The tax freedom daze

Author(s): 
June 27, 2002

It is hard to argue against freedom. After all, no one wants to be constrained from doing what they want to do. Free marketeers are particularly adamant about their freedom to choose in the marketplace, and about how to spend their incomes.

Every year, the ultra-conservative Fraser Institute pronounces Tax Freedom Day--the day when Canadians (finally) stop "working for the government" and start "working for themselves".

Tax Freedom Day is, without a doubt, a clever and media-savvy ploy. That people actually derive benefits from government services in exchange for the taxes they pay is conveniently swept under the ideological carpet. Instead, the Fraser Institute suggests that up to a certain date, the government takes all of your income, burying it in some distant mineshaft never again to see the light of day, and thus stripping away your ability to be truly free.

In 2002, "Tax Freedom Day" in BC falls in late-June, a few days earlier than 2001. This leads readers to believe that, even after federal and provincial tax cuts, the typical British Columbian pays close to half their income in taxes, and thus works for half the year to pay the government. But wait, total tax revenues amount to around 37% of Canada's GDP. Why the discrepancy?

The Fraser Institute ostensibly calculates total taxes paid divided by total income. Simple enough, it would seem, but there is a great deal of arbitrariness to what gets included as "income" and "taxes." On the income side, certain types of income are not counted, including employer-provided fringe benefits, capital gains, and gifts and bequests. On the tax side, however, everything that even resembles a tax is counted (including natural resource royalties), and these taxes are all completely assigned to families. This way, corporate income taxes paid are included in the family tax bill, but corporate income in the form of retained earnings is not. Counting in this way tips the scales, pushing Tax Freedom Day ahead in the calendar.

The Fraser Institute calls its version of income for Tax Freedom Day "cash income." However, they also calculate "total income before tax," which includes other income such as fringe benefits and investment income from trusteed pension plans, plus the value of taxes paid on property, corporate income tax and indirect taxes (why these taxes are deducted to come up with "cash income" is a mystery). Re-calculating Tax Freedom Day based on "total income before tax" would make it fall about two months earlier.

Another reason why taxes appear higher is that the Fraser Institute figures are taken as an average for all Canadians. The trouble with averages is that they get pulled up by big numbers at the high end. For example, a room full of five people, with four making $20,000 per year and one making $220,000 per year, has total income of $300,000--or an "average income" of $60,000. In the same way, if each of the four making $20,000 paid 15% of that income in taxes, and the person making $220,000 per year paid 40% of that income in taxes, then the total tax paid among the five is $100,000, for an average tax rate of 33%--even though four of the five really paid only 15%.

It is possible to nit-pick even more about how Tax Freedom Day is calculated. But methodological qualms aside, there is a misleading premise embodied in the tax freedom concept that should not be ignored: that taxes restrict freedom. As tax lawyer Neil Brooks points out: "Even with a tax on income, individuals are still free to make whatever career or investment choices they wish, and free to choose whatever goods and services they wish to consume."

On the other hand, public expenditures enhance people's freedom to travel on public roads, to learn in public schools and libraries, and to enjoy public spaces. Redistributive taxation can also increase overall freedom because of the income provided to low income earners. This expands their ability to make choices and take advantage of opportunities. In a market economy, the Fraser Institute's much-cherished "economic freedom" only matters for those that have enough cash.

Marc Lee is a research economist with the Canadian Centre for Policy Alternatives--BC Office. In 2001 he paid 19% of his income in federal and provincial income taxes.