FEATURE ARTICLE:

Tax Facts 8 Reveals Higher Tax Burden

by Isabella Horry, Filip Palda, and Michael Walker

Editor's notes

OUT HERE ON THE COAST, we've just had our first frost in two years. One's memory fades a bit; many of us had forgotten just how cold 0°C really is. But it's a fitting climate for the release of the long-awaited Tax Facts 8.

In it, Isabella Horry, Filip Palda and Michael Walker have produced some statistics that are as chilling as the weather. I find it pretty galling that our tax bill has increased by a whopping 1,305 percent over the past 31 years--and most of that in recent years, too. Our feature article will give you a summary of the gory details. If you are not on our list to receive our books as they're published, you'll want to be sure to order this one. At $19.95 plus G.S.T. and shipping charges, it is guaranteed to give you hours of reading agony. Call us for a copy at (604) 688-0221 or (416) 363-6575.

Now that you are thoroughly annoyed, I'll give you some encouraging news. The deadline has just passed, and so far well over 600 people have entered this year's Fraser Institute Competition for Economy in Government. Many of the ideas are sensible; all are the product of a genuine concern on the part of their authors about the way our tax dollars are spent. And even better, almost despite itself, the federal government seems to be starting to implement some of the finalists' suggestions from last year's competition.

We'll win yet!

Have a happy, safe, holiday season.

Tax Facts 8 reveals higher tax burden

Isabella Horry, Filip Palda, and Michael Walker

IN MID-NOVEMBER THE FRASER Institute released a summary of the latest results of its ongoing assessment of the Canadian tax system. Tax Facts 8 is the product of over a year's research involving the analysis of 26 different tax categories, 21 income sources, and the activities of three levels of government. [Tax Facts 8, by Isabella Horry, Filip Palda and Michael Walker (ISBN 0-88975-152-8), published in November 1992, is available for $19.95 plus G.S.T. from any bookstore in Canada or by contacting the Publications Department of The Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, B.C. V6J 3G7, Phone: (604) 688-0221, Fax: (604) 688-8539.] It exposes the direct and hidden tax burdens that Canadians bear. The results indicate that the tax bill of the average family has increased 1,305 percent since 1961, and that the rate of increase in the tax bill has been growing in the most recent years. Since 1984 and the advent of federal tax reform, the federal income tax bill of the Canadian family with an average income has increased by $1,119 dollars (in 1992 dollars). Since 1984 the combined federal, provincial, and municipal tax bill of this average family has increased by $2,622 (in 1992 dollars).

The Consumer Tax Index

In 1976 The Fraser Institute began compiling an index of taxation called the Consumer Tax Index. This index monitors changes in the tax bill faced by the average Canadian family over the years. In 1961, for example, the average family had an income of $5,000 and faced a total tax bill of $1,675. By the end of 1992 it is estimated that the average family will earn $53,535, but of that $23,537 will go to tax collectors at the federal, provincial, and municipal levels, in the form of hidden and direct taxes. The Institute's tax index shows that the average family's tax bill has increased by 1,305 percent since 1961. Including deferred taxation, the Balanced Budget Tax Index has increased by 1,542 percent.

In comparing taxes to other items on which consumers spend their income, Tax Facts 8 notes that the tax index has risen more sharply than an index of any of the other economic burdens the family faces--including the much discussed Consumer Price Index. Total outlays on taxes now account for a more significant chunk of the consumer's budget than shelter, food and clothing combined--a complete reversal of the situation in 1961, as the following tables and figures show.


Who pays taxes?

The Institute also examined the proportion of the total tax bill paid by various income groups in the economy. That analysis revealed that in 1992 the top 30 percent of families (those earning $63,854 or more) will pay 62.8 percent of all taxes levied by government while receiving only 57.6 percent of total income earned.

Click here to view Table: Income, taxes, and selected expenditures of the average Canadian family (dollars)

Click here to view Figure: Taxes and Selected Expenditures of the Average Canadian Family, 1961-1992

Click here to view Table: Taxes of the average Canadian family, 1992 (dollars)

Click here to view Figure: Taxes and Selected Expenditures of the Average Canadian Family Expressed as a Percentage of Total Income Tax

The not-so-obvious tax bill

One of the most revealing calculations in the study is the relationship between income taxes and other taxes. While most Canadians consider income taxes the most significant taxes they pay, the fact is that other taxes account for a larger fraction of the total tax bill. In 1992, for example, the average family will pay income taxes of $9,106. Other taxes, ranging from oil and motor vehicle taxes to amusement and property taxes, will amount to $14,431. In other words, taxes other than those levied on income account for 61.3 percent of the total tax bill of the average Canadian family.

Click here to view Table: Decile distribution of taxes (percent)

Deferred taxation--the Balanced Budget Tax Rate

Once again, the Institute has provided a calculation of the tax bill that Canadians would have to face if governments had to finance all expenditures from current tax revenue. In effect, governments have been able to increase expenditures in recent years while letting the average tax rate fall or be lower than it should be because they have increasingly resorted to deficit financing--i.e. issuing bonds. However, these debts and the interest on them must ultimately be paid and the current value of those future liabilities is, in fact, equal to the amount of the deficits being accumulated. In fact, as the Auditor-General has just pointed out, the bill is coming due; he also criticized the government's failure to explain this properly.

The Institute's "Balanced Budget Tax Rate" is calculated on the basis of all levels of government paying as they go--that is, operating on a balanced budget. For each year, the calculations included in the book show what the tax rate would have been, had all levels of government balanced their budgets in that year. (The results do not include the borrowing of Crown Corporations or other agencies.) The results are very interesting. They show that in 1992, the average Canadian family would have had to pay 7.4 percent more of their income than they actually paid to wipe out the deficits incurred by the various levels of government.

The impact of the corporate tax

In one of its most remarkable findings, the Institute has calculated that the elderly bear a disproportionate fraction of taxes levied on corporations in Canada. Canadians 64 and above shouldered 51.6 percent of the corporate tax bill. The reason for this anomaly is that the elderly receive a significant portion of their incomes from private sector pensions. These pensions are generally given over to pension fund managers and invested in corporations. This calculation highlights the fact that corporations are really just the sum of their parts; parts which belong to millions of elderly Canadians.

Click here to view Table: Total tax and total corporate tax paid by age group, 1992

The rags-to-riches tax burden

The Institute analyses the tax situation of a hypothetical Canadian whose cash income grew from half the average in 1961 to twice the average in 1992. This "Marie-Claire's" income grew from $2,750 in 1961 to $107,070 in 1992. As shown in the table, the hypothetical income earner paid $960 in tax in 1961 and $47,074 in 1992. While her cash income grew 3,793 percent between 1961 and 1992, her taxes paid increased 4,803 percent.

Click here to view Table: The rags-to-riches tax burden

An important Nobel Prize win

Michael Walker

IT IS THE SEASON FOR awarding Nobel Prizes and, as usual, enormous interest has been expressed in the prize for physics, for chemistry, and for physiology and medicine. As an economist, it has always irked me that little attention is paid to the individual who, since the prize was established in 1968 by the Bank of Sweden, wins the Nobel Prize for Economics. The short shrift given to the economics prize winner is typified by the October 14th edition of the Toronto Globe and Mail, which contained a 32-column inch story about the winner of the prize for medicine/physiology on page A8. Meanwhile, the coverage of this year's winner of the Nobel Prize for Economics was given 22 inches on page B16.

One of the reasons that there is a fascination with the prize winners in the physical sciences is because they are associated with things that seem more directly relevant to the average person's daily life, whether it be advances in medical technology, which may directly affect us all one day, or the application of science to the implements of mass destruction, as in nuclear physics. While that is what seems to be the case, precisely the reverse is true. It is the ideas of economists and their applications in practical matters that have a powerful impact on people's daily lives, including the extent to which they may be afflicted by weapons of mass destruction and whether the latest technology will be available for curing unusual diseases.

For example, the defensive military perimeter established around the expansionist tendencies of the Soviet Union played a role in the changes which are currently happening there. However, it is also true that the coup de grace to the totalitarian Soviet system was delivered by the increasingly widespread knowledge inside the Soviet Union about the superiority of capitalism as a way of organizing human activity. Victor Hugo might well have been talking about the Soviet Union when he remarked that "One can take a stand against the invasion of an army but one cannot take a stand against the invasion of an idea."

On the medical side of things, often the Nobel Awards are for discoveries that have lead to the ability to cure diseases which were, before the discovery, incurable. However, people are dying in their hundreds of thousands every year from diseases whose cures have long since been discovered. These are the wretches so unfortunate as to have been born in societies where coercion and state management rather than capitalism and cooperation determine economic development. The citizens of Cuba are living amid increasing squalor and increasing death rates because their dictator, Fidel Castro, refuses to acknowledge that the economic system of central planning has failed miserably--a failure which is now evident since the Soviet Union no longer subsidizes their imports of energy and other products.

So, while we may be fascinated by the latest award for understanding how human cells work, and may ponder the awesome implications of nuclear physics, it is to the ideas of economists that we must all turn in our attempt to understand how the future will unfold, and how we will deal with the major problems that, from time, crop up in our civilization.

This year, it is particularly important to pay attention to the ideas of the winner of the Nobel Prize for Economics. Gary S. Becker, who visited Vancouver just a few weeks ago when The Fraser Institute hosted the general meeting of the Mont Pèlerin Society, has been named this year's winner. Becker received the prize for his work in extending the insights of economics to examine such issues as: how human beings increase their marketable value by acquiring education and skills; how economics can be used to understand the interaction between individuals in a family; why certain changes in laws lead to increases in the crime rate; and how people behave with regard to their willingness to discriminate against other people. Becker's work has been directed more at understanding why people behave in the way that they do than at designing policies to influence the way in which people behave. Nevertheless, Becker's insights are some of the most important that we will require as we go forward in the 1990s and attempt to deal with some very tough, emerging, sociological problems.

While Becker's ideas have universal application, where they will be most important from our own point of view is in influencing the way we respond to the apparent collapse of traditional modes of behaviour in society, for example, the increasing incidence of crime and anti-social behaviour on the part of young people; inter-group hostility; and--especially in the United States but increasingly in Canada--the simple, apparent collapse in civic virtue and personal conduct. Becker's work is also directly relevant for the consideration and solution of problems surrounding the use of what are at the moment illegal drugs. Becker's careful analysis has produced an understanding of why people might rationally use addicting drugs and how they may respond to changes in the incentive such as, for example, the reduction in price that would undoubtedly follow legalization of marijuana.

With regard to criminal behaviour and the increasing incidence of capital crimes, Becker's work leads to what an increasing number of people are regarding as the common sense conclusion that if you reduce the penalties for criminal behaviour, then criminal behaviour will increase. Even in the darkest aspects of their behaviour, humans respond to incentives and disincentives, and if there is a lower cost associated with particular behaviour, that behaviour is likely to increase, whether it is discrimination, having more children, or committing minor or major crimes.

For all of the power of his ideas and the undoubted influence they will have over the lives of future generations, Gary Becker is a mild and unassuming man who has encouraged several generations of students, first at Columbia University, then at the University of Chicago, where he still teaches. Like his mentor at the University of Chicago, Nobel Laureate Milton Friedman, Gary Becker is described as a conservative economist though less conservative than Milton Friedman. Such labels are usually applied by those who don't agree with the ideas expressed by these two intellectual giants. My own preference is to agree with Professor Friedman that there are only two kinds of economic ideas: good economic ideas and bad economic ideas. Undoubtedly, however else they may be labelled, Gary Becker's economic ideas are good, powerful, and very important to our economic and social future.

December's solution: reform welfare

Filip Palda

CANADA NEEDS TO reform its welfare system. The problem is that the conditions attached to welfare give people little incentive to work. There is also evidence that welfare has made it easier for couples to divorce and, for prospective parents, to start families out of wedlock. The federal government gave some sign last month that it understood these problems. It proposed a $50 million, five-year study of a guaranteed income plan that would bring incentives back to people on welfare. The last thing we need, however, is another expensive study that would delay this urgent reform.

When government last changed welfare in 1966 it ignored the basic economic principle that high tax rates discourage effort. The Canada Assistance Plan of 1966 allowed able bodied people with employable skills to claim welfare money. But it also reduced benefits by a dollar for every extra dollar a welfare recipient earned at work. This put people on welfare in a 100 percent marginal tax bracket. The poorest people in the country faced the highest tax rate. The calculation someone on welfare had to make was clear: for a job to be worth taking, it would have to pay substantially more than the state handout.

The government now wants to study what would happen if it only took 50 cents of benefits back for every dollar the welfare recipient earned. Under such a "guaranteed income" scheme, someone initially getting $5,000 in welfare would see his benefits decline gradually to zero as his earned income approached $10,000. The government fears that many of the working poor whose incomes are slightly above what it takes to qualify for welfare would have to be subsidized under the new scheme. But it hopes that sufficiently many of those on welfare could be coaxed into working and abandoning some of their benefits. The studies being proposed would test the net effect of these two forces on the treasury. Many such studies, however, have been paid for in the U.S. The results there suggest that government spending would not have to rise by much under a guaranteed income program (Hum and Simpson 1992a). The MacDonald Commission of the 1980s reached the same conclusion for Canada. [Strangely enough, our federal government tried a guaranteed income experiment in Manitoba in the late 1970s, with the cooperation of Ed Schreyer's provincial government. But for secret reasons researchers have never been allowed to analyze the data (Hum and Simpson 1992b).]

However, there is a subtle problem with the present welfare system that may be harder to fix than the 100 percent marginal tax rate which the system places on effort. Allen [1992] found that, provinces with the most generous welfare programs tend to have more divorces and single parents. His careful study accounted for other factors which are believed to influence these family structures, such as age, income, education, mother tongue, and economic climate. After controlling for these influences he found that an increase of $100-200 in yearly benefits led to a 5 percent increase in the chance of the beneficiary becoming a single parent, a 2 percent increase in the chance of a child being born illegitimate, and a 1 percent increase in the chance of divorce. Welfare did not necessarily push people to these decisions, but for pregnant women who were not thrilled at the idea of getting married, welfare made the choice to become a single mother easier.

In the short run, the decision to become a single parent may increase one's income, but there is growing evidence that this is a bad decision to carry through with. Our legal system tends to protect investments married people make in each other. The wife who puts her husband through school does so secure in the knowledge that should he leave her, she will be able to get some of her investment back by suing him in court. An unwed mother does not have this protection and may find it riskier and therefore less attractive to invest time and effort in her partner. In the long run, the couple will be poorer than if they had passed up on the welfare payment and married.

Perhaps the only treatment of this problem is to educate people about the long term consequences of letting the state take care of them. Families probably police their children less and warn them less sternly of the problems of single parenthood than they did in the past. This may be a product of giving government so big a part in our lives. If we are to resist some of the unfortunate effects of welfare we must understand how it can undermine our ability to take charge of our lives.

References and Further Reading:

Allen, Douglas W., [1992], "The Impact of Welfare on Canadian Families," Forthcoming in Journal of Labour Economics.

Hum, Derek and Wayne Simpson, [1992a], "Economic Response to a Guaranteed Annual Income: Experience From Canada and the United States," University of Manitoba Department of Economics Working Paper.

---, [1992b], "Whatever Happened to the Guaranteed Income Idea?" University of Manitoba Department of Economics, Working Paper No. 91/02.

My brain hurts

John S. P. Robson

THERE ARE PEOPLE WHO don't believe in coincidences, but the person who lays out the Globe and Mail's front page doesn't seem to be one of them. For on October 14th a major story related the case of a postal worker fired for theft, who successfully appealed to a federal arbitrator on the grounds that her theft from the mail--and use of--a credit card was a delayed reaction to childhood sexual abuse.

And another, fairly minor CP story on the same front page noted that the number of Canadians who say they are disabled has "increased significantly" over the past five years, from 13.2 percent in 1986 to 15.5 percent in 1991 (yes, that's right, 4.2 million people). Now, I know what you're thinking. It must have been a very tough five years in terms of falling bricks, failing eyesight or crippling traffic accidents. But "The reasons for the increase are not fully understood, StatCan official Colleen Cardillo said. It may be that people are more likely to admit they have disabilities than in the past, she said." [Globe and Mail, October 13, 1992, p. A1.]

Part of the problem, of course, is that governments have spent enormous amounts of time and energy lately getting people to "admit" that they have disabilities, rather than encouraging them to attempt to cope with their problems and to rise above them. In the U.S., the New Jersey Department of Health, for instance, recently put out a plan that states that "one quarter of Americans cannot control their eating" while 8.9 percent of people in New Jersey--nearly 700,000 people--are "problem or pathological gamblers." The plan goes on to discuss co-dependency and so on, before calling on the state to screen for addicts of various sorts in courts, schools, and job-assistance programs, and to help them "recognize that they need help." [National Review, October 19, 1992, p. 8.]

So part of what appears to be going on is that the government is successfully encouraging people to give in to their problems, to define themselves primarily as "addicts" or "co-dependents" or this or that so they will have interesting stories to tell in group therapy sessions. By the same token they are discouraged from thinking of themselves primarily as "wife" or "employer" or "senator from Massachusetts," while admitting to themselves that they have certain bad habits they must control through willpower. As I have warned before in these pages, governments should be careful what they wish for... they may get it.

But the encouragement is not just a question of intellectual persuasion. For according to The Economist (it seems to be disability week in the media), the state of California has recently made stress a legal basis for disability claims. Ten years ago the number of such claims was trivial in the Golden State; now there are more than 10,000 a year, "about half of them from women who often cite `job pressure' or `harassment' as the cause of their emotional disability. California law requires only 10 percent of a stress claim to specifically job-related." [The Economist, October 3, 1992, p. 29.](Job pressure? 10 percent? Do you really mean to tell me that if you feel tense, and a small part of that is that your job is stressful, you can get paid not to work? Hmmmm. I wonder what will happen.)

The extraordinary thing about this is that traditional analysis of the supply curve for labour in various professions includes stress as one of the factors that influences it--the more the stress the higher the pay (ceteris paribus), to compensate. Now, however, the state in California has created a legal right to stress-free work, and if you can't find it they'll pay you anyway, not to work. And in Canada, you have the right to steal from your customers if you were abused as a child and can't cope with it. By contrast, someone who was the victim of incest but has dealt with it, and steals for some other reason, can still be fired. So if you're going to steal something, put on the victim's mask first. That isn't to deny that some people really are crippled by psychological or physical problems. It's just that, like anything else, you get more of it if you bid up the price.

In short, there are more and more people claiming to be disabled (a) because the government is successfully convincing them that they cannot cope with their problems and (b) because the government is paying them to claim, whether they believe it or not, that they cannot. And as I read all these media as part of my job, I feel increasingly tense... stressed... unable to cope...

TV news ignores economic growth and emphasizes downturns

Lydia A. Miljan, Director,
National Media Archive

WHEN THE ECONOMY IS healthy, economic news is seldom reported. Reports which do occur during the good times invariably highlight the negative aspects of the economy. This was the main finding of a study by the National Media Archive, covering the period between 1988 and 1992, which looked at how national networks report economic news.

The study found that as the economy deteriorated, television increased its attention to economic news, focusing on the negative downturn of events. In each indicator examined--the unemployment rate, the inflation rate, the gross domestic product, the gross national product, retail sales, corporate profits and consumer spending--the same pattern held. When the indicator performed well it was either ignored or downplayed. Instead, the reports focused on the other indicators which did not perform as well.

The study examined two cases: the gross domestic product and inflation. Statistics Canada reported increases in the GDP 27 times from July 1988 to March 1992. Only six of these increases were reported by the networks. In contrast, in that same period, the GDP fell 18 times. TV reported almost half of these declines. In other words, economic contraction was twice as likely to be reported as expansion.

CBC negative when GDP increases

In this study, reports on GDP increases accounted for almost one-half of network attention; most of these stories focused on the growth which occurred during the second and third quarters of 1991. Slightly over one-quarter of CBC and slightly less than one-quarter of CTV reports were neutral. Of the remaining statements, CTV had more than twice as many favourable as unfavourable statements. In contrast, CBC provided slightly more unfavourable than favourable assessments.

CBC counteracted the good news about economic growth with bad news about unemployment. In each of CBC's reports about the second quarter of 1991, a period of economic growth, the closing statement focused on factories closing, bankruptcies and the increasing number of jobless people.

In general, both CBC and CTV had a tendency to emphasize the bad news and minimize the good news. Further, the networks were inconsistent with their description of the statistics. On 28 March 1991, the 0.94 GDP decrease was portrayed as a crisis. CBC and CTV pointed out that the 0.94 decline was the worst decrease since the start of the recession. In contrast, on 28 June 1991, the GDP increase of 0.85 percent was treated with caution. Neither broadcaster mentioned that the 0.85 percent growth was the best increase since the start of the recession, nor that it was, in fact, the best increase in over three years.

Attention to inflation peaks during increases

The second case study was inflation. On a quarterly basis, increases in the inflation rate received more attention than its decreases. When the inflation rate decreased, even if the decrease was greater than a previous increase, the networks gave less coverage to the decrease than to the increase. In 1991 and 1992, the consistent and dramatic decreases in the rate of inflation did not receive as much attention as the slight upward fluctuations in 1990. When the inflation rate went down in the fourth quarter in 1990, CBC barely gave it any notice--just 4 percent of total inflation coverage. In contrast, CTV gave it 10 percent of its overall coverage of reports on inflation. However, when the inflation rate increased in the next quarter by almost two percentage points, both networks increased their attention to inflation by highlighting this change. In contrast, when the rate fell one year later by more than two percentage points, both networks gave this decrease less attention than they gave the increase in inflation one year earlier.

Not only did the declining inflation rate receive less attention than rate increases, it also received predominantly negative attention.

Government policy criticized for increasing inflation

The common theme in reporting increases and decreases in the inflation rate was criticism of government policy. During periods of inflation rate increases, neutral assessments of government policy comprised 10 percent of CBC and 15 percent of CTV attention. Of the remainder, over half of CBC and slightly over half of CTV assessments were unfavourable towards the government's policy on inflation.

Declines in inflation not attributed to government policy

When the inflation rate decreased the Bank of Canada's monetary policy was not applauded. For the most part, the role of the government was ignored. References to the government when the inflation rate decreased comprised only one-quarter of CBC and less than one-quarter of CTV's attention to the government. Instead, the nightly news focused on weakness in the economy.

Results on Inflation are based on census samples of 41 "National," and 29 "CTV National News" stories from January 1, 1988, to March 31, 1992. Results on the GDP are based on census samples of 13 "National," and 13 "CTV National News" stories from July 1, 1988, to March 31, 1992. Results on the entire economy study are based on census samples of 130 "National," and 115 "CTV National News" stories from July 1, 1988, to March 31, 1992. All stories appearing during that time were coded, representing a total population rather than a random sample of stories.

A private sector solution to cross-border shopping

Michael Walker

THE CROSS-BORDER SHOPPING issue has temporarily dropped from the headlines as the value of the Canadian dollar, having fallen by ten cents, makes American purchases more expensive. However, cross-border shopping is still an issue for merchants in border towns who lose hundreds of millions of dollars in business to competitors across the international border. In a study earlier this year for The Fraser Institute, published as Fraser Forum Critical Issues Bulletin III, Prof. Herbert Grubel and his colleague Gurmeet Khangura determined that at the base of the cross-border shopping phenomenon lay government regulation and taxation.

One of the key ingredients of this breakdown in policy is the extent to which Canadian governments, at both the federal and provincial level, levy taxes on gasoline. These taxes range from 31.1 cents per litre in Quebec to 20.7 cents per litre in Alberta. As a consequence, comparison shoppers will always find that gasoline is much cheaper in U.S. border towns than it is in Canada. The difference is large enough, even with significant exchange loss on the Canadian currency, to pay for a trip south of the border during which, of course, the consumer usually purchases many other things besides gasoline. The Fraser Institute, along with a number of other commentators, has suggested for some years that the solution to this problem is to eliminate the gasoline tax and to make up the resulting revenue loss from the general sales tax. The point being, of course, that the extraordinarily heavy tax burden on gasoline elevates its cost to the consumer and leads to the cross-border trip in the first place.

While this "solution" to the cross-border shopping problem has been around for some time, no governments have seen fit to react. However, in February of this year, merchants in the small town of Bedford, Quebec, near the Vermont border, took the matter into their own hands. The community began a private program of converting the gasoline tax into a general sales tax based on the total level of sales in their community. To do so, merchants issue Bedford dollars when their customers buy certain items or make purchases of a certain minimum amount. Customers then use these dollars to purchase gas at the town's gas stations. In fact, that is the only purpose for which they can be used. With the Bedford dollars, motorists are able to reduce the cost of gasoline in their community down to the level that they would pay in Vermont. This, of course, eliminates the advantage of going across the border to buy gasoline.

This is an extraordinarily clever solution to the problem. Bedford consumers, through the prices they pay for the other items they buy in the town, pay for the gasoline tax through a kind of private tax levied by the merchants. It is a private "tax," because the shop keepers will have to redeem the coupons from the gasoline stations, who otherwise would not have the money to pay gasoline distributors and the government for the gasoline they sell. Since the merchants get their income from their customers, the customers in the end pay the gasoline tax, but do so through their general purchases.

There is nothing illegal about this procedure because no tax avoidance is involved; the federal and provincial governments get their gasoline taxes, as well as the retail sales taxes they levy on the other commodities purchased in Bedford. As far as I can see, this solution to the problem of too high gasoline taxes can be replicated in every border community across the country.

This is yet another creative, private solution to a government created problem.

Time to pay for travel

Filip Palda

TRAVEL IS LIKE A CHOCOLATE bar, or a power tool: if you want it, pay for it. This is the main point of a Royal Commission report on transportation released last week. The commission found that Canadians spend $43 billion on travel each year, of which the government pays $5 billion by providing free highways, ports, and subsidized rail. These subsidies are uncalled for because they simply give businesses and consumers a free ride, at taxpayers' expense.

Because Canadians do not pay the true costs of travel, they overuse transport facilities and wear them down too quickly. Transport subsidies also reward regions that rely on inefficient means of travelling. Last year Ottawa had to fork out 43 cents of subsidy for every mile a person travelled on Via rail, which meant that a hundred mile trip cost the government $43 per person! Since Ontario and Quebec residents were the main users of this service, residents of B.C. had to help pay the extravagant bill for artificially cheap train rides.

The solution to such problems is to privatize highways, railways, ports, and ferries. The great benefit of private toll roads for example, is that people's needs are met more efficiently than when government is in charge. Private entrepreneurs have a strong incentive to sniff out what routes are most in demand, and the times of greatest demand. Governments have trouble doing this because they bow to political pressures such as how many votes a road construction project through a certain area will bring them. Economic reasons take the back seat when government decides.

If Ottawa takes the findings of the commission seriously, it will hold back from spending billions of dollars to improve Canada's travel infrastructures. The slack would be efficiently and inexpensively picked up by paying users.

Here we go again

John S. P. Robson

ACCORDING TO HEADLINES in early November, the B.C. government and the Ontario government are both attempting to slash spending in a desperate attempt to avoid incredibly huge deficits, and B.C. Finance Minister Glen Clark is doing what Ontario Finance Minister Floyd Laughren has been doing for two years--blaming Ottawa for cutting back transfers. Question one, for both these gentlemen: where do you think Ottawa gets its money, if not from the same taxpayers you do?

Question two: since neither of you was made Finance Minister against his will, why in your time as Finance Critic didn't you develop a more realistic understanding of the government's budget position?

Question three: if you did understand (and during the campaign in British Columbia Harcourt and Clark said that they did), why on earth did you promise all those people all those things?

Apparently B.C. will save $670,000 by delaying women's "equality" programs. Question four, for Mssrs. Harcourt and Clark: won't they be right in thinking you reneged?

Question five, related: what use is saving $670,000 when you are concerned that the deficit will be $2.7 billion, $900 million higher than projected? You would have to save $670,000 every two hours and forty-odd minutes for a year (assuming 12-hour days and six-day weeks, with a two week vacation) just to hold the deficit down to the projected $1.8 billion. That's $250,000 per hour, $4,166 per minute or $69.4 per second. Actually balancing the budget would require you to save nine million dollars a day, or $750,000 per hour. That's $12,500 per minute, or $208.33 per second. If Mr. Clark starts looking haggard, this is why (and NB that Mr. Laughren has dug himself a much deeper hole, needing to save around $900 per second to balance the budget).

Question six: what do my readers think President Bill Clinton is going to discover when he starts trying to write his first budget? (Answer: that to balance it he has to find savings of $1 billion a day, or $83.88 million per each of his twelve working hours; that's about $1.38 million a minute, or over $23,000 per second.) Actually, of course, with the help of Congress he is more likely to find thousands of dollars per second new spending, as he promised during the campaign (he also pledged not to raise taxes except on the ultra-rich).

Question seven, related: why did U.S. voters elect Mr. Clinton and give him a Congress that can't count any better than he can?

Question eight: when will we come to realize that if we don't control entitlements we will go broke? With the highest rate of economic growth of any province this year, B.C. has increased welfare payments by 16 percent. Just imagine what will happen if our economy slumps.

Question nine: are we--politicians and voters alike--idiots or what?

Poverty in the United States

Walter Williams, John M. Olin
Distinguished Scholar, George
Mason University, Fairfax, VA

ACCORDING TO THE Congressional Research Service of the Library of Congress, we spend $226 billion a year on welfare programs, which includes cash payments, food stamps, housing and medical assistance for the poor. The Census Bureau reports that there are 30 million Americans living in poverty, which is defined as a family of four with an income of less than $13,942. My arithmetic tells me that 30 million people divided into $226 billion yields $7,533 per person, or about $30,000 for a poor family of four. Something smells mighty fishy. We're spending enough to make every poor family middle class, yet we're told poverty is increasing, and we need to spend more.

There's just not much material on poverty in the United States. Robert Rector of the Heritage Foundation compiled some interesting facts about people whom the Bureau of Census identifies as poor in an article, "How `Poor' Are America's Poor?" Thirty-eight percent of poor people own homes with a median value of $39,200. One million own homes worth over $80,000, and 75,000 "poor" people own homes worth over $300,000. Sixty-two percent of poor households own a car, and 14 percent own two or more cars. Fifty-three percent of poor households have air conditioning. Just 20 years ago, only 36 percent of Americans, regardless of income, owned air conditioners.

Almost one-third of poor households own microwave ovens, and nationwide, 22,000 poor households have heated swimming pools or jacuzzis. In many respects, America's poor have a higher standard of living than the average European or Japanese. For example, 1.8 percent of our poor lack indoor toilets, and 2.7 percent lack a fixed shower or bath. Seventeen percent of average-income French and 54 percent of average-income Japanese households lack an indoor toilet, and 17 percent in both countries lack fixed showers or baths. America's poor eat much more meat and have much more housing space than the average person in Europe or Japan.

Rector goes on to say, "In Massachusetts in 1988, a mother with three children could receive welfare benefits in the form of Aid to Families with Dependent Children, food stamps, public housing, Medicaid and school lunch and breakfast programs costing taxpayers $18,765 per year. But the family would still be counted as poor by the Census Bureau." For strictly political reasons, the Census Bureau counts only the cash handouts to the poor, and ignores non-cash handouts and assets.

Since 1966, we have spent $3.6 trillion on poverty programs, and that's controlling for inflation. Put another way, in 1983, just $2.5 trillion could have purchased all of the assets of the Fortune 500 companies and all of the U.S. farmland.

By historical and global comparisons, there's almost no material poverty in our country. Today's poverty is poverty of the spirit. The welfare state, created over the last several decades, had made large numbers of Americans immune to the standard cure for poverty--a rapidly expanding economy. During the '80s, employers were virtually begging for employees and offering wages higher than the minimum, yet many poor people chose to remain on the dole rather than take that entry-level job. Compassion requires that we recognize that some poor people need a hand, but many others need a boot.

Government spending hits historic high water mark

Michael Walker

SPENDING BY ALL LEVELS OF government in Canada have reached their highest level ever. While governments have been consistently setting new peace-time spending records since the Second World War, the 1991-1992 fiscal year marks a new, never before reached level of spending. The most recently revised data for 1991 show that government activity now accounts for a higher fraction of the Canadian economy than was required to wage the Second World War. The mobilization of the economy to the war effort peaked at 49 percent of the total economy in 1944. During 1991, the share of the economy absorbed by the public sector reached as high as 50 percent but averaged 49.4 percent. The figures for 1992 thus far reveal that the spending pace is continuing at above 49 percent.

19.9 percent of GDP is spent by the federal government, 15.6 percent by the provincial governments and 8.3 percent by local governments. The rest of the 49.4 percent is spent by hospitals and through the Canada and Quebec Pension Plans, which are separately accounted for in government records. In every case except municipal governments, the current spending shares are peacetime records, and the municipal spending is only slightly below the peak levels reached in 1970.

The phenomenon is therefore not restricted to a single level of government. Is it a problem? In Fraser Forum last month, Mr. Ken Gregory offered the view that in the case of the federal government, at least, spending is not a problem because the federal deficit seems to him to be under control, and likely to fall more or less continuously during the next few years. However, figures just released from the federal finance department show that the deficit is going to overshoot last year's target by 7.5 billion dollars. And Ken Gregory's calculations take no account of the provincial deficits, which have been rising steadily and are beginning to rival the size of the federal deficit. Nevertheless, in one way, Ken Gregory is correct; it is not the deficit per se that should be of concern. The deficit is simply one way of dealing with the tax burden associated with the current level of spending. It defers the tax burden to the future. (Tax burdens are the subject of discussion elsewhere in this edition of Fraser Forum.) The appropriate focus of concern is the spending itself.

Some people, upon realizing that we have exceeded all previous records of government spending, will react by saying that we are getting a lot of services for the 50 percent of the economy that government in various guises spends. And waste, overlap, and spillovers notwithstanding, that is true. However, it is interesting to note that in 1974, governments at all levels took 13 percentage points less of GDP--only 36.7 percent in total--and provided Medicare, a more generous unemployment insurance system than we have now, income support programs for indigent Canadians, the Canada and Quebec Pension Plans and a vast array of other programs.

1974 was also the last year that the federal government balanced its budget. In all subsequent years, more was spent than was raised in current taxes, and the result was an accumulation of deficits in the form of a much enlarged public debt. The interest on this debt now accounts for a bracing 5.9 percent of the GDP and is a large part of the explanation for the swelling of current government spending.

Should we worry that the government now spends this record fraction of GDP?

Before dealing with that issue, it is first necessary to probe one possible source of an increased share of government spending that is largely self-correcting. That is, the GDP itself shrank during the recession. With no change in the level of government spending, a smaller GDP would have increased the share of the economy absorbed by the government sector. In fact, total spending by all levels of government increased from $312.2 billion in 1990 to $335.6 billion in 1991, and is continuing to increase rapidly at the present time.

Furthermore, the shrinking GDP also boosted the share of the economy spent by government indirectly, by increasing the demand for unemployment insurance payments. The recession increased the rate of unemployment and hence the requirement for spending on this program and on welfare assistance programs. However, at the same time, the government of Ontario was granting very large wage increases to government employees and the government of British Columbia was preparing to do the same. And most governments made no attempt to cut back drastically the level of spending on other programs to make room in their budgets for the increased social assistance spending necessitated by the recession. Some provinces, such as New Brunswick, made some attempt to control their spending and reduce their deficits during the recent period, but their efforts have largely been unsuccessful.

The federal government has tried to control its outlays, particularly with regard to the cost of operating and administering the federal government function itself. However, the growth in programs due to the recession has not been extracted from other programs and the federal government's share of the economy has therefore increased by 1.5 percent of GDP. This has occurred in spite of the reduction in the cost of servicing the public debt, which has fallen due to the lower rates of interest that the federal government must pay.

Why should we worry about these developments? There are three reasons. First, the government's share of the GDP is a close proxy for the extent to which people are free to choose in the Canadian economy. Fully half of the decisions about the disposition of GDP are now made by somebody other than the person who expended the effort to produce the output. That in itself is something about which we should be concerned, to the extent that we prize our freedom and ability to make independent choices.

A second, related reason is that when such a large wedge opens up between what people produce and what they can spend, it is only a matter of time before they will expend less effort so as to avoid the tax wedge that is imposed.

Third, as the scope of public decision making increases, the effective size of the private sector shrinks. But only the private sector is economically productive and capable of generating the incomes and wealth that provide the jobs and standard of living to which we have become accustomed in Canada. This is not mere rhetoric. While the government sector does provide some services that would otherwise have to be provided by the private sector, such as health care and education, we have no assurance that in the process wealth is created. The reason is that simply providing educational services doesn't make a society wealthier if the cost of providing them is greater than the value that would be placed on them by the users if they had their choice. The increasing exodus of parents and children from the public school system into parochial schools, value schools, or simply privately operated schools is a manifestation of the fact that the educational consumer's choice isn't being met by the elementary and secondary school system. To the extent that it is actually happening, public education expenditures are actually destroying wealth, not creating it. That privately operated schools also tend to cost less suggests that people may not be getting what they want, and yet are paying premium prices for it (see Stephen Easton's study, Education in Canada, published by The Fraser Institute).

A clearer example is the shipyard which produced ferries, frigates or ice-breakers at a higher cost than the same ships could be purchased from a foreign supplier or from one in another province. Since taxpayers are paying the cost of the ships and the cost of a subsidy to the shipyard, the ships are worth less than they cost. In other words, the shipyard is producing scrap metal, not "valuable" output.

By comparison, if a private citizen buys a sail boat, a weekend runabout, or a fish boat, and pays the full cost asked by a private supplier, provided there are no artificial barriers to trade in such boats, we can rest assured that wealth has been created because the buyer and seller agreed to the sale without being forced or subsidized and therefore are both better off after the transaction than before.

In Canada we must ask whether many of the uses to which the 50 percent of the country's income are put by the public sector are actually destroying wealth. In a recent program called the Economy in Government Competition, The Fraser Institute offered Canadians the opportunity and the incentive to suggest areas where the Federal government could cut the cost of delivering existing services without reducing services or the amount of public employment (except through attrition). The result was some 773 suggestions of which hundreds were both sensible and thoughtful, and a hundred or so quite professional. An independent panel of judges selected 28 finalists who were asked to prepare detailed programs for cost reductions. They did. The results were presented to the federal government in February, 1992. Recently, the government responded to the suggestions. The basic tone of the political response from the minister responsible was constructive and encouraging. However, the response from the bureaucracy which accompanied it was not "Thank you for the ideas which with modification we will adopt." Rather, it was, "no good, not invented here, simplistic, we are already doing it, it can't be done" . . . etc.

One case in particular indicates the flavour of the response. The Department of Finance indicated that it was impractical or impossible to adopt a "Dutch auction" process for selling government bonds, even though Professor John Chant, who suggested it, had indicated that savings in the tens of millions might be possible. The very week we received the Finance Department's negative response, the U.S. Treasury Department began to sell its bonds in a Dutch auction.

Apparently there is less willingness to "leave no stone unturned" in the pursuit of economy in government than the Finance Department has led us to believe. The Fraser Institute nevertheless intends to press these ideas for reform along with the hundreds of other ideas which are flowing in as part of the 1992 Competition for Economy in Government. The only alternative to finding cheaper ways of producing government services is actually to cut services, since a further increase in the share of the economy absorbed into the government sector is neither sensible nor sustainable. While we have a list of service reductions that would be sensible, we hope that the less painful course of cost reductions can be pursued immediately.

Questions and answers

Isabella Horry

Q: What portion of world exports do Canadian exports comprise, and how has it changed over time?

A: Between 1971 and 1989 Canadian exports rose from US$ 19 billion to US$ 121 billion, and at the same time our share of total world exports fell from 5.3 percent to 4.0 percent (See Table 1). The shares of the U.S., the European Community, and the rest of the world fell during this period, while those of Japan and the Asian NIC's increased.

Click here to view Table 1: Share in Total World Exports by Country/Region in all Industries (Percent)

Q: What is the composition of Canada's exports and how does it vary across different markets?

A: In 1989, Canada exported US$ 121 billion. According to a recent study by Rao and Lemprière, just over half (51 percent) of these exports were natural resources and resource related products. This share has fallen since the early 1970s when it was 59 percent. The composition of exports differs across markets as seen in the following table. The majority of Canadian exports to the U.S. are non-resource based manufactured goods. Resource based manufactured goods, meanwhile, make up nearly 83 percent of manufactured exports to Japan (see Table 2).

Click here to view Table 2: Composition of Canadian Exports by Country/Region Exported, 1989

Going into labour

John S. P. Robson

WHEN THE FREE TRADE Agreement with the U.S. was signed, and during the subsequent election, its supporters promised a beneficial restructuring of the Canadian economy and strong growth in exports, production and employment. On the surface, these (except the exports) have not resulted, and critics of the agreement are claiming vindication. This is particularly important because NAFTA has just been signed, and it is liable to become a major issue.

But there is a post hoc fallacy here. True, economic developments following the signing of free trade have not been as cheery as we would have liked. But the U.S.-Canada free trade agreement has not been the only public policy change since 1988. And while its effects have indeed been positive, On this see for instance Peter Pauly, "Macroeconomic Effects of the Canada-U.S. Free Trade Agreement: An Interim Assessment," joint publication of the Centre for International Studies and The Fraser Institute, 1992.Note they have been overshadowed by negative developments in other areas, so that we have a net loss of jobs even though free trade has increased employment.

One of the most serious of these other, negative developments is that the Ontario government has been undertaking increasingly sweeping and increasingly misguided interventions in the economy over the past five years, and particularly the last two. With Ontario producing more than 40 percent of Canada's GDP, these interventions should cause concern throughout Canada. Yet few measures emanating from Queen's Park can rival the truly disastrous Labour Code that will impose rigid, confrontational unionization throughout the Ontario economy.

What makes this Labour Code most worrying is that it relies on the idea that you can increase wealth coercively, and that what workers really need is not employment in a booming industry but the government's help in shaking down employers. Apparently the fable of the goose that lays the golden eggs is not required reading in Queen's Park, but as we never tire of pointing out, wealth that has not been produced cannot be redistributed. And a large part of our current economic difficulty is the direct result of trying to do so.

According to statistics in the Globe and Mail last year, between 1985 and 1990 productivity in the Canadian manufacturing sector increased 1.2 percent while unit labour costs increased 24.4 percent (in the U.S. productivity rose 23.8 percent and unit labour costs fell 4.1 percent). [Globe and Mail, April 29, 1991, p. A10.] If your work is only worth 1.2 percent more, but your pay has increased 25.6 percent, someone else is correspondingly worse off. "Damn you Jack, I'm all right," say the unions and their government backers, and production decisions become increasingly political, not economic, and more and more people are living at the expense of fewer and fewer.

The longer this goes on the poorer and more rigid our economy will become, and the more painful the eventual adjustment. Yet many of our provincial governments, including that of Ontario, seem to have no real policy beyond postponing that adjustment for as long as possible. Consistently, these governments support coercive unionization, but oppose free trade.

And their opposition to the implications of free trade is one of the major reasons its benefits have been limited so far. For while free trade gives our consumers an instant improvement in their range of choices, [Or, to be technical, their consumption possibility frontier shifts outward instantly.]the benefit to our producers is less direct and consists as much of a kick in the butt as a helping hand. Given open borders our producers would have to shape up, and, like tearing off a bandaid, the adjustment they must make won't hurt less because we put it off and then do it slowly.

And what people often don't appreciate about our producers is that they are not just a bunch of jowly white men in suits sitting around boardroom tables. Producers are everyone involved in production, which very definitely includes workers. And according to the Globe's statistics, our manufacturing workers--heavily unionized thanks to government--are not pulling their weight. At a time of heightened worries about competitiveness, at a time when it is clear that the factors going into growth in GDP are petering out in Canada, the idea that workers can gain income by some means other than by producing more wealth is a very dangerous idea.

And it is an idea now apparently embraced by the government of B.C., which has produced a labour code so radical that business groups are threatening not to participate in joint corporate-government trips abroad to encourage investment, to pull out of joint consultative groups with the government, and so on. True, this is one of those rare cases where a politician kept his word, as Moe Sihota, Minister of Consumer and Corporate Affairs, had promised in advance that business would not like the new labour code. In fact, the B.C. business community has been screaming bloody murder. So let's hope for another "clarification" by the Premier on this subject. [For those of you who spent the last two months in Antarctica, Moe Sihota, who doubles as Constitutional Affairs Minister, recently told a room full of people (with video camcorders) that Robert Bourrassa gave in completely in the Constitutional negotiations (see for instance Maclean's, October 19, 1992, p. 14). The Premier later clarified these remarks, saying that what Sihota should have said/meant to say/really did say was that everyone gave some ground.]

December graph

Isabella Horry

Click here to view December Graph

(Still) tilting the playing field

Filip Palda

WHAT STRUCK ME ABOUT the recent referendum campaign was how much taxpayer money the federal government spent to promote its Yes campaign: $20.5 million on glossy television ads to promote the agreement, 22 million copies of an enthusiastic description of the proposal distributed at a cost of $7.35 million, and $2.2 million in newspaper ads. In addition, MPs sent government-paid mail messages to all constituents to promote the accord, and those in power used their government staff and travel privileges to move the Yes campaign along.

This cavalier use of taxpayer resources is an unsavoury example of how our leaders are increasingly trying to tilt the playing field to their advantage. In a way, I can understand them. Politicians who have been around too long or who want to push unwelcome ideas through Parliament face a worsening situation these days. Canadian voters are becoming more educated and sophisticated in their choices. They are willing to listen to new ideas from emerging political movements and are not impressed with glitzy ad campaigns that do not address their needs.

The only solution old time politicians seem to believe in, is to spend more money and make sure their opponents cannot. Subsidies, government paid ads, and selective spending limits are the result of this corrupt way of thinking. In the referendum campaign there was a limit on what grassroots campaigners could spend, but no limit on the official federal budget to "inform" voters about what choices they faced.

As the result of a sneaky Royal Commission report on elections released earlier this year, the upcoming federal election may hold even more advantages for the established parties. The Commission urged strong subsidies for the three main parties, and even went so far as to call for government-paid party institutes that would engage in full-time voter "education." The report also suggested that independent Canadians should not be allowed to spend more than $1,000 to express their views during election time.

The message is that the NCC, Greenpeace, abortion groups, and just about any grassroots organization that wants to challenge those in power will have to keep quiet, while the "legitimate" representatives of the people carry on a "civilized" political debate. If the referendum campaign holds a lesson on how to conduct politics, it is that the people should determine who gets to spend how much. Wily politicians should not be allowed to tap the wealth of government and fiddle with the rules in order to get reelected.

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.