Milagros Palacios and Charles Lammam, The Fraser Institute
If you’ve ever tried to calculate all the taxes you pay in a year to all levels of government, you’ve probably given up somewhere along the way. While most of us can easily decipher how much income tax we pay – it’s right there on our tax returns – it’s a lot more difficult to gauge how much we pay in not-so-obvious taxes.
For Canadian families to reasonably estimate their total tax bill they’d have to add up a dizzying array of taxes, including visible ones like income taxes, sales taxes, social security taxes, and property taxes as well as hidden ones like profit taxes, gas taxes, alcohol taxes . . . and the list goes on.
Not an easy task to calculate taxes
This is no easy task. That’s why the Fraser Institute calculates Tax Freedom Day every year. Tax Freedom Day is an easy-to-understand measure of the total tax burden imposed on Canadian families by federal, provincial, and local governments. If Canadians were required to pay all taxes up front, they would have to give governments each and every dollar they earned prior to Tax Freedom Day.
In 2012, we estimate that the average Canadian family consisting of two or more people will earn $94,258 and pay a total tax bill of $41,627 or 44.2 per cent of income.
This results in Tax Freedom Day falling on June 11. From then on, Canadians start working for themselves and their families rather than the government. While that alone is reason to celebrate, you may want to keep the champagne on ice because the good news ends there.
Tax Freedom Day arrives one day later than last year. And there are two main reasons for the delay.
First, several Canadian governments have increased taxes, from increased Employment Insurance premiums at the federal level, to a higher provincial sales tax in Quebec, to increased health taxes in British Columbia and a new tax on high earners in Ontario. Indeed, these and many other tax increases underscore a worrying trend across the country.
Second, Canada’s economy is still recovering from the recession and as incomes continue to increase, a family’s tax burden increases to a greater extent because of Canada’s progressive tax system, which imposes higher taxes as Canadians earn more money. For instance, the top fifth of income earners face an average total tax burden amounting to 54 per cent of income while the bottom fifth face an average burden of 18 per cent.
Don’t pop the cork just yet; there’s more bad news.
The federal and almost all provincial governments are running deficits this year. (Ottawa expects a deficit of $21 billion while the provinces cumulatively expect deficits amounting to $20 billion.) According to our calculations, Tax Freedom Day would come 12 days later this year (on June 23) if Canadian governments covered their current spending with even greater tax increases instead of borrowing the shortfall (debt).
It just keeps getting worse
It is important to remember that budget deficits incurred by Ottawa and the provinces must one day be paid for by taxes. With the recent significant growth in government debt across the country, Tax Freedom Day could come later in the future. By kicking today’s debt down the road, governments are passing on the burden of repayment to young Canadian families.
It is ultimately up to Canadian families to decide whether June 11 is an acceptable Tax Freedom Day. But therein lies the value of the calculation; it gives families important information to help make that assessment.
On that note, happy Tax Freedom Day, although maybe “happy” isn’t the right word.
Milagros Palacios and Charles Lammam are economists with the Vancouver-based Fraser Institute.