October 2001
Misinformation about Taxes & Health Care
by Jason Clemens
Recently I had the pleasure of attending a debate about the state of health care in Canada between Dr. David Gratzer, author of Code Blue, and Michael Decter, author of Four Strong Winds: Understanding the Growing Challenges to Health Care. The debate was informative and lively. What struck me most, however, was the infor-mation Mr. Decter presented regarding the relationship between taxes and health care spending in Canada.
Unfortunately, the myth that Canada needs high taxes to finance socialized health care is an assumption far too many Canadians share. This myth impedes the comprehensive discussion that needs to take place regarding both health care reform and tax relief. As with any myth, the only way to fully counteract it is with fact.
Look first at the difference in government spending and taxation between Canada and the US. According to the latest Economic Outlook (June 2001) published by the Organisation for Eco-nomic Co-operation and Development (OECD), Canadian governments spent 40.9 percent of all goods and services produced in Canada (GDP) in 2000.
Governments in the United States, on the other hand, spent 29.4 percent of that nation’s GDP. In other words, Canadian governments spent 39.1 per-cent more than US governments as a percent of GDP.
Not surprisingly, this higher spending required higher tax revenues. In 2000, Canadian governments extracted 44.3 percent of GDP in revenues while US governments took 31.6 percent of GDP. In other words, Canada’s taxes are 40.2 percent higher than those of our south-ern neighbours.
Whether we look at total spending or total revenues, the difference in the size of government in Canada and the United States is over 10 percentage points of GDP. That means that our government is roughly 40 percent larger than the US government.
The myth of taxes and health care says that this large difference in spending and taxation is necessary to support Canada’s public health care system. The myth’s implication is that public (i.e., government) spending on health care in Canada must be about 40 percent higher than comparable spending in the US. The reality is, however, quite different.
According to the OECD’s latest report on health care, Canadian governments spent $1,738 per person in 1999, mea-sured in US dollars using Purchasing Power Parity (PPP)—a fancy economic method for translating currencies based on the different costs of goods and services in different countries. In the same year, US governments spent $1,938 (US) per person on health care. On a PPP-adjusted dollar basis, then, Ameri-can governments actually spent $200 more per person than Canadian governments on health care.
If we do this calculation using the actual exchange rate, as opposed to the PPP exchange rate, the value of Canadian government per capita health care spending declines to $1,365, a difference of $573. Put differently, if we use the actual exchange rate, we can see that US governments spend 42 percent more per capita on public health care than do Canadian governments. Canadians often forget that the US federal govern-ment provides two enormous health care programs to its citizens: Medicaid and Medicare.
More important in refuting the myth that high taxes are needed to fund our public health care system is the percent of GDP spent on public health care. In 1999, the most recent year for which comparable data are available, US gov-ernments spent 5.7 percent of GDP on public health care while Canadian gov-ernments spent 6.6 percent of GDP, a difference of 0.9 percentage points.
This is the fundamental, factual error made by those such as former Ontario Deputy Health Minister Michael Decter, who link high Canadian tax levels with socialized health care. One simply can-not explain the huge gaps in taxation and spending between the United States and Canada solely by the difference in public health care spending of less than 1 percentage point of GDP. It just doesn’t add up.
It’s time for Canadians to realize that our high taxation levels are not neces-sary to fund our health care system. We must move away from repeating this myth ad nauseum and begin to more pragmatically discuss how we can best reform our health care system—within a reasonable, tax-reduced budget.
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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