VANCOUVER — As the stress of the April 30th tax filing deadline fades and the shock realization by most Canadians regarding how much income and payroll taxes they pay subsides, it’s worthwhile considering the costs imposed on Canadians to comply with tax regulations.
All told, governments in Canada expect to collect $586.6 billion in 2013 (fiscal 2013-14). There are, however, significant costs beyond the simple dollars extracted.
Take for example the costs incurred by individuals, families, and businesses across the country to comply with the tax code. These costs include the time required to collect, organize, and report tax receipts, and the fees paid to tax preparers, accountants, and lawyers, to name just a few.
According to a new report the Fraser Institute published recently, on average, Canadians who filed taxes spent 7.2 hours completing their returns, which is time not spent with their family, building their businesses, or undertaking countless other more productive activities. This translates into an average cost of $217 per Canadian tax-filer.
In aggregate, these costs for individuals and families for just personal income taxes reached almost $6.7 billion in 2011. Another $246.2 million was incurred to comply with personal property taxes.
Businesses, both small and large, also incur costs to comply with taxes. Our estimate is that businesses incurred up to $17.8 billion in compliance costs for 2011 for the broad range of taxes businesses are required to administer on behalf of governments as well as the taxes they pay.
All told, that means Canadians incurred up to $24.8 billion in total tax compliance costs in 2011, representing roughly 1.4 per cent of our economy. That’s $719 per Canadian who filed taxes to comply with the tax regulations and rules.
Let’s be clear, these costs do not add productive capacity to the economy by building new factories or purchasing new machinery nor do they improve our human capital by investing in education or training. These costs also don’t improve our lives by increasing our incomes or the time available for family and friends. Rather, these are the costs incurred to do nothing but comply with tax rules.
More disturbing is that the real burden of such compliance costs falls disproportionately on lower-income Canadians. While the average cost of complying with the tax code increases as one’s income increases, the real burden of such costs is measured as a share of one’s income. Using this measure, lower-income Canadians pay the highest share of their income to comply with the tax code.
A similar situation exists for business. As a share of revenues, smaller businesses pay a higher cost for complying with the tax system than larger businesses. Put simply, our tax code imposes costs on those least able to afford them.
These are only the costs that individual Canadians and businesses incur to comply with the tax code. Another $6.6 billion is incurred by governments across the country to administer our tax system. That means we spend roughly 1.8 per cent of GDP every year just to comply with and administer our tax system.
The answer is to simplify the tax system radically. That means reducing and even eliminating special privileges, tax credits, and other deductions for both individuals and businesses in order to reduce the complexity of the tax code. We know from countless studies completed in both Canada and abroad that the complexity of the tax system is one of the main drivers of tax compliance and administrative costs.
By curtailing or removing these special privileges we can reduce the complexity of the tax code and make it easier and less costly to comply with. This means scarce, valuable resources can be freed for higher purposes like investing in new factories, new technologies, and new businesses, all of which will improve the economy over the longer-term. Tax reform should be an agenda item for all governments as they struggle with how to improve the economy.
Jason Clemens, Milagros Palacios, and Niels Veldhuis are economists with the Fraser Institute (www.fraserinstitute.org).