Ten Tax Myths
P R É C. S O M M A I R E S U I V.

Myth 1
Canadians are overtaxed

 T his declaration fits the classicmodel of propaganda: a deliberately oversimplified statement designed to elicit an emotional response instead of a rational one. It generates resentment at government, implies a whole range of bad intentions from irresponsible politicians and a “bloated” bureaucracy, and promotes isolation between government and citizens.

This blanket declaration begs many questions. Which Canadians are overtaxed? All, or just some? Overtaxed compared to what and whom? Other countries? Does it mean we are overtaxed compared to what we get for our taxes? Compared to what we used to pay in taxes? Overtaxed in relation to the revenue we need for good public services? Or might it mean, if we actually examine the situation, that low-income Canadians are overtaxed compared to wealthy Canadians and large corporations?

This deceptively simple statement that we are overtaxed is designed to make people jump to the simple answer: lower “our” taxes. Such a solution ignores all the above questions about public services, tax fairness, and the overall objectives of a tax system. That makes a real debate about taxes more difficult, allowing governments to reduce taxes on highincome earners and corporations without public opposition — which is exactly what happened in the 1980s.

The assumption implicit in the blanket statement is that tax levels, particularly on middle-income families, are still rising. This is simply not the case. To be sure, the total amount of personal income taxes collected by Ottawa and the provinces has been rising in recent years (although it is projected to fall in the next few years because of tax cuts introduced in the 1998 and 1999 budgets).

In 1995, the total personal income tax bill was about $94 billion. In 1996, that figure rose to $99 billion. This increase, however, largely reflects growth in the economy and the extra taxes collected from high-income individuals as a result of large increases in capital gains and dividend payments. As Table 1.1 reveals, while the total income assessed by Revenue Canada rose 3.6% between 1995 and 1996, the largest increase by far came in the form of taxable capital gains, the vast bulk of which were earned by people at the top of the income ladder.

Table 1-1
The Rise in Tax Revenue

Total Number of Tax Returns 20,514,59020,805,9801.4
Employment income ($) 346,341,166354,167,9572.3
Capital Gains ($) 7,471,1809,834,16631.6
Taxable Dividends ($) 9,312,33810,335,60711.0
All Income ($) 530,085,394549,101,5903.6
Source: Author’s calculations based on Revenue Canada data.

Table 1-2
Percentage of household budget spent on four major categories, 1997

2nd quintile 3rd quintile4th quintileHighest
Food181513 119
Shelter322421 1916
Transportation111413 1311
Personal income taxes310 172130
Source: Statistics Canada

Employment income rose just 2.3%, a figure that barely kept ahead of the increase in the number of tax filers. In short, a disproportionate share of extra tax revenue has been coming from upper-income earners profiting from a booming stock market and larger bonuses. These developments have little effect on middle-income earners, yet that is precisely what many tax critics have presumed.

To further support their claim that Canadians are over-taxed, anti-tax crusaders routinely make reference to the “average taxpayer” to illustrate their argument. The right-wing Fraser Institute uses this approach to make the case that personal income taxes now make up the largest share of average household spending. And statistics do appear to show that, on average in 1997, Canadian families spent 21 cents of every dollar on personal income taxes, followed by 20 cents for shelter, 12 cents for transportation, and 11 cents for food.

There is a problem, however, in using averages this way, which is easily explained by the following example. Suppose four families with $30,000 incomes each pay $4,500 in income tax — or 15% of their incomes. Now, add in a wealthy family with $250,000 in income that pays $92,500, or 37% of its income. Using an approach based on averages, one would conclude that these five families pay an average 30% of their income on taxes (total tax payments of $110,500 divided by total income of $370,000 equals 30%). The trouble is that the 30% figure is completely misleading. The majority of people (the four middleincome families) pay 15% of their income in income tax, not 30%.

So, based on averages, Canadians appear to spend more on personal income taxes than any other expenditure, but the truth is that most of us do not. Table 1.2 illustrates the percentage of household budgets spent on food, shelter, transportation, and personal income taxes. Rather than using averages, however, the data are broken down into five equalsized income groups or quintiles, ranging from the 20% of households with the lowest income to the 20% with the highest income.

Using this approach, we find that, for 40% of Canadian households, income taxes represent the smallest share of expenditures. For the third or middle quintile, shelter remains the largest expenditure. In fact, it is only for the top two income groups that taxes are the major household expenditure. When critics use averages to describe taxes paid by Canadians, it produces skewed results that ascribe tax rates to the average person that are in fact paid only by taxpayers at considerably higher income levels.

Nevertheless, there is no question that some Canadians are overtaxed. Tens of thousands of lowincome Canadians end up with income tax bills. Between 1980 and 1990, the average income tax rates increased for all quintiles, but the largest proportionate increase was for the lowest quintile — an increase of 43% (from 2.3% to 3.3%). Consequently, the overall progressivity of Canada’s income tax system, when measured as the ratio of the effective rate payable by the top quintile to that payable by the bottom quintile, declined from 1980 to 1990. It has only been in the 1990s that the ratio has widened again.

What about wealthy Canadians? Are they overtaxed? It’s true that wealthier Canadians pay a greater share of their taxable income in taxes — that, after all, is the principle of progressive taxation. Revenue Canada figures for the 1996 tax year show that those Canadians with taxable income above $250,000 paid on average about 37% of that in federal and provincial income taxes. Canadians with taxable incomes of between $30,000 and $40,000, by contrast, paid just over 15% of their income in taxes.

Table 1-3
Effective Income Tax Rates by Quintiles, 1980-1997

YearLowestSecondThird FourthHighestRatio of top quintile to bottom
19852.39.414.3 17.421.49.3
19903.312.017.5 20.525.57.7
Source: Statistics Canada, Income after tax, distributions by size in Canada, 1997.

However, this doesn’t give us the complete story, since these rates are based only on taxable income. Many wealthy Canadians have income from sources not taxed, such as inheritances and gifts. In fact, Canada eliminated its inheritance tax in 1970. When you include these other sources of income and wealth, then wealthy Canadians are clearly undertaxed when compared to other groups.

As a broad-based share of all sources of income, Canadians with income over $300,000 paid just 14.4% of that in personal income tax. That’s only slightly more than what people earning $50,000 paid.

Are corporations overtaxed? Corporate lobbyists complain loudly that governments are undermining their profitability through taxes. But this is far from the truth. The corporate tax rate fell dramatically throughout the 1950s and 1960s, and has remained fairly stable since the 1970s. Perhaps most importantly, Canadian corporate income taxes compare favourably with those of other countries, including the United States.

Are we overtaxed with respect to the other developed countries to which we normally compare ourselves? The question is far more complex than commonly assumed. International tax comparisons raise countless problems. Tax rates are notoriously difficult to measure on a strictly comparative basis, since numerous tax expenditures, credits, shelters and write-offs can significantly lower the amount of tax actually paid. Consequently, many researchers measure effective tax rates, most commonly by calculating total tax revenue as a share of GDP.

By this approach, Canada comes in right in the middle of the pack — higher than some, but lower than others. Nevertheless, even with this approach, problems continue to abound. What is classified as a tax in one country might be classified as a user fee in another. The costs of what is provided as a publiclyfunded service in one nation may have to be borne privately in others. Some countries even include in their revenues taxes paid by governments themselves, such as sales taxes on purchases.

Problems arise even when we compare ourselves to the United States. While the overall tax burden is higher in Canada, it does not necessarily mean that all Canadians are left with less disposable after-tax income than their American counterparts. The OECD records that the disposable income of families earning the average industrial wage, expressed as a percent of gross pay, is actually higher in Canada than in the United States.

Other data confirm this. In 1995, the median family in Canada had $30,200 to spend after taxes, compared with $29,500 for the median U.S. family (both in Canadian dollars). The Canadian family is even better off than the $700 difference because it has already paid for health care in its taxes, while the American family may have to pay private premiums or bear the costs of sizeable medical bills if it is among the 43 million Americans without health insurance.

Moreover, the other burden faced by American families is the cost of education. Most private colleges charge tuition fees of US$25,000. State schools charge considerably less, but still average more than tuition at Canada’s colleges and universities[1]. How do we determine if we are overtaxed? How much tax revenue does Canada require to meet the needs expressed by the majority of its citizens? This is a complex question tied to issues of Canadians’ values, their commitment to community, their strong support for Medicare and public education, the protection of the environment, and decent pensions. And, in answering the question of how much revenue do we need to pay for desired public services, we must ask: just how should we raise that revenue?

Most Canadians have always displayed a strong commitment to the principle of fairness, and that principle must be key to any tax system designed to meet the needs of society and community. That principle of fairness was enshrined historically in the principle of taxing people based on their ability to pay — i.e., a progressive tax schedule that charged increasingly higher tax rates as income increased.

Much of our revenue leaks out of the system by means of what are called tax expenditures — incentives, breaks and tax shelters. Many of these tax breaks are provided disproportionately to wealthy individuals and corporations. As Table 1.4 shows, those earning over $80,000 a year, while making up just 2.9% of all tax-filers, claimed 21.5% of all RRSP and RPP deductions and 83% of all capital gains deductions in 1996.

Table 1.4
RRSP/RRP and Capital Gains Deductions, 1996

Income Level% of all tax filers % of total RRSP and RPP deductions % of total capital gains deduction
Less than 20K52.45.61.2
$20K - 40K27.827.74.1
$40K - 60K12.631.46.7
$80K - 100K1.311.05.1
$100K - 150K0.95.914.4
$150K - 250K0.42.924.9
$250K +0.31.738.5
Source: Calculations based on Revenue Canada data.

Ordinary working Canadians are paying more and getting less because regressive changes in the tax system in the 1970s and 1980s reduced revenues to such an extent that Canada began to build up significant annual deficits. Businessmen were allowed to deduct the cost of expensive lunches as business expenses; developers are still allowed to claim a depreciation expense, even though their buildings are appreciating in value; corporations are able to depreciate their capital assets faster for tax purposes than they do for purposes of their own financial statements.

The Bank of Canada’s ill-considered high interest rate policies in the 1980s caused those deficits to balloon because the government had to pay those high rates on the money they borrowed to service the deficits.

The interest on that debt is being paid largely from working Canadians’ taxes and goes almost exclusively to financial institutions and wealthy investors. Ironically, wealthy Canadians gain at both ends of this so-called debt crisis. They gain, first, by having their taxes lowered (helping to cause the crisis by lowering government revenues) and secondly, by reaping the investment benefits of interest payments on the bonds the government had to sell to make up for the lost revenue.

As we will see in the remainder of this study, the Canadians who are truly overtaxed are poor and working Canadians whose tax burden has increased dramatically over the past 15 to 20 years. Here are just some of the numbers that show how low-income Canadians have seen their tax burden increase.

Are Canadians overtaxed? It depends. On what we want taxes to pay for, on how fair we want our society to be, on how we stack up to the other developed nations we normally compare ourselves to, on what the actual effect of various taxes is on economic growth and sustainability.

It depends, ultimately, on what values we choose to have as a people and how we incorporate those values into public policy. The question should be reformulated: “Does our tax system reflect the values, aspirations and needs of the majority of Canadians and their communities?”

[1] Andrew Cohen, “So you wanna live the dream”, Report on Business Magazine, July 1999.
[2] The CCPA Monitor (Ottawa: Canadian Centre for Policy Alternatives), March 1995.
[3] Stanford, Jim, Paper Boom, CCPA, Ottawa, 1999, p. 269-70.

Ten Tax Myths
P R É C. S O M M A I R E S U I V.