Archive for August, 2009

The Fraser Institute and “Average Canadian Family”

August 24, 2009


In an article titled Squeezed published in the December 2008 issue of MoneySense magazine, columnist Rob Gerlsbeck refers to a Fraser Institute study on taxes:

Because while a pay raise once went straight into your pockets, it is now likely to disappear before you even see it. Who gets it? The taxman. A generation ago, the average Canadian family handed over about 36% of its income to government in the form of income taxes, property taxes, sales taxes and so on. Today that figure is a staggering 45%, according to the Fraser Institute. So while our wages have stayed pretty much the same, we are paying thousands of dollars more every year to various levels of government.

While Mr. Gerlsbeck does not provide a reference to the Fraser Institute study, I presume he is referring to the Tax Freedom Day report published last year:

In 2008, the average Canadian family earned $90,678 in income and paid a total of $40,667 in taxes (44.8 percent).

The Fraser Institute’s calculation of the Tax Freedom Day garners a lot of publicity and much hand wringing over our high tax burden (I’m not blameless here — see earlier posts on this topic). The reports do highlight the myriad taxes that Canadians pay but may not be aware for — employer share of EI premiums and CPP contributions, for instance.

However, the figures used by the Fraser Institute reflect neither the household income nor the tax burden of a typical family. According to Statistics Canada’s Income in Canada (75-202-X), an economic family with two persons or more earns, on average, a total income (including Government transfers) of $86,300 and an after-tax income of $71,900. Note that these figures are fairly close to the Fraser Institute’s estimate of $83,775 and $70,262 respectively for the 2007 year. Since, the income distribution is skewed, it makes much better sense to look at median instead of average values. The median economic family with two persons or more earned less and paid a lot less in taxes: a total income of $70,800 and an after-tax income of $61,800.

Even this figure is an exaggeration because it excludes unattached individuals whose incomes are a lot lower. The income tax rate on a median family is 12.7%; not 16.1% that the Fraser Institute claims an “average family” pays. Hence, it is also highly likely that the 44.8% total tax burden is a statistical exaggeration.

This and That: The Greenback Effect and more…

August 20, 2009

  1. In an op-ed piece in the New York Times, Warren Buffett worries about the threat of inflation and the purchasing power of the greenback due to the printing presses working overtime in Washington. Foreign investors will worry about the implications of buying into US-based stocks denominated in a potentially depreciating currency.
  2. Jeff Matthews, who writes the fantastic I am Not Making This Up blog, points out that companies vigorously repurchase their own shares at higher prices and suspend their share repurchase programs when prices are lower. How does that qualify as “returning value to shareholders”?
  3. CARP has a simple motto: Just give us more! Jon Chevreau blogged about CARP’s latest multi-part proposal for pension “reform”. Michael James points out that math doesn’t seem to play a big role in CARP’s proposal for a new and improved OAS and GIS.
  4. In a recent issue, Maclean’s magazine laid out the case against having kids. Canadian Financial DIY wonders who will pay for our healthcare and pensions when we are old if too many of us decide not to have kids. Canadian Money Forum members also discussed the article here.
  5. Million Dollar Journey says why stop with double leverage ETFs? Now you can gamble your money away with triple leverage ETFs.
  6. With three young children at home, it is a rare treat for us to go to the movies. Preet shows how you can save money by becoming a mystery shopper.
  7. Canadian Financial Stuff cautions that automatically renewing your anti-virus software is an expensive proposition.
  8. Emerging markets are not exotic enough these days. The Intelligent Speculator reports on investment opportunities in 28 countries classified as “frontier” markets.
  9. Scotia Bank announced this week that it has begun selling life, health, auto and home insurance. Thicken My Wallet analyses whether banks selling insurance is a good thing for the consumer, the shareholder and the economy.
  10. Mr. Cheap warns investors not to confuse ex ante expectations with ex post results.

Why the middle class is feeling squeezed?

August 20, 2009


In a column in MoneySense magazine titled Squeezed, Rob Gerlsbeck suggests that the blame for financial woes of the middle class — a heavy debt load, low savings rate etc. — should fall squarely on factors that are beyond the control of individual families. He disputes the widespread belief that Canadians have a spending problem and says that the middle class is feeling squeezed due to:

  • No Income Growth.

    If you strip away the impact of rising prices, the years between 1980 and 2005 turn out to be a dead zone for middle-class prosperity. During this period, in terms of inflation-adjusted dollars, the median annual salary for a full-time worker rose all of $53 — that’s right, $53 a year — to $41,401, according to Statistics Canada.

  • Higher Taxes.

    A generation ago, the average Canadian family handed over about 36% of its income to government in the form of income taxes, property taxes, sales taxes and so on. Today that figure is a staggering 45%, according to the Fraser Institute.

  • Higher Shelter and Education Costs.

    Looming larger than all those costs is the monster in the room — mortgage costs. The average price of a home in Canada’s major markets has soared since 2000, shooting from just over $160,000 to $315,000. Last year the ability of the average Canadian to own a home was at its lowest point since the last housing bubble in 1990.

One suggestion for easing the squeeze on the middle class comes from Dalhousie University economics professor Mathieu Dufour, who suggests putting the productivity gains of the past 25 years (estimated at an average of $10,000) directly in the pockets of workers by cutting income taxes and raising corporate taxes. Larry MacDonald pointed out that dividing the world into corporations and workers is far too simplistic, especially when protection from the free market may be responsible for some of the higher costs.

Still, I wonder if some financial engineering that puts money directly in the pockets of families would help very much. It would provide an initial boost to savings but, just as with salary increases, families will simply adapt to the new reality and boost their spending. Also, how true is it that family budgets are so lean that there is no fat to trim? According to the Statistics Canada report on Spending Patterns in Canada, families in the middle quintile of income levels, spend an average of $3,400 on recreation, $1,600 on tobacco and alcohol beverages and $250 on games of chance, hardly what you would call essential spending.

While it is true that home prices are much higher when compared to the median salary today than it was in the 1980s, mortgage rates are also much lower. Moreover, part of the reason for higher shelter costs could be traced to square foot inflation of the average home. Even today, families can manage their shelter costs by buying a smaller home or renting a little longer. It is a little facile to simply blame factors we have little control over for our financial woes.