Note: I am choosing to engage the concept of ‘Tax Freedom Day’ on a methodological basis rather than commenting on the fact that it focuses on costs rather than doing a cost/benefit analysis. If you want more on that topic, comment below!
Tax Freedom Day. A popular phrase and concept, but what is it really measuring?
In Canada, it is published by the Fraser Institute. You can read their report from 2013 here.
On its face, it seems like a totally reasonable thing. There are lots of hidden taxes, manufacturing taxes, the employer portion of CPP, QPP, and EI, etc…
They also make the (I think reasonable) statement that the total tax burden on businesses ultimately expresses itself in the goods and services they sell:
“Although businesses pay these taxes directly, the cost of business taxation is ultimately passed onto ordinary Canadians.”
Leaving the main purpose of these taxes as social engineering, implementing the decisions we have made as a society as to how to incentivize people to spend their money. (But then, all taxation decisions do this, and that is a much larger topic.)
They even say nice things like “Most Canadians would have little difficultly determining how much income tax they pay; a quick look at their income tax return or pay stub would suffice.”
1) Capital gains (unknown number of days)
But here’s the catch. They compare ‘Cash Income’ with tax from all sources. For example, they include ‘Income tax’, including all taxes on income, which includes all taxes on capital gains, but not the income from capital gains, or as they put it, in their own words:
“…total income before taxes includes deferred incomes such as investment income accumulated by pension plans, interest accumulated on insurance policies, and corporate retained earnings. While these types of incomes are accumulated, they are not paid to Canadian families in the current year, and thus should not be considered as part of their income for Tax Freedom Day calculations.”
So their conclusion is that any time shifting of income qualifies it as ‘not income’.
Anyways, the point is that their methodology includes capital gains taxes, but not capital gains income.
2) ‘Average’ vs. ‘Median’ (11 days)
The Fraser Institute notes that the ‘Average’ (arithmetic mean) family income is $97,254, and ‘pay[s] a total of $42,400 in taxes’. Note that this is 43.6%. This will be important later.
Combining the report with StatsCan data:
The StatCan Income by Decile:
We can intuit that the median 2+ person ‘economic family’ as an annual cash income of $72,300, or about 7.55% of the total, and pays about 6.85% of the tax burden or about $29,065, or about 40.55% of their ‘cash income’ in taxes. This is a difference of 11 days.
(Compare with the Fraser Institute report table 9 on page 9, note that unlike the provincial comparison table (table 7, page 7), it does not include the income levels of the deciles)
Looking at their own table 9, their usage of ‘average’ income means that the ‘tax freedom day’ is overstated for roughly 65% of the population.
3) ‘Economic Families’ of two or more people vs. those living alone. (8 days)
This is a smaller point, but in table 6 on page 6, they show that the ‘families with two or more individuals’ tax rate of 43.6% (their headline number), when ‘unattached individuals’ are included is reduced to 42.4%
If they weren’t trying so hard to convince people that taxes are high, it would feel like they’re making the social judgement that families of two or more are the default, and anything else is odd.
Bottom line: Don’t believe everything you read. With very little work, I’ve shaved 19 days off the headline number used by any number of mainstream news publications. I’m sure there’s a lot one could say in addition on this topic, about income redistribution and income sources.
The Fraser Institute has a very specific agenda that they are pushing, however much they proclaim otherwise. Caveat Emptor.
Note: Incidentally, whoever decided that copy-paste from .pdf files should break all the formatting and insert all kinds of line breaks should be made to manually fix all of the files by hand.
I’m using 2013 as a basis, because I can easily find the 2013 StatsCan decile data. If you want to read the 2015 Fraser institute report, you can read it here: