Note: I took this shark’s photo at the Ripley’s Canada Aquarium in Toronto.
According to an August 2017 study by the Fraser Institute Canadians pay, on average, more in taxes than for the basic necessities of life. A typical Canadian household used 37 per cent of its income on basic necessities but 42.5 per cent of its income in taxes. (https://www.fraserinstitute.org/article/taxes-the-average-canadian-familys-largest-expense)
An average Canadian family with an income of about $83,000 paid $31,000 for basic necessities: housing (rent and mortgage payments), food and clothing, while paying roughly $35,000 in taxes last year. (That includes federal, provincial and local taxes, including income, payroll, sales and property taxes.)
Canadians’ tax bill has risen by over 2,000 per cent since 1961, while the Consumer Price Index rose by only 718 per cent over the period, the report said. Thus, taxes have increased by around 2.8 times as much the general cost of living.
This rate of escalation in the tax share of income cannot go on indefinitely. All levels of government will have to put tighter limits on their spending, sooner rather than later. However, that day can be put off for a few more years by the federal government distracting the voting public from government spending increases by complaining that some income groups are not paying their “fair share”.
Is anyone not paying their fair share?
In an article published November 30, 2017, the Fraser Institute used the title “Measuring the Distribution of Taxes in Canada: Do the Rich Pay their “Fair Share”?” (Fraser Institute). It actually never answered it own question. While the article does discuss the distribution of taxes, it never says what tax group is “rich” or whether the taxes they pay are their “fair share”. Rather, the article provides an unsurprising finding: “The fact is that Canada’s top income-earners pay a disproportionate—and growing—share of all taxes collected by government.”
A disproportionate share is precisely what one would expect in a progressive tax system where income taxes are based on ability to pay, which rises with increasing income. But lets look at the Fraser Institute’s numbers.
The top 20 per cent of income earners in Canada (families with an annual income greater than $186,875) will earn 49.1 per cent of all income in Canada but pay 55.9 per cent of all taxes (including income, payroll, sales and property taxes, among others). The top one per cent of earners will pay 14.7 per cent of all taxes in 2017 (up from 11.3 per cent in 1997), but will earn only 10.7 per cent of all income.
When looking at income taxes alone, the top 1 per cent will pay 17.9 per cent of all federal and provincial income taxes while earning only 10.7 percent of all income. This is a payment to income ratio of 1.67:1.
At the other end of the earnings scale, the lowest 50 percent of income earners will earn 20 per cent of all income, but pay just 9 percent of all income taxes for the 2017 tax year. This is a payment to income ratio of 0.45:1.
Are these percentages and ratios fair or unfair?
Before deciding that question, consider a somewhat different way of quantifying the share of taxes, provided by the Canadian Taxpayers Federation (Global News), based on a September 2017 study report by Mark Milke, Ph.D. (CTF Report)
Canadians who make over $100,000 a year (before tax) represent just 8.4 per cent of tax filers across the country, but paid 52 per cent of all income tax revenue collected by the federal government in 2014 and 54.5 per cent of all provincial income tax collected.
Furthermore, tax filers with incomes of $250,000 or higher represented 1 per cent of all tax filers that same year, but that 1 percent paid 21 per cent of all federal income tax.
If the Prime Minister and Minister of Finance say that the 8.4 percent who will pay more than 52 percent of all federal and provincial income taxes for 2017 are not paying enough to cover their “fair share” then please tell us: what is their fair share? Is it 55 percent? 60 percent? And what is it that would make these percentages fair and the 52 percent unfair? Without saying what is fair, the assertion that it is unfair is meaningless.
Until we get authoritative answers to these questions, with full explanations for how the answers were determined, all we have from the government are attempts to press our emotional button labelled “fairness”. The government’s critics are attempting to unpress these buttons by giving us the numbers that suggest there is no unfairness. I leave it to you, my readers to make up your own minds about whether the situation is fair, unfair, or just what it is.
If we get rid of the “f-word” to judge tax levels, what should we look at instead, to make this judgment? Every tax has effects on the people who have to pay it. These effects can be estimated in advance, and tracked with experience to refine the estimates.
An excellent example is seen in the government’s suddenly stated surprise and concern about small business incorporation as a tax reduction strategy. This is one of the “loopholes” that supposedly needs to be closed because the tax benefits of incorporation are being abused, or used much more than was intended. Really?
Anyone can incorporate a company, on line or through a law firm. The initial cost of incorporation is between $1-2 thousand, but can save tax in the tens or even hundreds of thousands of dollars every year. You don’t need to be a financial genius to recognize that incorporation is beneficial. And it is simply incredible to suggest that at the time these incorporation tax provisions were legislated, no one in the Finance Department right up to the then Minister understood that such a tax benefit would be widely used to reduce taxes payable. This was an entirely predictable and a fully intended consequence of this tax legislation.
Changing tax provisions that have reduced taxes until now will result in increased tax revenues. But it will also change the behaviour of those facing the higher taxation, to offset their impact. Whether the increased tax revenue will be a sufficient benefit to offset the disincentives of high taxes to hard work, efficient spending on overhead and, for younger professionals, even remaining in Canada, will only be evident in the years to come.