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 article has 33 comments

  1. Looking forward to parts 2 – 10 of this expose!

    I recall that at one time, the Fraser institute compared pre-medicare taxation rates to post-medicare taxation rates without stating that fact.

    As dear ol’ dad says: Figures don’t lie, but liars can figure!”

    DAvid

  2. I once heard a joke about the astronomical average income of geography graduates from the University of North Carolina. Michael Jordan is among these graduates. This is an extreme case, but it illustrates nicely that average figures for skewed distributions are not representative of the typical case.

  3. Unfortunately, median income is equally skewed. The ones being “squeezed” are salaried workers in large cities. Rural population, business owners and urban poors have a much different tax structure (Warren Buffet pays less tax percentage wise than his average employee). Therefore, each group should have its own median value. Considering both the rich and poor pays less taxes than the salaried workers percentage wise, the real tax load is probably closer to 30%. Add in property taxes, vehicle taxes, gas taxes, 13% HST, EI, etc… I’d say 45% is about right for a upper second/lower third tax bracket salaried worker.

  4. “There are three kinds of lies: lies, damned lies, and statistics.”… A phrase attributed to the 19th Century British Prime Minister Benjamin Disraeli, among others, and later popularized in the United States by, among others, Mark Twain.

    I always heard that expression but I had no idea who originally coined it. It seems as though nobody really knows – that information came from Wikipedia.

    I think I heard one of the talking heads on TV say something about the Fraser Institute using total government tax revenue and dividing it by the population of working Canadians or something like that… That way it incorporated such things as property taxes and sales taxes – the total tax that the average Canadian taxpayer pays? I wish I had paid closer attention in that news tidbit, but it wasn’t the main point of the article.

  5. The problem with your corrections of the statistics from the Fraser Institute is the fact that the Fraser Institute calculated their information based on total taxes which also includes sales taxes, property taxes, and other forms of tax. In the last paragraph or two, you attempted to correct the income tax rate that the Fraser Institute used but unfortunately income taxes are not representative of the total tax burden in Canada. To use an incomplete number that represents only a portion of the total taxes paid by a family and claim that their total tax numbers are exaggerated when you have made no allowance for other forms of tax is inaccurate.

  6. I think the Fraser Institution’s number is fine by itself. However, the 45% does not say whether Canadians are squeezed or not. If I am paying 45% of my income in taxes, but I am getting 45% in return, then I am not being squeezed. For example, due to taxes, I might be paying more for my car. However, I might be paying less for my health care. I suspect it would be so complicated to calculate, even the fastest computer in the world would not be able to do it.

    Of course, to a libertarian like myself, even if the return is 90%, it’s still a bad deal because the number 45% shows government has deeply intruded into our private financial lives. I have no doubt that the government’s intention is generally good, but that’s little comfort to me.

  7. I was going to make the same point as WP but they said it much better than I would have. However, the fact that the Fraser Institute calculates income tax at 16.1% while you peg it at 12.7% does cast some doubt on the Fraser Institute’s numbers and reasoning.

  8. Whatever tax rate we are paying is irrelivant. Unless you unemployeed you are getting less out of the system than you are putting in. It is impossible to get more out of any system than you put in. This is never more true than with government programs.
    If you pay 50% tax some of your taxes are taken to ‘top up’ the guy who pays 25% or 25% or 48% or whatever. This garantees getting less out.
    On top of this, can anyone name anything the government does that is efficient? Is there an example of government outperforming the private sector in level of quality or efficiency? I have yet to find one.

  9. Canadian Capitalist

    @WP: My intention here is not to provide any correction to the statistics provided by the Fraser Institute. I’m simply pointing out a fallacy — average does not represent a “typical” Canadian family. Actually, even “median” doesn’t — as Archanfel points out in his comment — but it is likely to be closer to the truth.

    I have shown how the income tax burden on a median family is lower than the numbers the Fraser Institute provides. Since the reports use averages for all other forms of taxes — sales tax, property tax, excise tax, tobacco tax etc. — it is highly likely that the median family’s tax burden is lower than 45%.

    @Phil: That’s how the Fraser Institute calculates the tax burden: total taxes collected by all levels of Government divided by the number of households. They also use “cash income” — wages, bonuses, commissions, Govt. transfers etc., which excludes non-cash items. The use of averages paints a very misleading picture of the total tax burden of a “typical” family.

  10. @ Xander – In what is becoming a weekly refrain, I implore the anti-tax, anti-government nutters to pick up an introductory economics textbook and brush up on “public goods”. There are things that the private sector cannot provide efficiently or effectively.

  11. Canadian Capitalist

    I highly recommend “Naked Economics” by Charles Wheelan. He also writes one of the better columns on Yahoo! Finance. In one his first columns, he did talk about public goods that Al refers to:

    http://finance.yahoo.com/expert/article/economist/980

  12. Although, as we dig deeper into the field of public good economics, we also learn that that there are many services often claimed to be “public goods” that don’t necessarily need to be provided by the public. Ronald Coase with one classic example http://www.ccer.edu.cn/download/7874-2.pdf

    Are lighthouses similar to levees? maybe, maybe not…

    I agree with the public provision of public goods, but I think we often need to be more carfeul with how loosely we attach the label to anything/everything these days.

  13. Thanks for the link to the Wheelan column – just read a few articles and you’re right – it is excellent.

  14. I agree – the Wheelan article is bang on!

    It’s perfectly reasonable to disagree on what “better” might look like, but I’m not being entirely facetious when I say that if you don’t like government and you’re not willing to take action to change things, you might as well move to Somalia. The rule of law, public order, infrastructure, etc. are all necessary conditions for a vibrant private sector.

  15. Thanks for the analysis. Tax burden arguments are not meaningful without (i) comparing tax rates (which should include estate tax); and (ii) comparing services provided by each jurisdiction given their tax rate. Without it, there is no real meaning to any tax rate.

  16. Income: 68000 (Single)

    Federal Tax: 14500
    Property Tax: 4500
    Sales Tax(est) : 1500
    EI Premiums? : 1000
    _______
    31.6%

    Not sure if I am missing anything? I did estimate GST\PST as around 1500 a year.

    What about your RRSP contributions? This would return a portion of your federal income tax for investment purposes and delay taxation on it until a future time when your income could be higher or lower.

  17. Canadian Capitalist

    @Adam: Yes. You are missing CPP contributions and employer share of EI premiums:

    Income = $68,000
    Tax = $14,500
    Property tax = $4,500
    Sales Tax = $1,500
    EI = $1,750
    CPP = $4,200

    Tax = 39%

    Of course, there is alcohol tax, tobacco tax, entertainment tax, gasoline tax, motor vehicle fees, etc. that would bump up your personal tax rate.

  18. CPP : I thought about CPP, but didn’t include it as it theoretically is forced savings, not a tax I will never get back. ?

    EI : I don’t include the employers share, only because it’s money I would never see anyways. That would contribute to the companies tax rate, not mine. Yes?

    Alcohol tax etc : I lumped that all in with my Sales Tax category.

  19. Re: EI – most people will see some of that money back at some point. Even if you are gainfully employed your entire life and don’t make use of unemployment benefits, many (most?) people or their partner will access maternity/paternity benefits at some point.

  20. Thank you for the great analysis. 2 things come to mind after reading you. A) Always be careful with the Fraser Institute publications. Without wanting to question their integrity, they clearly have an agenda to promote and it is important to question their figures and not just print them out and accepting them at face value. B) That being said, this is a very old trick. This is essentially how the Bush tax cuts were being promoted, by claiming that the”average family” would get X $ in extra cash, when in fact, the bulk of the gains from those tax cuts were earned by the very top income bracket.

  21. @Canadian Capitalist: CPP and EI are capped at $2049 and $711 respectively for a single person, I think you must be looking at a couple filing jointly. EI is just that, insurance. If it wasn’t a government program, we’d get pitched by State Farm or Belair or someone to put our money with them, with probably far more restrictions for us and loopholes for them not to pay. Of course some would say they could better use the money themselves to prepare for loss of a job, but based on many investors’ poor choices in the last decade, I would dispute that.

  22. Canadian Capitalist

    @Adam: Well, a portion of your CPP contributions goes towards paying current benefits. In that sense, CPP is not like an individual RRSP account. The level of benefit is not guaranteed and rules may change — may be even drastically.

    The employer portion of EI is a hidden tax. It is a payroll tax. While you may not benefit from EI or CPP today, many Canadians do. That’s why including transfers in calculating income is important.

    @Andrew: You are referring only to the employee’s share of CPP and EI. The employer also pays their share of EI and CPP, which should be accounted for. EI does provide a valuable safety net but it is often used to dole out pork by the Government in power.

  23. Blogger Canadian Capitalist’s recent post (The Fraser Institute and “Average Canadian Family”) contains numerous faulty claims about the Fraser Institute’s Tax Freedom Day Calculations:

    First, he claims that “the figures used by the Fraser Institute reflect neither the household income nor the tax burden of a typical family” because we provide estimates for the average, instead of median family.

    However, we use a sample of families determined by the average income, as opposed to the average itself. If we included all families (i.e., used the average) we would end up with a significantly later Tax Freedom Day. In other words, high-income families face a significantly higher overall tax burden than average Canadian families and, if included in our calculations, would result in a later Tax Freedom Day.

    Blogger Canadian Capitalist then goes on to state that even using the median would be an exaggeration because “it excludes unattached individuals whose incomes are a lot lower.”

    We provide three sets of Tax Freedom Day calculations in our publication: (1) All families and unattached individuals; (2) Families with two or more individuals; (3) Families of four (parents and two children under 18).

    In addition, Canadians can calculate their own Tax Freedom Day based on the size of their specific family, income, and geographic characteristics using The Fraser Institute’s web-based Personal Tax Freedom Day calculator at http://www.fraserinstitute.org/tools/Default.htm

    Niels Veldhuis
    Fraser Institute senior economist

  24. The rebuttal from Niels Veldhuis, Fraser Institute senior economist is funny. CC’s “numerous faulty claims” turn out to be two. The first one basically says, we could have abused the average/median confusion by more than we did. The second one indicates that CC’s complaint should be directed at journalists who abuse Fraser institute numbers by choosing the most extreme values and not placing them in the proper context rather than directed the complaint against the institute itself. The content of this rebuttal is very weak compared to the strong claim in the first paragraph.

  25. Canadian Capitalist

    @Niels: Thank you for your comments. I fail to see how averaging the incomes of families earning between $20K and $120K somehow provides an accurate picture of the income or tax burden of a typical family. As I pointed out in the post, the Fraser Institute’s average income estimate is fairly close to StatsCan’s figures. Dropping out families with incomes more than $120K might explain why StatsCan’s figures are higher.

    However, the point made in the post stands: the median is significantly different — median income is 15.5% lower than average and the income tax burden is 33% lower. It is what you’d expect given the skewed nature of income distributions.

    It may garner much publicity but the use of averages by the Fraser Institute provides a significantly distorted view of the tax burden of the “average” Canadian family.

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