Tax Freedom Day
Posted in Reality Check
 
Posted on September 9, 2008 05:48 PM | Permalink
 
By Ira Basen

"We promised to lower taxes, and to begin by cutting the GST from seven to six to five per cent. We have delivered. Today Tax Freedom Day — the day you stop working for the government and start working for yourself — arrives 11 days earlier than it did in 2005."  Stephen Harper

When Prime Minister Stephen Harper met reporters in at Rideau Hall on Sunday morning, he used the occasion to highlight many of the themes he will be emphasizing over the course of the campaign. His commitment to lower taxes was high on his list of accomplishments.

We will no doubt be hearing a lot from Harper about how he delivered on his promise to cut two percentage points off the GST, but the prime minister’s decision to connect his tax policies to the early arrival of Tax Freedom Day is problematic on several levels.

For one: What is Tax Freedom Day?

Since its beginnings in the U.S. in the 1970s, the concept has become a favourite of conservative economists and right wing think-tanks around the world. Harper, an economist by trade, is also no fan of taxation.

During the last federal campaign, he went so far as to proclaim “I believe that all taxes are bad.”

Total tax bill
In Canada, the Tax Freedom Day franchise belongs to the Fraser Institute, which boasts, amongst its senior fellows Harper’s political mentor, Preston Manning. The institute defines Tax Freedom Day as “the day Canadians have paid off the total tax bill imposed on them by government and can finally start working for themselves."

What could be wrong with that? It's a simple, easy-to-understand idea, which is why every year in June, the institute's proclamation of Tax Freedom Day gets it media attention.

It hasn’t yet become a Hallmark holiday, but for conservatives who believe that “all taxes are bad,”and that sometime around Jan.1 would be a good time to be free of the rapacious arm of the government, it's the best day of the year to get their point across.

But Tax Freedom Day rests on a premise that is far from universally shared. It assumes that as citizens, we benefit only when we start “working for ourselves,” and that we accrue few if any benefits from all the money we send off to various levels of government.

But those taxes are used to pay for our schools, hospitals, roads and buses. They’re used to protect us from harm, preserve social cohesion and help the less fortunate among us.

Like many on the right, the Fraser Institute believes in market-driven solutions to many of the functions currently undertaken by government and the idea that we are somehow separate from the governments we elect to represent us is the core message that Tax Freedom Day is designed to convey.

Flawed methodology
But even if we accept the premise behind it, there are reasons to be wary of how the Fraser Institute calculates the annual arrival of Tax Freedom Day.

The institute says that Tax Freedom Day in 2008 was the day (June 14) “the average Canadian family” has earned enough money to pay the taxes imposed on it by the three levels of government. That means we spend nearly half the year working for the government instead of ourselves.

But the formula used to calculate Tax Freedom Day appears designed to maximize the amount of tax Canadians pay in order to drive home the point that our taxes are much too high. For example, the Fraser Institute begins by adding all taxes received over the course of the year by all governments in Canada, including “income taxes, property taxes, sales taxes, profit taxes, health, social security and employment taxes, import duties, license fees, taxes on the consumption of alcohol and tobacco, natural resource fees, fuel taxes, hospital taxes and a host of other levies."

The inclusion of “natural resource fees” is curious. These are taxes, usually in the form of royalties, paid by companies, not individuals. So it seems odd to include that money in the tax burden borne by individual Canadians.

In resource-rich provinces, the difference is significant. The Fraser Institute acknowledges that if those royalties were removed from the equation, Tax Freedom Day for residents of Newfoundland and Labrador would have come 27 days earlier in 2008, and 12 days earlier in Alberta.

The 'average' family
There are also questions about the institute’s use of “the average Canadian family” as a benchmark for determining how much tax Canadians pay.
Wealth in Canada is not evenly distributed. A small number of Canadians earn a disproportionate amount of the national income and thus pay a disproportionate amount of the taxes, and this skews both the income earned and the tax paid by the “average” Canadian family.

Think of it this way: Bill Gates walks into a bar and suddenly everyone else in the bar becomes a millionaire, on average. It’s an interesting statistical quirk, but not very meaningful.

The Fraser Institute calculates that the “average Canadian family” paid a total of $40,667 in taxes last year, or 44.8 per cent of its total income.

But according to a 2005 paper written by Prof. Neil Brooks of Osgoode Hall Law School, a more accurate calculation would have involved the mean income earned and tax paid, the point at which half of the families are above the line, and half below, rather than the average.

Had the Fraser Institute done that, Brooks argues, the level of taxation would have dropped significantly, and Tax Freedom Day would have come much earlier, perhaps too early to serve the ideological purposes of the supporters of Tax Freedom Day.

 

Harper’s claim

But putting all that aside, what about Harper’s declaration to reporters at Rideau Hall that Tax Freedom Day is now 11 days earlier than in 2005, and his suggestion that tax reductions imposed by his government were responsible for the shift?

In fact, in 2005, Tax Freedom Day arrived on June 25, then moved to June 23 in 2006, June 18 in 2007, and dropped another four days to June 14 in 2008.

So while the big day has indeed moved ahead 11 days since 2005, the trend was already moving in that direction, and the actual shift since the Conservatives came to office in February 2006 has been 9 days, not 11.

What caused the shift?
According to the Fraser Institute, the drop in the GST in January 2008 from six per cent to five per cent accounts for two days, and the fact that 2008 is a leap year accounts for another full day.

But the biggest shifts can be found not on the federal level, but in the provinces. Tax cuts in Manitoba caused Tax Freedom Day to arrive seven days earlier in 2008 than 2007, and cuts in Saskatchewan and B.C. resulted in a difference of six days.

So, is Harper correct to assert that his government has lowered taxes for Canadians? The answer is yes. But he would be wise to avoid linking that accomplishment to the Fraser Institute's economically dubious Tax Freedom Day.