It’s Tax Freedom Day

Call me a curmudgeon, but I am not celebrating the Fraser Institute's Tax Freedom Day. This notion does not deserve any media attention, but the fact that it does suggests it is a clever and successful gimmick.

That is about the nicest thing that can be said about TFD. It grossly exaggerates the amount of taxes people pay in a way that is deliberately designed to mislead people into being resentful about taxes. It hides the fact that people get services in return for their taxes – in fact, if you asked Canadians if they would pay slightly more taxes in order to have better schools and health care, less poverty, addiction and crime, and safer roads (just to name a few of the things that taxes pay for), I bet that most would say yes.

The definitive critique of TFD was done by Neil Brooks, Professor of Law at Osgoode Hall in Toronto, who teaches tax law. It was published by the CCPA last year. Below is the summary:

Tax Freedom Day: A Flawed, Incoherent, and Pernicious Concept

In an attempt to convince working people that Canadian taxes are unduly burdensome, rightwing think tanks and conservative politicians have been exaggerating the level of taxes paid by Canadian families for years. Presumably, they see this as their best strategy for convincing the general public that they should go along with more tax cuts for the wealthy and more cuts in government spending programs.

As part of this propaganda campaign, each year the Fraser Institute issues a press release announcing the imminent arrival of tax freedom day. In its press release, the Institute states that until the arrival of tax freedom day Canadians are working for the government; only after that date do they start working for themselves. Last year, tax freedom day fell on June 28, implying that Canadian families spend about one-half of their annual income on taxes.

The Fraser Institute has been enormously successful in promoting the concept of tax freedom day, yet the whole notion is incoherent. The term suggests that Canadians derive no benefit from the taxes they pay, but instead that their taxes simply go down some dark hole. It implies that the goods and services that Canadians provide to themselves through democratically controlled institutions — such as police protection, highways, national parks, schools, disaster relief, and medical services — do not enlarge their freedoms or enrich their lives.

If, as the Institute claims, Canadians are working for the government until they have earned enough each year to pay their taxes, does that mean that for the rest of the year — or at least until they have earned enough to start saving – they will be working for Loblaws, Ford Motors, Canadian Tire, and Famous Players, as they shop for their groceries, service their cars, purchase chain saws, and attend movies?

Even if it were useful to inform Canadians how many days they had to work in order to earn enough to pay their taxes, the Institute’s calculations are preposterously exaggerated. Their calculations understate the income of Canadians, overstate their taxes, misuse the concept of averages, and are often misleadingly applied only to families with at least two members.

Inexplicably, the Institute’s statisticians do not include all of a family’s economic income in calculating the effective tax rate paid by a family. They include only what they refer to as the “cash income” of the family. Indeed, since they attribute all taxes paid in Canada to individual families — including those paid by employers, corporations, and taxes paid on capital gains — their calculations treat families as having paid a good deal of their taxes out of income they are not treated as having received.

If the Institute had used an average family’s total income, as they calculate it, instead of just their cash income, tax freedom day in 2003 would have fallen on April 24 instead of June 22, a full 58 days earlier than that announced by the Institute. Indeed, if the Institute had just used the method of calculating tax freedom day as used by the right-wing Tax Foundation in the United States, instead of their own tortured math, tax freedom day in Canada would have fallen on June 7. But even designating this date as tax freedom day would have substantially overstated the taxes paid by the typical family.

The Institute’s calculations of the taxes paid by the average family are meaningless for most taxpayers for another reason. Because income is distributed so unequally in Canada, the average income of families is much higher than the income of the median family, or the family right in the middle of the income distribution scale. Thus the majority of families earn much less than the average income and their effective tax rates are lower than that of the statistical average family.

Although the Institute does not calculate the taxes paid by the median family, it does calculate the effective tax rate of families in different income deciles. On the basis of their total income, as calculated by the Institute, the poorest _0% of families had an effective tax rate of _2% in 2003, which meant their tax freedom day would be on February _5; those families in the fifth decile (their income placed them in the 40% to 50% of families) had an effective tax rate of 28.8%, which meant their tax freedom day would be on April _7; and the richest _0% of families had an effective tax rate of 39%, which meant their tax freedom day would be on May 24.

In the detailed calculations in its publication Tax Facts _3, the Institute calculates that, based upon their cash income, tax freedom day for the average family would fall on June 22 in 2003. In their press release for that year, they announced it fell on June 28. This difference is due to the fact that, in its monograph, when the Institute refers to the average family it is referring to the total of what Statistics Canada refers to as families and unattached individuals. In its press release, however, when referring to families, it is referring only to families with two or more individuals. In its press release, it ignores unattached individuals, whose average incomes — and therefore average effective tax rates — are lower than those for families with at least two members.

Another concept the Institute has promoted in an attempt to mislead Canadians about the taxes they pay is a concept it refers to as the consumer tax index, which purports to show how much our taxes have increased in the last few decades. The Institute calculates that taxes have increased by a staggering _,550% since _96_. But once again it arrives at this through chicanery. It fails to factor out inflation, and also fails to note that much of the increase is due to the significant real increase in the incomes of Canadians over this period. Once these two factors are taken into account, a different picture emerges: the effective tax rate in Canada has risen by about 40% over this period — not _,550%. The larger but meaningless number was obviously used to delude Canadians into believing that they are grossly overtaxed.

Ironically, the Institute claims that its purpose in presenting its information is to stimulate rational public debate about taxes, in the interests of encouraging sensible tax policy. This is a ludicrous assertion. In the guise of helping Canadians to understand their tax system, the Institute presents information that is deeply flawed and misleading — information that in fact seriously limits the public’s ability to understand and participate meaningfully in the shaping of tax policy. Given the importance of what’s at stake, it is hard to see the Institute’s campaign as anything other than pernicious.

 
 

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