As Canadians prepare their tax returns, it’s fair to ask if we get good value for all the taxes we pay.
We have a little extra time to ponder this, since the federal government has given Canadians another month to file tax returns as a result of the COVID-19 pandemic, to June. 1.
So do we get good value for our taxes?
Probably not, for most people. The total tax bill in Canada – including income taxes, payroll taxes, sales taxes and so on – is 45 per cent of the national income. That’s far too high.
High taxes are harmful, in part, because of the difference between how money is spent by government versus by the private sector.
Since politicians are spending someone else’s money, they’re generally not as careful to keep costs under control. And because they’re usually not spending the money on themselves, they have less incentive to ensure the goods and services they provide are of high quality.
Conversely, in the private sector, people spend their money on themselves. For the most part, they spend money wisely (since it’s their money), and on goods and services that are useful (since they’re the ones benefiting from the spending).
The second reason Canadians don’t get good value for the taxes they pay is that the cost of taxes is extremely high – much higher than most people recognize. In almost every case, the real cost of a tax is far higher than just the flow of tax dollars to the government.
Take for example corporate income tax. A study by economists Kenneth McKenzie and Ergete Ferede found that, based on data from 2014, raising corporate taxes by $1 would cost workers between $1.52 (Alberta) or $3.85 (Prince Edward Island) in lower wages, depending on the province.
In Ontario, raising corporate taxes by $1 cut wages by $1.97. In order for corporate taxes to be worthwhile at the margin, government spending must yield twice as many benefits as when people spend money on themselves – which is surely not the case. (This is actually an understatement, since the $1.97 only accounts for the lost wages to workers, and doesn’t include others made worse off by corporate taxes, such as shareholders, landlords who rent to businesses and so on.)
In addition to the corporate tax, there’s payroll tax. In a 2008 study, labour economist Morley Gunderson of the University of Toronto said that, based on research, a one-percentage-point increase in payroll taxes reduces employment by at least two per cent.
Like the lost wages from corporate taxes, the lost jobs as a result of payroll taxes represent an economic cost to Canadians that doesn’t show up on the tax bill. Instead, it takes the form of lost economic benefits from employment and production that doesn’t materialize.
Tariffs are yet another example of a tax with economic costs to taxpayers far higher than just the flow of revenues to the federal government. By impeding international trade, tariffs destroy a huge amount of value – the value of all the economically beneficial transactions that don’t happen because of the tariffs.
Whether on corporate income, labour, international trade or anything else, taxes in Canada impose a huge economic cost.
Canadians are reminded of the high cost of taxes every year when they file their returns. But in reality, government is even more expensive than most people realize.
Matthew Lau is a research associate with the Frontier Centre for Public Policy.