July 2000 Fraser Forum: Tax Freedom Day 2000
Canadians worked until June 29 this year to pay the total tax bill imposed on them by all levels of government.1 From June 30 to the end of the year, taxpayers can keep all the income they earn. This represents a five-day improvement over 1999, when Tax Freedom Day fell on July 5. Tax Freedom Day was one day later in 1999 than in 1998, which in turn was one day later than in 1997.
The Fraser Institute has been researching the comprehensive tax burden for the average family in Canada and each of the provinces since 1977. The most widely recognized output of this research is Tax Freedom Day, the day of the year that Canadians finally start working for themselves. All money earned prior to this day goes to one of three levels of government: federal, provincial, or local. The Institute calculates Tax Freedom Day in order to provide a simple, easy reference point about the impact of the most complex and intrusive activity of government - its tax-collecting apparatus. It is all but impossible for an ordinary citizen to have a clear idea of the tax demands which are imposed on them by the various taxing efforts of government. Tax Freedom Day provides clarity about the size of the tax burden.
While 1998 and 1999 show only a small advance, and 2000 a break from the ramping up of taxes, it is nevertheless the fact that Tax Freedom Day this year is 58 days later than it was 39 years ago. In 1961, the earliest year for which the calculation has been made, Tax Freedom Day was May 3. By 1974, it had advanced to June 8, and in 2000 Tax Freedom Day will fall, as noted, on June 30.
The total tax bill that is added up to compute Tax Freedom Day includes not only income taxes, property taxes, and sales taxes, but also 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 too numerous to mention. Over the years, there has been some variation around the rising trend of taxation and some kinds of taxation have actually fallen in some years. However, only recently have we witnessed declines in the overall tax burden. Even the 1997-to-1998 and 1998-to-1999 declines that we announced in previous years have vanished with the release of more up-to-date budget information. Instead of the three-day drop originally announced for 1997 to 1998, the new data reveal that Tax Freedom Day was basically level, moving from July 3 to July 4. The originally announced four-day drop between 1998 and 1999 was also revised to a one-day increase.
The 1999 to 2000 decline in Tax Freedom Day is to some extent a result of more prudent fiscal conduct by the various levels of government, as witnessed by the fact that 7 provinces and the federal government expect to have balanced budgets this year. The many years of experience we have had in interpreting the affairs of government led us to caution, in 1998, that the 1997-to-1998 drop in Tax Freedom Day may be partly an illusion brought on by conservative revenue forecasting. We renewed this caution last year regarding the drop between 1998 and 1999. Forecasts predicting how much tax revenue provincial and federal governments will collect are key inputs in the Tax Freedom Day model. Many provinces and the federal government use prudent assumptions when forming these estimates and it is common for tax collections to exceed expectations. Our caution was well founded: as noted, both of the previous declines have turned into one-day increases. Again, we advise that part of the five-day improvement between 1999 and 2000 may be an illusion. Last year we stated that there is good reason to hope that 1998 will be the "high water mark" for Tax Freedom Day in Canada. While this turned out to be too optimistic, there is considerable evidence to suggest that 1999 will be distinguished for having the latest Tax Freedom Day in Canadian history.
There are several reasons to believe this. The federal government and all provincial governments have cut income tax rates in recent years. Federal tax brackets and exemptions are once again fully indexed to inflation, something The Fraser Institute has been suggesting since before partial indexation was introduced. Many provinces have also announced that they will implement indexation, although some have put it off until as late as 2003. There are more personal and corporate income tax cuts awaiting implementation, and even more cuts have been alluded to. The strong economy is also starting to improve Canadian incomes. In 2000, income growth in all provinces boosted the cash income of families more than their tax bills increased, thus diluting the overall tax impact and leading to earlier Tax Freedom Days than in 1999. However, all the news is not good. Canada and Quebec Pension Plan contribut
While all Canadians face more or less the same federal tax bill, Tax Freedom Day for each province varies according to the extent of the provincially-levied tax burden. Table 6 shows Tax Freedom Days for Canada and each of the provinces for 1981, 1985, 1992, 1999, and 2000. All provinces experienced a Tax Freedom Day improvement from 1999. The earliest 2000 provincial Tax Freedom Day fell on May 30 in Newfoundland. The latest date is July 8 in Quebec and British Columbia. The Atlantic provinces historically have the earliest Tax Freedom Days partly due to the large share of their total revenue that comes from other provinces through the federal government. So, to some extent, earlier Tax Freedom Days in those provinces, as well as in Manitoba, Saskatchewan, and Quebec, come at the expense of later celebrations in the contributing provinces: Ontario, Alberta, and British Columbia.Table 9 ranks the provinces by their Tax Freedom Days and by the percent of their total revenue that comes from transfers from the federal government; the Atlantic provinces top both rankings.
Alberta has the fifth earliest Tax Freedom Day at June 19, followed closely by Ontario at June 22. Manitoba's Tax Freedom Day is June 27. The personal income tax bills for the average Canadian family in all provinces except Manitoba show a drop between 1999 and 2000. Manitoba shows an increase in spite of recent cuts to provincial tax rates and the impact of federal cuts on provincial revenues because the province expects a strong increase in personal income tax revenue while most other provinces expect less revenue than in 1999.
Tax Freedom Day in Saskatchewan falls on July 6, six days after the Canadian date. Saskatchewan has the largest increase in sales tax revenue of all the provinces. It expects a large increase in total sales tax revenue over 1999, in part due to a tax base broadening announced in this year's budget. Saskatchewan's sales tax revenue in 1999 was low compared to the previous five years.
British Columbia shares the latest Tax Freedom Day with Quebec - July 8. Table 3 shows that BC had relatively weak income growth and a $286 per family overall tax bill increase. British Columbia has been reluctant to cut taxes significantly and will, under its current tax reduction plan, continue to have the highest top marginal tax rate in North America. British Columbia also continues to spend considerably more than it takes in, which amounts to deferred taxation.
As has often been the case, Quebec also enjoys the dubious distinction of having the latest Tax Freedom Day. This is because that province imposes heavier tax burdens on families than do other provinces, in spite of the fact that, like the Atlantic provinces and Manitoba and Saskatchewan, it receives a relatively significant fraction of its revenue from other provinces through the federal government. However, there may be some hope for Quebec taxpayers, as the recently revised Quebec income tax structure features fewer tax brackets and emphasizes cuts for all taxpayers. Although it has the latest Tax Freedom Day, Quebec also shows the largest improvement in Tax Freedom Day from 1999 - a full week.
While the level of taxes paid by the average family is crucial, there are also concerns about the fairness of the Canadian tax system: how much tax is paid by citizens of different incomes? The decile distribution of income and taxes shows how the tax burden is spread across the population and is a standard part of the annual Tax Freedom Day announcement. The distribution in table 8 shows that the top 30 percent of income earners pay 65.7 percent of all taxes and earn 58.3 percent of all income. The bottom 30 percent of all income earners pay 4.2 percent of all taxes and earn 9.1 of all income. This distribution shows that the tax system is effectively progressive and extracts proportionately more money from those on the higher end of the income scale.
Note
- Tax Freedom Days are calculated on the Fraser Institute's Canadian Tax Simulator (CANTA- SIM). Statistics Canada's Social Policy Simulation Database and Model (SPSD/M)) is an important part of this model for the 1992 through 2000 Tax Freedom Days. The assumptions and calculations underlying the SPSD/M simulation results were prepared by The Fraser Institute and the responsibility for the use and interpretation of these data is entirely that of the authors. Statistics Canada recently undertook a revision of its National Accounts and Provincial Economic Accounts. They were only able to provide new data back to 1992; pre-1992 Tax Freedom Days using SPSD/M will be recalculated when Statistics Canada completes the historical revision.
Tables
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