On April 19, 2010, the Fraser Institute released The Canadian Consumer Tax Index, 2010. This report overstates average taxes and ignores the introduction of new public services during the past half-century. It does so in the following ways:
The Fraser Institute’s starting point is that all taxes are paid by individuals. According to the report, the “tax bill of the average Canadian family” includes $2,484 of corporate income tax and $397 of charges for natural resources.
The Fraser Institute justifies this stance with the typical argument that all taxes are ultimately paid by individuals because all income ultimately accrues to individuals. For example, corporate income taxes come out of profits that belong to individual shareholders.
By this logic, the appropriate comparison is between total taxes and total income (GDP). In 2009, taxes of $471 billion from a GDP of $1,528 billion implied an average tax rate of 30.8%, relatively low by historic or international standards.
But the Fraser Institute compares total taxes with income accruing directly to persons and unincorporated businesses. Not surprisingly, a smaller denominator produces a larger fraction: “the total tax bill of the average Canadian family in 2009 amounted to 41.7 percent of cash income.”
The source cited for this figure (and others) is “The Fraser Institute’s Canadian Tax Simulator, 2009,” so it is difficult for a sceptical reader to check the calculations. What is clear, however, is that the numerator includes corporate income tax while the denominator excludes retained corporate profits.
The use of deficits
Taxes actually declined in 2009 because of the recession. To show a continuing increase, the Fraser Institute adds deficits (“deferred taxes”) onto the total. (We should remind right-wing pundits of that methodology next time they complain about higher taxes in Canada than in the United States.)
Not factoring in public services
The Consumer Tax Index purports to be a public-sector version of the Consumer Price Index. The latter examines how the price of a given basket of goods and services increases over time. It deliberately holds quantity constant in order to measure price changes.
By contrast, the Consumer Tax Index makes no distinction between the price and quantity of public services. Its base year is 1961, shortly before the Canada Pension Plan and Medicare were added to Canada's basket of public services.
The Fraser Institute claims that, as a share of “average cash income,” taxes rose from 33.5% in 1961 to 41.7% in 2009, an increase of 8.2%. Canada Pension Plan premiums, which the Fraser Institute counts as a tax, now equal 9.9% of employment income up to average industrial earnings.
The introduction of public pensions and health insurance surely explains most if not all of the tax increase over the past half-century.
Erin Weir is a research associate for the Canadian Centre for Policy Alternatives.