National Tax Freedom

Steve: This morning I'm meeting with Niels Veldhuis. Did I pronounce that correctly?

Niels: "Veld-house." Steve: "Veld-house", who is a senior research economist at the Fraser Institute. Niels: That's right. Steve: Here in Vancouver. And Niels' special area of interest is fiscal studies. And this "Tax-Freedom day", which I believe was something the Fraser Institute developed as a concept Niels: That's right. That's exactly right. Steve: Can I ask you a little bit about the history of the Fraser Institute and where this concept of "Tax-Freedom day" came from? Niels: Absolutely. Well first of all, every individual who works, pays income tax, and they know how much income tax they pay. It's very easy to see that, year-by-year, whether or not your income tax is going up, there's a host, however, of all these other taxes that Canadian families pay; such as sales taxes, taxes on alcohol, taxes on tobacco, taxes on gas. Natural resource levees, healthcare taxes that aren't as transparent as say, income tax. So over the course of a year, the average Canadian family doesn't have a good gauge to see whether or not the total amount of taxes they pay is actually increasing or decreasing. So what we wanted to do is develop an easy way for an average family, who's not really interested in getting down to all the little numbers, to say "Okay, my tax bill is going up this year and this is the reason I'm paying more gas tax, or I'm paying more tobacco tax, or I'm paying more hospital taxes." So what we did was, we started with a model that Stats-Canada built and it has approximately eighty thousand Canadian families.

Steve: Maybe I should just interrupt. Stats-Canada, of course, is the Canadian Statistics Agency.

Niels: That's right. They collect all sorts of data, any sort of data from Canadians and Canadian companies. So what they did was they developed a model to examine how much tax Canadians pay per year and all the different types of taxes. So what we do is we can say "Family X", we can pick a family of these 80,000 families and say, they pay this much income tax, they have this many kids, they're married or not, they live in this Province, they get a national child tax benefit. So we can see all the taxes that they pay to the government and all the transfers that they get from the government. So what we do is, we take all these 80,000 individuals and we allocate, or we examine how much each family pays of the total Canadian tax bill. So this family pays, let's say, .0002% of the total income tax bill. Then what we do is we take the new numbers that the governments are budgeting (the new numbers always come out for 2003) and we allocate those new budget numbers to all these different Canadian families. So we can say, okay, Family X in B.C. is going to pay $45 of the total, or a certain percentage of the total tax bill in 2003.

Steve: Right.

Niels: So then we have these 80,000 families that are a representation of Canadians and how much tax they're going to pay in the current year. Let's say that's 2003. We then take an average of all those families and we figure out what's the average income and what's the average tax bill. And for this year in Canada, the average income was somewhere around $70,000 for a family that's greater or equal to two people, and the average tax bill was around $35,000. So, if you divide one by the other, the total taxes you're paying is 48%, so close to 50%, when you include all the different taxes. So what we do is, of course you can tell people it's 35,000 and your income is 70,000, again that's different for all families. So we take the ratio: how much tax they pay over their income. And so that's around 50%. And then we times that by 365 days a year. And that's how we get Tax-Freedom Day. So Tax-Freedom Day this year, in Canada, fell on June 28th, overall for Canada.

Steve: Is Tax-Freedom Day coming earlier or later, say over the last five years?

Niels: Well, that's a great question, actually. Tax-Freedom Day the latest date was in the year 2000. So it's been running up from 1961. I think in 1961 it was May 3rd; in the year 2000 it was July 2nd for Canada. So we've seen this incredible run-up. Steve: Say that again, from May Niels: From May 3rd, in 1961. Steve: Right.

Niels: To July 2nd in the year 2000.

Steve: Right.

Niels: And 2000 was the peak, so we've seen this incredible run-up over forty years. Steve: Right.

Niels: Over 40 years. And since 2000, we've seen a bit of a reduction, although it's seesawing back and forth. Steve: How does that compare with other countries?

Niels: Well, that's a good question. The problem with comparing other countries is you get into the methodology problem, which we have with The States. They calculate their Tax Freedom day based on aggregate numbers. So they just take the total tax bill divided by the total amount of income, which is not as, let's say precise. I don't want to say precise, but they don't provide as many details as we provide. Steve: Uh-huh.

Niels: So I've done the calculation using the US methodology, and we're about 45 days later than the U.S. So theirs falls on April 19th: ours, using their methodology, falls about on the 4th of June. Quite a bit. If you take that back to 1961, we were five days later than the US. So in forty years we've managed to open up the gap by 40 days. Steve: Wow.

Niels: Which is quite incredible.

Steve: Now, how do we compare with countries in Europe?

Niels: Again, it's too difficult to compare the methodologies between Europe and Canada. Steve: Right.

But, presumably, a country like Sweden would have an even later Tax Freedom Day.

Niels: That's right. I mean if you look at the total tax bill that Swedish people pay, it's much higher than Canadians. If you look at the amount the government spends as a percentage of our income, in Canada you're looking at about 38%, 39%. In the U.S., you're looking at 32%. In Sweden, I believe they're up and around 50%. Steve: But that's interesting, because the government spends 32% of the GNP, I guess, in the U.S. Niels: That's right. Steve: 38% in Canada.

Niels: That's right. Steve: But the tax bill in Canada is relatively much larger than this 32:38 ratio. Am I missing something?

Niels: The reason, and that's actually a great question. The reason that there's a discrepancy between the tax bill over the GDP as an aggregate number, is that Canadians don't include all incomes when they calculate. If you ask a Canadian, "How much is your income", they'll include wages and salaries, they'll most likely include some investment income, some interest income, maybe, on Canadian bonds. What they won't include are things like retained earnings, or future capital gains. Steve: Right.

Niels: And retained earnings, obviously, are factored into GNP. And they're not factored into Canadian's cash income, as we call it. Steve: I see.

Niels: So that's the discrepancy. Steve: Now, how long have you been here at the Fraser Institute?

Niels: I've been here coming on, or just over a year, actually. Steve: And what were you doing before?

Niels: I was teaching University and College economics.

Steve: Where?

Niels: At Simon Fraser and at Kwantlen.

Steve: Kwantlen, oh yeah, OK. And the Fraser Institute has been around for how many years?

Niels: Well Fraser started, I believe, in 1976. 1976, 1977.

Steve: Um-hmm. And did they apply, or were they looking for someone? How did you make the contact, the connection?

Niels: Well, actually there's a senior fellow by the name of Steve Easton who's a professor of Economics at Simon Fraser University, and he does work here quite regularly. I've worked with him throughout my university quote-unquote "career", and he actually got me involved with the Institute. He knew what I was interested in, and he said there were some jobs opening up and I should apply. And of course I took his advice and I ended up here.

Steve: A different question: There is a perception, at least some people realize that people with higher-than-average incomes pay most of the taxes. I mean some of the people try to suggest that all the wealthy people manage to get out of paying taxes. But the reality is that a very high percentage of the tax burden is paid for by a very small percentage of the population.

Niels: That's right. Steve: So then why wouldn't the majority of people, who are, in fact, getting "the free ride", who are getting "the goodies" that the wealthy are paying for, why wouldn't they politically want to keep on voting for governments that enable them to get money from the wealthy for programs that they benefit from? In other words, what is the political attractiveness of reducing taxes?

Niels: Again, a great question. I think our goal, at least the way I view our goal, is to teach people that if you reduce the role of government in their lives, people will make better decisions. They'll make better decisions about where they're going to put their money, what they're going to spend it on, where they're going to invest. They'll be increased entrepreneurship, increased wealth-creation. And in turn, when you have increased investment, increased wealth-creation, increased entrepreneurship, you get increased salaries. Because more capital increases people's productivity. Steve: So, some people might say, "You know, right now I've got my government-supported day care, I've got my government-supported whatever, you know these programs, therefore I benefit." And if I'm somebody who's in a, say, less-than-average income bracket, then I'm not paying my share of those. People with more money are paying for that on my behalf, through their taxes. "Gee, isn't that a good thing." You can see where people would think that.

Niels: That's right. But the tax and transfer system of the government isn't one that just taxes the very wealthy people and gives it all to the very low-income people. Steve: Right.

Niels: It takes from, of course it takes the most from the wealthy, but it also takes a big chunk from the average Canadian, and gives it back to the average Canadian.

Steve: Right.

Niels: So, we're taking money away and giving money to the average Canadians. And in turn, what they're really doing is telling people how they should be spending their money. Steve: Right.

Plus they are, it's a major job-creation activity for civil servants. Niels: Absolutely. The size of the Canadian government is quite alarming.

Steve: And I guess there is a concern that that is not efficient. Rather than taking money away from someone to give it back to them, but filtering it through an inefficient bureaucracy, you're better off to leave the money with them. Niels: That's right. Absolutely. They'll spend it much more efficiently; they'll invest it much more efficiently. Steve: Ok. Well, that's been a very interesting discussion. I thank you very much.

Niels: Not a problem. I appreciate it.