The Great Canadian Tax Myth

[Satan's Evil Twin]

The great Canadian tax myth

Believe it or not, what we pay is low by international standards

BY PAUL KERSHAW, EDMONTON JOURNAL APRIL 30, 2012

As the deadline for filing income taxes looms, many Canadians, like me, are scrambling to pull together financial information. As we calculate our taxes, we are especially likely to complain about how much we owe for the year and question why the amount seems so high.

Although "death and taxes" jokes are inevitable, it's worth setting the record straight about taxation in Canada: where we are relative to other countries, and how much we pay compared to decades ago.

I suspect most Canadians believe that we live in a high-tax country but that's just not true. Adding up the income, sales, corporate, property and other taxes we pay to all levels of government, total taxes are 31 per cent of Canada's economy. This is below the average (33.8 per cent) for rich industrialized countries that are part of the Organization for Economic Cooperation and Development (OECD). If Canadians paid taxes at the OECD average, we'd owe an additional $45 billion a year.

For high-tax countries, we need to look to France, Finland, Austria, Norway, Belgium, Italy, Sweden and Denmark. Taxes add up to between 42 and 48 per cent of their economies. In other words, their citizens pay up to half again as much as we do in Canada.

Yes, there are also a handful of OECD countries that collect fewer taxes than we do, including the United States, Greece, Portugal, Spain, Ireland, Japan and Australia. Keep in mind, all but Australia have a larger public debt than Canada relative to the size of their economies. So they're not obviously strong role models.

Since Canada is a relatively low-tax country by international standards, perhaps we feel heavily taxed because we pay more now than we did in the past. This is true when total revenue collected by federal, provincial and municipal governments is compared to what Canadians paid a generation ago. We pay $22 billion more now than we would if 1976 tax laws still applied. This increase is driven primarily by our decision to collect more pension plan premiums.

But here's the thing. Over that same period, we decided to increase spending on medical care and pensions by more than $80 billion a year. Spending on these programs increased four times faster than the taxes that pay for them.

Canadians haven't always been so unwilling to balance the country's chequebook. Just 10 years ago, taxes were $80 billion higher because Canadians were still determined to pay for the things we want.

However, since 2000 we've prioritized tax cuts to "pay ourselves" first and foremost. Individual income tax is down nearly $38 billion a year, and we slashed sales taxes by nearly $19 billion to a level far below a generation ago. Corporate taxes also dropped substantially, down nearly $18 billion. This is one reason why financial services giant KPMG's annual competitiveness reports show that Canada has become an especially good place for companies to do business. But in the spirit of full disclosure, corporate taxes in Canada are only around $3 billion lower than they would have been had we kept corporate rates as they were in 1976.

Because the Occupy movement has effectively revealed the growing gap between the rich and the rest, some Canadians worry that a big problem with taxation is that the wealthiest Canadians are not paying their fair share. Compared to 1976, there is reason for concern.

Canadian Tax Federation data show that current marginal federal and provincial income tax rates combined peak at about 43 per cent. This top rate kicks in on income above $128,800. Back in 1976, someone with the same income after adjusting for inflation would be paying a tax rate of 49 per cent. Plus, in 1976, we had even higher tax rates for incomes above $198,000, with the peak rate of 61 per cent coming at $305,000.

This means we have definitely moved far closer to a flat tax for the "one per cent" compared to a generation ago, and substantially reduced their income tax responsibilities. Plus, more privileged Canadians often can organize their income so that it is taxed at corporate rates, which provide substantial savings compared to paying taxes as individuals.

Before we conclude that problems with taxation rest only with the one per cent, middle-income Canadians need to take a hard look in the mirror. The proportion of total income tax paid by the vast majority is down, compared to both 1976 and 2000. By contrast, Statistics Canada data show it has gone up for the most affluent 20 per cent of Canadian families, as much as nine per cent compared to a generation ago. This is partly because the top 20 per cent of earners have seen their incomes rise in recent decades faster than others. But it is also because middle-income Canadians were paying combined federal and provincial income tax rates around five per cent higher than they are now. This is conveniently disguised by the slogan, "We are the 99 per cent."

The pattern of dramatic tax cuts that began in 2000 does not play out neutrally across generations, because spending patterns have not been neutral. Since expenditures on medical care and pensions grew while taxes declined, there are far fewer resources with which to adapt to the declining standard of living for generations under age 45. They are squeezed for time because it takes two adults to earn what one often could a generation ago, and they must pay for housing prices that have skyrocketed, along with larger student debts.

There are policy solutions to their challenges, just as we have implemented successful policy solutions for the sick, and for seniors. But policy solutions need to be paid for; otherwise we squeeze generations that follow with larger debts. We can make room to pay for them by spending less on other things like fighter jets and jails, or yes, possibly changing expectations around medical care. Or we have to pony up ourselves, as we did before the year 2000.

Paul Kershaw is a professor of public policy at the University of British Columbia.

http://www.edmontonj...9704/story.html

[RUPERTKBD]

I never actually believed that our taxes were particularly high on a global scale.

It's just those guys to the south with their 14 trillion dollar debt that make it look so...

[unbridled_id]

Hey when Obama is out of a job in January maybe he can bring his tax and spend policies to your government ?

[lateralus]

I would like to see the difference between provinces.

[Satan's Evil Twin]

I would like to see the difference between provinces.

[LostViking]

When I consult people on taxation, I use the individual tax system to argue organizing income through a corporate entity or through investing. Basically, since individual income is taxed between 40-45% for anyone making enough money to justify hiring a tax consultant, the ~25% capital gains rate or the corporate rates are a much better option. I know for me personally, seeing about half of my money taken away every paycheque does pay a psychological toll, around this level of taxation it gets into your thoughts, and suddenly I find myself making plans to run my finances through a corporation or simply invest for a living.

I would warn that if increases are made to individual tax rates, whether justified or not, you will see a big push to have income even more filtered through investments. I would say that it wouldn't make a lot of sense to tighten the top tax brackets simply because it creates a stronger case for high incomes to abandon their careers and become investors - the current recession shows this may not be the healthiest option for our economy.

So I would say that if we wanted to increase taxation, we should start with the corporate and particularly the investing rates - if coupled with a decrease in the highest personal tax rates the effect would be larger. Less incentive to capitalize, more incentive to simply work a 9 to 5.

The truly sad part, when looking at the countries mentioned in the article, are that the high tax countries are certainly not doing any better financially than the low tax ones. I would argue that economic problems lie elsewhere, and that meddling with taxation is merely a feel-good activity that will raise moral, but doesn't solve the broader issues that should be dealt with first and without distraction.

[woot]

Excellent post. "The 99%" indeed.

[ronthecivil]

With the skyrocketing costs of healthcare (and every other social service for our soon to be retiring majority of the population) being carried by a smaller segment of the population you can look forward to the worst case all around. Rising taxes and lower service levels.

That housing costs are out of line with incomes is an entirely different problem that will solve itself one way or the other and when it does it will further impact revenues.

In good news when it does we may end up like Florida on the other side and you can save up your babysitting money to buy a house.

[:D]

I was undertaxed by $600 at work last year

So even with moving expenses and my SPCA donations, I owe $400+

Didn't read the thread

[:D]

In good news when it does we may end up like Florida on the other side and you can save up your babysitting money to buy a house.

[ronthecivil]

Great, I've been trying to get into babysitting for years now...

[Hyzer]

With the skyrocketing costs of healthcare (and every other social service for our soon to be retiring majority of the population) being carried by a smaller segment of the population you can look forward to the worst case all around. Rising taxes and lower service levels.

That housing costs are out of line with incomes is an entirely different problem that will solve itself one way or the other and when it does it will further impact revenues.

In good news when it does we may end up like Florida on the other side and you can save up your babysitting money to buy a house.

[Hyzer]

Well, save up. Right now I am a two income (nurse + engineer) family and despite being dueling proffesionals best we can hope for is to get a modest home in north Surrey or Langely or perhaps if we wanted to move over the river a small townhouse in Burnaby/New West.

I will stay commuting until I can buy a house in North Burnaby. Ideally a couple from people way over their head because they are too stupid to understand basic economics/financing. Instead of babysitting get a real job, and then save. Ideally then buy three distressed homes next to one another, live in the middle one, and rent the side ones. Then if your neighbours piss you off you can kick them out !

[ahzdeen]

When I consult people on taxation, I use the individual tax system to argue organizing income through a corporate entity or through investing. Basically, since individual income is taxed between 40-45% for anyone making enough money to justify hiring a tax consultant, the ~25% capital gains rate or the corporate rates are a much better option. I know for me personally, seeing about half of my money taken away every paycheque does pay a psychological toll, around this level of taxation it gets into your thoughts, and suddenly I find myself making plans to run my finances through a corporation or simply invest for a living.

I would warn that if increases are made to individual tax rates, whether justified or not, you will see a big push to have income even more filtered through investments. I would say that it wouldn't make a lot of sense to tighten the top tax brackets simply because it creates a stronger case for high incomes to abandon their careers and become investors - the current recession shows this may not be the healthiest option for our economy.

So I would say that if we wanted to increase taxation, we should start with the corporate and particularly the investing rates - if coupled with a decrease in the highest personal tax rates the effect would be larger. Less incentive to capitalize, more incentive to simply work a 9 to 5.

The truly sad part, when looking at the countries mentioned in the article, are that the high tax countries are certainly not doing any better financially than the low tax ones. I would argue that economic problems lie elsewhere, and that meddling with taxation is merely a feel-good activity that will raise moral, but doesn't solve the broader issues that should be dealt with first and without distraction.

[DonLever]

To most Asian immigrants, Canada is a very high tax country. They are shocked to find out that they can pay almost 50% income tax.

Countries like Japan, South Korea, Taiwan, and Singapore have low tax rates compared to us. In Hong Kong, there is a 15% flat tax that only apply to high income earners.

[inane]

Well, save up. Right now I am a two income (nurse + engineer) family and despite being dueling proffesionals best we can hope for is to get a modest home in north Surrey or Langely or perhaps if we wanted to move over the river a small townhouse in Burnaby/New West.

I will stay commuting until I can buy a house in North Burnaby. Ideally a couple from people way over their head because they are too stupid to understand basic economics/financing. Instead of babysitting get a real job, and then save. Ideally then buy three distressed homes next to one another, live in the middle one, and rent the side ones. Then if your neighbours piss you off you can kick them out !

[RUPERTKBD]

are you the nurse in the family? if not, ask how much the annual salary is... because i'm going into psych. nursing.. just wonderin'.

[ronthecivil]

Not true. I know you desperately want it to be true, but it ain't.

[inane]

Take family income and multiply by 3.3. Add downpayment. That's how much you can afford.

Then look at MLS

Not sure what you think I desperately want to be true but isn't.

[ronthecivil]

Depends how you define 'small' and how you define 'modest', but go look and you'll find what you can afford.