's tackle the issue another way. If we examine Canada's entire economy, the OECD pegs total taxes, including CPP and EI contributions, at about 31 per cent of GDP. This simply does not square with the Fraser Institute's figure of 44 per cent.

And let's not forget that governments in Canada actually account for about 20 per cent of GDP if we focus on their direct purchases -- from teachers' salaries and hospitals, to roads and public libraries. Providing these kinds of public goods is why we have governments in the first place. Presumably the Fraser Institute would rather have Canadians, at least those rich enough to afford it, pay for private schools, private health insurance and toll roads instead. But where would this leave lower and middle income Canadians?

Most of the rest of the economy's taxes flow back to individuals and families as cash -- ranging from child tax benefits to public pensions. These forms of redistribution and social insurance are fundamental to Canada's social fabric.

But there may be a silver lining. Such biased economic exercises raise a fundamental question: Just what indicators should we be using to keep score on Canada's economic performance?

In the 1990s, a cover story for the Atlantic Monthly was titled, "If the economy is up, why is everyone down?", reflecting a widespread feeling that the most commonly used scorecard for the economy, gross domestic product (GDP), was misleading. The recent theological debate on whether or not Canada has been in a recession is also based on GDP trends.

In 2009, then-French president Nicholas Sarkozy, frustrated with the focus on GDP, funded a group of Nobel laureates and internationally prominent economists to see whether there was a better economic scorecard. Their answer, in the area of incomes, was to focus on median family income -- the income level that separates families into two equal-sized groups when arrayed by income.

For Canada, the trends in this measure of economic performance do not jibe with GDP per capita, nor with the family income figure used by the Fraser Institute. *In 1997, median Canadian family after-tax income (in constant 2014 dollars) for a four-person family was about $64,000, just a few hundred dollars higher than it was in 1976. Nothing to celebrate, in other words. Over this same period, GDP per capita had grown by about 20 per cent.

*After this period of stagnation, there was a clear turning point in 1997, with median family income (again using a four-person family as the point of reference) then growing quite steadily, reaching just over $85,000 in 2013. This figure reflects real growth of 33 per cent, faster than the roughly 26 per cent growth in real GDP per capita over the same period.

We have, then, three very different impressions of Canada's economic performance: The Fraser Institute has generated implausibly high average tax rates, using opaque methods, with the implication that Canadians are losing close to half their income to some ne'er do wells -- their governments. The mainstream financial press focuses on short term wiggles in the GDP stats, and politicians try to score points on who is to blame or reward for particular wiggles in GDP.

But far less effort is devoted to producing and trying to understand data on how actual Canadian families are doing.

We need to make more use of modern kinds of "big data" to estimate median family income and related indicators like the prevalence of low income, the size of the middle class, the share of the top one percent and income inequality. Such information would help paint a truer portrait of Canadian household prosperity -- both improvements and declines -- across the country.

It's time we stopped buying biased and second-rate economic indicators and took a thoughtful look at how Canadians are really doing.

*Calculations by the authour based on the time series of Statistics Canada's Low Income Measures (LIMs) for a four person family (up to 2012 and for 2013-2014).

These figures were doubled to represent median values (since the LIMs are defined as half the median family-size adjusted income) and then deflated using the CPI.

The GDP figures were taken from the OECD statistical website, and more specifically from time series like this one. These figures in turn were converted to constant dollars and then divided by the total population to derive constant dollar GDP per capita, where these two series were drawn from Statistics Canada's CANSIM. The spreadsheet containing all these calculations is available from the authour on request (mwolfson@uottawa.ca).

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