Consumer Tax Index

When confronted with a document as muddled as yesterday’s Canadian Consumer Tax Index, a major challenge is figuring out where to begin in critiquing it. Indeed, this one Fraser Institute report supplied enough fodder for three separate posts today by Iglika (and she is promising a fourth!)

I think that the report’s worst flaws are overstating average taxes and ignoring the introduction of new public services during the past half-century.

Taxes

The report’s starting point is that all taxes are paid by individuals. Apparently, the “tax bill of the average Canadian family” includes $2,484 of corporate income tax and $397 of charges for natural resources.

The typical argument that all taxes are ultimately paid by individuals is that all income ultimately accrues to individuals. For example, corporate income taxes come out of profits that ostensibly 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 GDP of $1,528 billion implied an average tax rate of 30.8%, relatively low by historical 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. However, among other things, it is clear that the numerator includes corporate income tax while the denominator excludes retained corporate profits.

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 current taxes in Canada than in the United States.

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 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.