Volume 9, Number 4
December 2000

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Question of the Month

Q: Why are Canadians so preoccupied with tax cuts, when our tax rates fall squarely in the middle of the G7 countries, but our decline in social spending has been far higher (even though our 1997 deficit was far lower)?
—Cat Ashton, York University,
Toronto, Ontario

A: I do not agree that Canadians are preoccupied with tax cuts. Rather, they are simply aware of the large tax burden that they bear and want it reduced. In 1961, taxes accounted for 33.5 percent of the average family's cash income. In 1981, they accounted for 40.8 percent, and in 2000, 47.5 of the average family's cash income went to pay taxes.

It is much more important to compare Canadian taxes and spending with those of the United States, since 86 percent of our trade, which accounts for over one third of our Gross Domestic Product (GDP), is with the United States. Also, the fact that some other countries tax and spend more than Canada says nothing about how useful this spending is. Research from the World Bank shows that, among industrialized countries, those with small governments perform just as well as those with medium-sized or large governments on social indicators such as life expectancy, literacy, secondary school enrolment, and infant mortality. Further, countries with small governments have better performance on economic indicators such as real GDP growth, the unemployment rate, and the number of patents per 10,000 population.

The United States is a good example. For the last 30 years, US governments have taxed and spent less of their GDP than have Canadian governments. In 1997, total tax revenues as a percent of GDP were 23.9 percent lower in the US than in Canada. What is surprising is that American governments are now able to spend more per capita than Canadian governments on goods and services. In 1999, per capita US government spending (net of debt service costs) was $168 CDN higher than per capita spending (net of debt service costs) by Canadian governments. This remarkable fact results from the interaction of the lower tax regime and higher standard of living in the US. Simply put, Americans have more money than we do, and American governments can provide the same level of spending with low tax rates that Canadian governments do with relatively high tax rates.

Canadians' desire for tax relief is not a mystery when one considers the increase in taxes in recent decades and the economic drag of a large government sector.

—Joel Emes, Senior Research Economist, The Fraser Institute

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