A Tale of Two Worlds

Commentary, Frontier Centre, Taxation, Uncategorized

Most Canadians gritted their teeth and filed their 1998 income taxes last week. Why, they might fairly ask, does government cost so much?

The great divide between the public and private sectors, in terms of productivity and efficiency, continues to expand. Over the last generation, the prices of products in competitive markets have plummeted, while those delivered by governments have become much more expensive.

A recent Wall Street Journal article tells the first story. Personal computer prices have fallen 85% in the last 15 years. VCR prices are down by 75%. A cellular phone now goes for just 2% of what it cost in 1984.

Even traditional big-ticket items have become much more affordable. The hours of work the average person must dedicate to purchasing them have fallen spectacularly. Compared to 1970, prices expressed in hours of work are down 40% for refrigerators, 60% for dishwashers, 64% for dryers and 80% for electric stoves. The average house now contains two more 16’x20′ rooms than it did in 1970, and the number of cars per 100 people has jumped 83%. Three out of four households own two or more televisions.

Even the poorest have progressed rapidly. Three out of four households below the "poverty line" have at least one car; up from 64% in 1980; 72% have washing machines, up from 58% in 1984. Only 5% percent of the bottom fifth of all income earners from 1983 are still there. Although these statistics are American, the same dynamic is at work in Canada.

The market economy has proven to be an enormous engine of social progress. Can we say the same about the compulsory sector, particularly the cost of government goods and services?

Hardly.

A month ago, the Fraser Institute released the latest data on the total taxes paid by the average Canadian family. They have mushroomed 1,286% since 1961. According to Tax Facts 11, the latest in a series of studies conducted every two years, the tab rose from 33.5% to 46.4% of family income from 1961 to 1998.

In 1961, the average family had an income of $5,000 and paid $1,675 in taxes. In 1998, the average family earned $49,996 and paid $23,218 in direct and hidden taxes to all three levels of government. The share of family budget needed to meet this liability now exceeds the cost of food, clothing and shelter combined.

The usual rationalization for this explosion of government consists in the mantra, "Help the poor." But are we? Tax Facts 11 illustrates how the burden of taxes falls on those least able to pay.

For instance, senior citizens pay 48.2% of taxes levied on corporations in Canada. Retirees receive a large part of their incomes from pensions invested in corporations. High corporate taxes reduce their profits and returns to shareholders.

Even more vulnerable are those who seek to rise from poverty through hard work. Tax Facts 11 tracks the taxes paid by a hypothetical Canadian whose income grew from half of the average in 1961 to twice the average in 1998. If his income grew from $2,750 in 1961 to $99,990 today, his tax bill would have grown 5,174% from $960 to $50,630. Scarcely an incentive for improvement.

Until recently, Canada’s inherited and natural wealth let our governments "muddle through" without serious consequences to the national economy. No longer: in today’s ultra-competitive world we have to find a way to make government services perform for us as well as consumer markets do.

It will happen soon when governments figure out that competition and choice drive innovation, efficiency, and lower costs.