July 2001
June 29 is Tax Freedom Day, 2001
by Joel Emes & Jason Clemens
Canadians worked until June 28 this year to pay the total tax bill imposed on them by all levels of government. From June 29 to the end of the year, taxpayers can keep all the income they earn. This represents a five day improvement over 2000 when Tax Freedom Day fell on July 4 and is the same Tax Freedom Day Canada had 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 ordinary citizens to have a clear idea of the tax demands that are imposed on them by the various taxing efforts of government. Tax Freedom Day provides Canadians with clarity about the size of their tax burden.
While recent Tax Freedom Days show a leveling off of the tax burden, and 2001 offers a break from the ramping-up of taxes, it is nevertheless a fact that Tax Freedom Day this year is 57 days later than it was 40 years ago. In 1961, the earliest year for which the calculation has been made, Canadian Tax Freedom Day was May 3. By 1974, it had advanced to June 8, and in 2001 Tax Freedom Day will, as noted, fall on June 29.
The total tax bill that is added up to compute Tax Freedom Day includes not just 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 the overall tax bill leveling off and even beginning to decline. The many years of experience we have had in interpreting the affairs of government led us to caution in the last few annual Tax Freedom Day announcements that the drop in Tax Freedom Day originally announced may be partly an illusion brought on by conservative revenue forecasting. Provincial and federal budget forecasts of tax revenue are key inputs of 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 turned out to be well founded; once final data became available, previously-announced declines in Tax Freedom Day turned into either no change or increases.Again, we advise that part of the five-day improvement between 2000 and 2001 may be an illusion, although the conservative revenue forecasts may prove to be more accurate than in past years due to the recent slowdown in the economy. We originally stated that there was good reason to hope that 1998 would 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, or possibly 2000, will, in the future, be distinguished as 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 was suggesting even before partial indexation was introduced. Most of the provinces have either indexed their tax systems, or indicated that they will. Several provinces, most notably Alberta and Ontario, have begun to implement corporate income tax cuts. Tax cuts in other countries will put further downward pressure on Canadian tax rates. The one caveat about the hoped-for decrease in Tax Freedom Day is that Canada and Quebec Pension Plan contributions will continue to rise through 2003 when they are expected to reach their long-term steady state of 9.9 percent of pensionable earnings. The increase in CPP and QPP contributions between 2000 and 2001 offset over 80 percent of the decrease in personal income taxes for the average Canadian family.
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 1 shows Tax Freedom Days for Canada and each of the provinces for 1981, 1985, 1992, 2000, and 2001. Most provinces experienced a Tax Freedom Day decline from 2000. The earliest 2001 provincial Tax Freedom Day fell on May 30 in Newfoundland. The latest date is July 4 in Quebec. The Atlantic provinces historically have the earliest Tax Freedom Days due, in part, to the large share of their total revenue that comes from other provinces through the federal government and lower relative incomes. 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. In all provinces except Prince Edward Island, the average family's income tax decreases, reflecting the recent federal income tax cuts. These decreases are especially large in Quebec, Ontario, and British Columbia, as these provinces have also cut the provincial portion of personal income tax, British Columbia dramatically so following the recent election. The average family in Alberta shows a relatively small decline in income tax (see table 4) but also has the largest increase in cash income. Without the federal and provincial person income tax cuts, the income increase in Alberta would have resulted in an increase in personal income tax collections. Prince Edward Island shows an increase in income tax collections because that province expects a large increase in provincial income tax revenue; most other provinces have budgeted a decrease or a small increase. Alberta has the fifth earliest Tax Freedom Day at June 17; Alberta posted a nine-day decrease in its Tax Freedom Day between 2000 and 2001, driven largely by significant decreases in natural resource revenue. Exclusive of natural resource revenues, Alberta posts a one day decline and the second lowest Tax Freedom Day in the country for 2001. Ontario follows at June 27, which is one day later than Ontario's Tax Freedom Day for 1996; between 1996 and 2001 provincial and municipal taxes as a portion of average cash income in Ontario decreased while federal taxes increased. Manitoba and Saskatchewan are next at July 2nd. Manitoba shows a one day decrease in Tax Freedom Day while Saskatchewan shows a six day decrease, although, like Alberta, all but one day of the decrease is eliminated if we exclude natural resources. The decrease in personal income tax for the average British Columbia family is over $900; this is the largest decrease in the country and is the result of the recent federal and provincial tax cuts. The six-day decline in Tax Freedom Day in the province remains intact even when natural resource revenue is excluded (unlike the other provinces that collect relatively large shares of their revenues from this source).
As is often the case, the latest Tax Freedom Day is in Quebec as that province exerts its tax pressure against families in a much more aggressive fashion than 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. That said, Quebec taxpayers have enjoyed some relief as a result of the new Quebec tax structure that features fewer tax brackets and rate cuts for all taxpayers. Quebec shows a relatively large six-day decline in its Tax Freedom Day from 2000.
While the level of taxes paid by the average family is a crucial piece
of information, there are also concerns about the fairness of the Canadian
tax system: how much tax is paid by citizens of different income groups?
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 65.3 percent of all taxes and earn 58.2
percent of all income. The bottom 30 percent of all income earners pay
4.4 percent of all taxes and earn 9.2 percent of all income. This distribution
shows that the tax system is effectively progressive; it 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 (CANTASIM). Statistics Canada's Social Policy Simulation Database and Model (SPSD/M)) is an important part of this model for the 1992 through 2001 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.
Joel Emes (joele@fraserinstitute.ca) is Senior Research Economist at The Fraser Institute. He has an M.A. in Economics from Simon Fraser University.
Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Fiscal Studies at The Fraser Institute. He has a Masters Degree in Business Administration from the University of Windsor.
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