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OTTAWA—Each summer the Fraser Institute announces the arrival of “tax freedom day:” the day when Canadians allegedly stop “working for the government” and start “working for themselves.” A study by Neil Brooks, released today by the Canadian Centre for Policy Alternatives, takes a closer look at Tax Freedom Day and finds that to arrive at this politically loaded and heavily-reported date the Fraser Institute’s calculations understate the income of Canadians, overstate their taxes and misuse the concept of averages.
”The concept of Tax Freedom Day is a gimmick designed to suggest that Canadians derive no benefit from the taxes they pay when nothing could be further from the truth,” explains Brooks. “With their taxes, Canadian citizens buy their most valued goods and services: high-quality public schools, world-class universities, excellent medical services, public parks and libraries, safe streets, and livable cities.”
In addition to reinforcing the suggestion that the goods and services Canadians provide to themselves through their taxes do not enlarge their freedoms or enrich their lives, the methods used by the Fraser Institute to calculate Tax Freedom Day are also deeply flawed.
To determine family income, the Fraser Institute uses a family’s cash income—a much more limited definition of income—rather than a family’s total income before taxes. This gives the impression that Canadian families pay much more of their income in taxes than they actually do, and also ensures that tax freedom day falls much later in the year than it would if a more accurate method of calculating tax burden had been used. In 2004, according to the Institute, the average family paid over 48% of its total income in taxes and tax freedom day fell on June 28. However, if the Institute had based its calculations on an average family’s total income, only about 31% of that family’s income would have gone to taxes and tax freedom day would have fallen on April 30—58 days earlier.
In addition, the Fraser Institute bases its calculations on the “average” family as opposed to the “median” family. Because income is distributed so unequally in Canada, the average income of families is much higher than the income of the median family– the family in the middle of the income distribution scale. The majority of families earn much less than the average income and their effective tax rates are lower than that of the statistical average family.
“Even if it were useful to inform Canadians how many days they had to work in order to earn enough to pay their taxes, the information the Fraser Institute presents about the tax system is flawed, misleading, seriously distorts public knowledge, and hinders rational debate about the tax system,” concludes Brooks.
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