Until quite recently, it seemed there was only one solution to all of Canada’s social and economic problems: raise taxes and create government programs. This is why Canadians in general, and Quebecers in particular, are subjected to high marginal tax rates.
Today this approach seems less widespread. According to a poll published in November 2001, 64% of Canadians (and 74% of Quebecers) would prefer to have governments lower their taxes to activate a sluggish economy rather than increase spending.
Despite this, we read regularly in the newspapers about demands from various pressure groups that tend to encourage greater interventionism. These demands can be summed up more or less as follows: let’s increase government spending and make the rich pay. According to this line of thinking, the wealthy pay scarcely any taxes because of the various tax planning tricks they have available. With the additional taxes that could be collected, social programs could be better financed, thereby eliminating poverty, spurring the economy and hiring more civil servants to supervise the colour of margarine.
But are there really all that many wealthy citizens in Canada who can be taxed more heavily?
According to 1998 tax returns, 72,660 people in Canada earned more than $250,000 per annum. This represents 0.3% of households filing tax returns. But these taxpayers accounted for 14% of all income tax collected, or about $15 billion. And they paid this amount despite the fact that they received only 7% of total income. In other words, their share of taxes represents double their share of income, putting their implicit average taxation rate at 36%. By way of comparison, people earning less than $25,000 paid just 8% of income tax collected while earning 23% of income, giving them an implicit taxation rate of 7,6%. If we add other forms of taxation, the share of total tax receipts paid by the wealthiest would probably be even higher.
Consolidated public spending on social programs in Canada reached $120 billion in 1997, excluding education and health. If we add these two latter categories, the amount rises to $240 billion, equal to 60% of total public spending. Let’s suppose we want to increase this spending by “only” 10%, in other words, by $24 billion, and to finance this increase solely from the pockets of the “wealthy.” What impact would this have on them? Would their tax contribution go up by 10%, by 20% or, perhaps, by 30%?
In point of fact, they would be hit with a staggering 170% increase! Even assuming this type of tax policy could be applied effectively, is it realistic to believe we could increase taxes by 170% on the most mobile members of our society without triggering an exodus? To ask the question is to answer it.
Well, then, could we not broaden slightly the definition of “wealthy” given above and extract higher taxes from everyone with gross annual incomes higher, say, than $70,000 per annum? Let’s see what happens. Statistics Canada figures for 1998 show that families with incomes in the highest quintile (in other words, the wealthiest 20% of the population) paid more than half (52.2%, to be more precise) of income tax paid by all Canadian families. This represents a level 4.2 points higher than 10 years ago. The top quintile includes the “wealthy” who benefit from a gross annual income of $70,000.
To conclude, the wealthy (whether real or imaginary) already pay a high proportion of total taxes. The belief that they don’t pay much to the taxman is just a myth. In the long term, the only foreseeable effect of excessive taxation is a gradual decline in the number of taxpayers in truly high income categories.
Governments cannot finance any significant increase in public spending on the backs of the well-off without killing the goose that lays the golden egg. Higher income for all citizens resulting from economic growth is the only realistic and viable solution.
Michel Kelly-Gagnon est président de l’IEDM.