Insights from a discussion between titans
Two Canadian business titans, who are active not only in business but also philanthropy and public policy, recently discussed (privately) what ails Canada. One could reasonably be described as a Toronto liberal and the other a west coast pragmatist. The nature of their discussion is telling about the state of policy in Canada and the too-often observed detachment between opinion and fact.
The Toronto liberal confidently asserted that the main issue facing the country was that people like the west coast pragmatist don’t pay enough taxes, and that if his tax burden were increased, many of Canada’s problems would be solved. He specifically noted Sweden as a model Canada could and should follow because “they tax the rich more.”
Let’s dissect this argument piece by piece.
If we divide all Canadian families into five equal groups based on income, the top 20 per cent are the only group that pay a higher share of the country’s taxes than their share of total income. Based on 2023 data, the top 20 per cent of families in 2023 received 45.7 per cent of all income earned in Canada but paid 53.1 per cent of all taxes including income, payroll, sales, property and other taxes at the federal, provincial and local levels.
It’s even more pronounced if we look at the top 10 per cent who earned 29.1 per cent of all income but paid 35.8 per cent (more than one-third) of the total tax burden.
The remaining 80 per cent of families paid a lower share of the total tax bill than they earned in income (proportionately). For instance, the middle 20 per cent of families earned 15.7 per cent of all income in Canada but paid slightly less, 14.2 per cent of the total tax bill.
So when the Toronto liberal says the elite should pay more, it’s not an objective statement but rather a subjective one since the only objective measure available for assessing the distribution of the tax burden is the distribution of income, which shows that the top 20 per cent are more than shouldering their proportion of the tax bill. To argue it should be higher is a value statement, not an empirical one.
Next is the assertion that Sweden, like other Scandinavian countries, taxes its higher-income citizens more than Canada. As a recent study by internationally-recognized Swedish economist Johan Norberg noted, there are two main sources of revenues used in Sweden to finance its larger welfare state. The first is a high national sales tax of 25 per cent, the second-highest in the OECD.
The second is a relatively high top personal income tax rate of 52.3 per cent that applies to comparatively low levels of income. Canada’s top personal income tax rate applies to income over roughly CA$236,000 while Sweden’s top personal income tax rate applies to income above roughly CA$79,000. In other words, many average Swedish workers pay the top personal income tax rate.
Indeed, Norberg noted that Sweden has one of the least progressive tax systems among high-income countries because it relies on its VAT (equivalent of Canada’s GST) and high personal income tax rates that apply to relatively low levels of income such that average Swedes, not high-income Swedes, carry the burden of social spending in the country. An analysis of Denmark yielded similar results—average Danes carry the burden of higher levels of government spending through a heavier tax burden.
The Toronto liberal’s assertion on needing higher taxes in Canada also seems to ignore what the current federal government has already done, since it’s essentially what he advocates. Specifically, the Trudeau government raised the top federal personal income tax rate from 29 to 33 per cent. Due to provincial income tax increases, which occurred around the same time, eight of the 10 provinces now have a top combined federal-provincial personal income tax rate above 50 per cent and the remaining two provinces, Alberta (48.0 per cent) and Saskatchewan (47.5 per cent) are close.
This was in an environment where there was a general consensus that income taxes were too high, not too low. Consider Paul Martin, former Liberal finance minister and prime minister, who in the early-2000s delivered multiple large-scale tax relief measures to both improve the economy and competitiveness, but stated that “on the personal income tax side, taxes are still too high.”
Finally, higher taxes, higher government spending and more regulation of the economy have not benefited Canadians, despite assertions by the Toronto liberal. Consider that since 2013, Canada has experienced the slowest rate of growth in per-person income since the 1930s.
And prospects for the future, unless government policies are dramatically changed, is in some ways actually worse. A 2021 study by the Organisation for Economic Cooperation and Development (OECD) projected that Canada would rank last among all industrialized countries for growth in per-person income as broadly measured by GDP from 2020 to 2060. This means countries as diverse as Estonia, Korea, New Zealand, Slovenia and Turkey are expected to have higher living standards than Canada by 2060.
Let’s give the Toronto liberal the benefit of the doubt, though, and assume he meant something narrower about Canada’s problem since the discussion occurred in and around the Trudeau government’s fall economic update. Let’s assume he meant that federal finances would improve if the government raised taxes.
There’s an easy way to test this assertion. In 2015, the year the current government was elected, federal revenues totalled $292.6 billion against spending of $273.6 billion, and interest costs on the national debt were $21.8 billion. The federal budget was essentially balanced.
Fast-forward to the economic update released in November. This year (2023-24) the federal government expects revenues to reach $456.2 billion, an increase (ignoring inflation) of 55.9 per cent since 2015. Despite this increase in revenues, Ottawa expects to borrow $40.0 billion this year as spending ($449.8 billion) and interest costs on the national debt ($46.5 billion) are more than expected revenues. Moreover, the total national debt is expected to reach $2.0 trillion this year with interest costs exceeding $60 billion annually by 2028-29. Put simply, when this government gets more revenues, it has a clear and unmistakable proclivity to spend it all—plus borrow even more.
The country badly needs a return to the policies that characterized Canada from the early-1990s through to about 2014 (or so), and transcended political party from coast-to-coast, and which the current federal government and too many provincial governments have either forgotten or purposefully rejected. The Chrétien Consensus consisted of balanced budgets and declining government debt, limited and prioritized government spending, and tax relief aimed at making Canada more competitive and attractive for investment and entrepreneurship. These are the policies that will return Canada to prosperity—not the higher taxes, spending and borrowing currently dominating government policy.
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