Here’s why that’s the wrong question to ask
A recent Fraser Institute report and commentary stated that taxes are the single largest budget item of Canadian households. “Your family’s largest expense may surprise you,” the think tank wrote alarmingly, with taxes as the punchline.
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’s finding is neither false nor surprising. If, instead, you lump 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 obfuscation in its 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 its 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 the gross domestic product (GDP) rather than 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 to hospitals to roads and public libraries. Providing these kinds of public goods is why we have governments in the first place.
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, forms of redistribution and social insurance fundamental to Canada’s social fabric.
But there may be a silver lining. Such economic exercises as that undertaken by the Fraser Institute 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, GDP, was misleading.
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. 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) 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’s implausibly high average tax rates, with the implication that Canadians are losing close to half their income to taxes; the mainstream financial press’ focus on short term wiggles in the GDP stats; with politicians trying 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 1 per cent 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.
By Michael C. Wolfson
Michael Wolfson is an expert advisor with EvidenceNetwork.ca and holds a Canada Research Chair in population health modeling/populomics at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada, and has a PhD in economics from Cambridge.