By Jake Fuss
and Milagros Palacios
The Fraser Institute
Have you ever wondered how much you actually pay in taxes each year?
While tax returns help us understand how much income tax we pay, it’s difficult for most Canadians to calculate their total tax bill.
In Canada we pay many taxes to the federal, provincial and local governments. Some of these taxes are visible but many are hidden, which adds to the confusion about how much we actually pay.
Not only do we pay income taxes, we pay property taxes, payroll taxes such as the Canada Pension Plan, health taxes, sales taxes such as the GST, carbon taxes, taxes on gasoline, taxes on imported goods, ‘sin’ taxes and so on.
To be clear, Tax Freedom Day doesn’t measure the benefits or quality of services Canadians receive from government in return for their taxes. Rather, it looks at the price paid to receive a product in the form of government.
Understanding your family’s total tax burden is important to assess the value you receive from government services and income transfers. It’s ultimately up to Canadians to decide if they receive good value for these services.
In 2020, we estimate the average Canadian family (consisting of two or more people) earning $115,735 will pay $43,671 in total taxes – or 37.7 per cent of their income. In other words, if you paid all your taxes for 2020 up front, you’d give government every dollar you earned before May 19 – Tax Freedom Day.
After working the first 139 days of the year for government, you’re now working for yourself and your family.
However, there isn’t much to celebrate this year.
This year, Tax Freedom Day came much earlier than usual because the estimates of income and total taxes for average Canadian families have been significantly impacted by the COVID-19 recession.
The earlier date has nothing to do with the federal government or any provincial government reducing taxes.
When the economy slows and incomes decline, the average family’s taxes tend to be reduced to a greater extent than its income. There are several reasons for this, including Canadians falling into lower income tax brackets due to lower incomes and reductions in sales taxes paid due to reduced consumption.
Canadians may rightfully also be thinking about the economic and tax implications of the budget deficits our federal and provincial governments will run this year. The federal government projects a $252.1-billion deficit in 2020, while cumulative deficit for the provinces is expected to reach $63.1 billion.
Of course, today’s deficits must one day be paid for by taxes. This means the combined projected federal and provincial government deficits of $315.2 billion should be considered as deferred taxes.
So if Canadian governments had to raise taxes to balance their budgets instead of financing spending with deficits, Tax Freedom Day would arrive more than two months later, on July 26.
The economic responses to COVID-19 will undoubtedly have large future implications for levels of taxation and the state of government finances for the federal and provincial governments.
May 19 may seem early for Tax Freedom Day, but without a significant change in policy direction, all signs point to a much later day in the future.
Jake Fuss and Milagros Palacios are analysts at the Fraser Institute.