With the income tax filing deadline having just passed, many Canadians are likely still getting over the shock of just how much income tax they paid last year. Income taxes however account for only about one-third of the total taxes Canadians pay. Add property taxes, sales taxes, profit taxes, health taxes, social security taxes, alcohol taxes, tobacco taxes, fuel taxes and many others to the mix and the average Canadian will pay $37,700 in taxes (42.6 per cent of income) in 2009.
Fortunately, Tax Freedom Day came three days earlier in 2009 than in 2008. But before we get too excited, it is important to understand that the reduction in taxes has little to do with tax reductions by either the federal or provincial governments. Instead, the economic downturn has automatically eased the tax burden on the economy and resulted in an earlier tax freedom day.
In times like these when the economy slows and incomes decline, the tax burden of Canadian families tends to be reduced to a greater extent than income. That means an earlier day. Chalk up this accelerated decrease in the tax burden compared to decreases in income to the progressive nature of the Canadian tax system.
Progressivity means that as individuals earn more income, they pay proportionately more in taxes. The reverse is also true. It is this reverse phenomenon that produces an earlier day.
Changes aside, the real concern for most Canadians is whether they receive good value for the $37,700 they pay in taxes on average. While many Canadians happily pay their taxes to support the numerous government programs they believe are effective, many others are outraged at the level of taxation and the poor quality of the government services they finance.
On the benefits side, Canadians should consider the findings of the 2007 study -- Public Sector Efficiency: An International Comparison -- that measured the efficiency of the public sectors in Canada and 23 countries.
The study found that Canada's public sector was relatively inefficient and that we should be able to achieve the same outcomes from government programs while using only 75 per cent of current resources. In other words, there is approximately 25 per cent waste in Canada's public sector.
In addition, Canada's auditor general consistently finds case after case of government cost overruns, unnecessary spending, improperly managed programs and other examples of government failure.
Let's not forget the massive "stimulus" packages included in this year's federal and provincial budgets which will benefit a host of special interest groups including farmers, the auto industry, forestry, tourism, environmentalists, aboriginals, and arts and culture. Nor should we forget the $10.5 billion the federal government just poured into General Motors.
Canadians should also remember that we're not paying for all of this spending now -- the federal government and most provincial governments are running deficits this year and into the foreseeable future. At some point however, this debt must be paid back by taxes. In other words, deficits should be considered as deferred taxation. And it is also why later tax freedom days in the future are a real possibility.
If Canadian governments actually had to cover current expenditures with current taxation and were not able to defer any of the tax burden by running a deficit, tax freedom day would be significantly later in the year. In fact, it would arrive on June 25 -- 19 days later.
Niels Veldhuis is an economist with the Fraser Institute. Calculate your personal tax freedom day at www.fraserinstitute.org.