Check the math before crying class warfare

April 27, 2005

“Canada’s Top 10% Pay 52% Of The Total Tax Bill” announced the front-page story in the Saturday Globe and Mail. Quite a sensational claim on the front page of a national newspaper.  But take another look--some very peculiar conclusions are possible with the dubious use of statistics. 

Suppose we told you that Bill Gates and the guy down the street had an average net worth of $20 billion. Would you have the impression that this guy down the street is quite a wealthy fellow? Even if buddy down the street earned minimum wage at a fast food outlet, when paired up with someone as wealthy as Bill Gates their average net worth would still be sky high.

If you use statistics out of context, you can draw all kinds of wonky conclusions. The moral of the story: do some detective work before making conclusions with statistics--especially if you intend to trumpet sensational conclusions in major newspapers.

The story was based on a recent Statistics Canada report examining the personal income tax system (note that this report isn’t about all taxes paid--it doesn’t include GST for example). The take-away message of the article--the rich shoulder a disproportionate share of the income tax load. 

This is a misleading conclusion--misleading because not enough attention has been paid to who is included in the statistics. 

The Statscan report cited concerns tax-filers (that is anyone who submits a personal income tax form), not taxpayers (people who file their taxes and have taxes payable). Lots of people who submit a tax return pay no taxes.

Why do these folks bother to file their tax returns? Because they are required to do so in order to receive provincial and federal refundable credits, like the child tax benefit or the GST credit. And with more programs being delivered via the tax system, the number of tax-filers who pay no taxes is increasing. In 1990, 27% of tax-filers paid no tax: now this number has risen to 32%.

Tax-filers vs. taxpayers: why does it matter? If we just examine tax-filers, without recognizing that their number is swollen with folks who pay no taxes, it’s possible to come to some strange conclusions. It will look like the rich are paying a higher proportion of total income taxes – even if nothing else changes to make the tax system more progressive. Simple mathematics tells us that the percentage of taxes paid by the richest group of tax-filers will increase when the number of tax-filers who pay no taxes grows.

Suppose there are three taxpayers: one low-income (who pays $10 in taxes), one middle-income ($20) and one high-income ($30).  This would mean that the top 1/3 of taxpayers pay 50% of all of the taxes collected. If there are seven more tax filers who each pay $0 in taxes, the top 1/3 of tax-filers pay 100% of the taxes (since of course the bottom 2/3 pay no taxes). Yet nothing has changed in terms of who is paying taxes!

Using the publicly available 2002 tax data, and making a few minor adjustments to approximate the categories used in the Statistics Canada report (since the government’s website doesn’t break down the information exactly as the report does), we discovered that the top 10 % of taxpayers accounted for 45 % of total income tax revenues; while the top 10 % of tax-filers accounted for about 53%.

What does this translate to in terms of taxes paid?  The top 10% of taxpayers paid about $39 billion in taxes, while $46 billion was paid by the top 10% of tax-filers.  By focusing on taxpayers, we produce a result in which the top 10% pay a lot less in taxes: 16% less to be exact.

By the way, this explains another little mystery alluded to in the Globe’s reference to the  “the rarefied 10% club” (i.e. being the top 10% of income tax-filers) starts with tax-filers who have an income over $64,500—hardly what many would consider “rich.” Now we know why.  The cut-off point for the top 10% of income tax-filers is lower than the cut-off point for the top 10% of income tax payers.

Membership in the top 10% of taxpayers means you’d have an income over $75,000. Does that still sound too modest to be considered “rich”?  To give you an idea of how income is distributed within the top 10% taxpayers, the average income of the top 10% is about $140,000.

After doing just a little arithmetic, you might not want to rush to the conclusion that the rich are being soaked by Canada’s tax system.  But unfortunately all of this scrutiny into the nuts and bolts of the statistics comes long after the newspaper headline has passed into popular consciousness. 

Ellen Russell is Senior Economist with the Canadian Centre for Policy Alternatives

Sheila Block is Director of Policy at the Registered Nurses’ Association of Ontario and a CCPA Research Associate