The Truth About Canada (18 page)

Let’s compare personal taxes of workers in the manufacturing sector. Production workers in Canada, on average, are taxed below the OECD average and far below the EU15 average. As a percentage of labour costs, personal income taxes in Canada plus any employee and employer social security contributions worked out to just over 32 percent in 2004. The OECD average was 36.5 percent, and the EU15 average was 40.8 percent.
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Of the 30 OECD countries, Canada was in 19th place in these taxes. Belgium was highest on the list at 54.2 percent, followed by Germany at
50.7 percent and Sweden at 48 percent. Mexico was at the bottom of the pack at only 15.4 percent, much as might be expected, given the low wages and relatively poor social benefits in that country.
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Let’s zero in on after-tax disposable income. Once again, contrary to the image presented so often by many of our politicians and much of our media, the disposable income of a single Canadian production worker as a percentage of gross pay (75.6 percent) is almost identical to the disposable income of an American production worker (75.7 percent).

This, of course, is interesting to consider when you look at how much higher Canadian social benefits are almost right across the board, but in particular when you compare personal and family health-care costs.

For a married couple with two children, the disposable income in Canada, at 85.7 percent, is only marginally below the U.S. rate of 88.5 percent. However, health-care premiums for the U.S. family cost many thousands of dollars and have been increasing rapidly every year, and at an accelerated rate in the past few years. Employer health insurance in the United States has been unravelling, with annual costs for a family of four now some $12,000 (see
Appendix One
). A key problem remains the extremely inefficient and costly fragmentation of the U.S. system, with administration costs of about 25 cents on every dollar. This compares with 2 cents for the Canadian single-pay system. Of the over 47 million Americans with no health insurance, almost half are full-time workers. Last year, there were almost 850,000 personal bankruptcies in the United States due to the inability to pay medical bills.

Let’s do a quick further comparison with taxes in the United States. Despite the fact that Canada’s total tax load leaves us down in 21st place compared to other OECD countries, we continue to get a steady cry from the same old right-wing gang that taxes in Canada are too high compared to those in the United States. Our taxes are, in fact, higher than those in only nine other OECD countries, but as we’ve seen, Canada’s corporate tax rate has already fallen well below the U.S. rate, and our manufacturing tax rate on capital is 33.1 percent, compared to the U.S. rate of 34.8 percent. On services, we’re down to 39.6 percent, compared to the U.S. rate of 40.2 percent. By 2005, the effective Canadian corporate income
tax rate on manufacturing pre-tax profits was down to 32 percent, compared to the U.S. rate of just over 37 percent.

By the way, the same big-business Canadian Council of Chief Executives (CCCE) corporations constantly bellyaching for even more corporate tax cuts — while at the same time recording all-time-record after-tax profits — have seen their marginal effective tax rate on business investment fall from 44.6 percent in 2000 to 37.7 percent in 2005, with further reductions scheduled for 2010 to about the same level as the U.S. rate. In a July 2007 letter to the
Globe and Mail
, federal Finance Minister Jim Flaherty said, “We are moving Canada’s overall tax rate on new investment from third-highest to third-lowest in the G7 by 2011.”

The Canadian Labour Congress, in a 2007 presentation to a House of Commons finance committee, made the following important point regarding taxes on new investment: “Marginal tax rates are not the appropriate measure of international competitiveness. An investor deciding where to locate a facility is concerned about the investment’s total tax liability, not the tax on the last dollar invested.”

For our corporate continentalists and compradors who want us to copy everything that happens in the United States, it’s worth asking if they would be pleased if we continued to drop our total taxes down below U.S. levels, and, by the way, how do they like the unprecedented U.S. government deficits and their rapidly ballooning debt? Perhaps ask them how they would pay for that debt, which is continuing to grow every year, with more big budget deficits guaranteed and forecasts by the Congressional Budget Office for hundreds of billions of dollars more debt a year over the next decade, with an accumulated debt headed for $10-trillion by 2009.

Whatever else you may want to say about them, the flacks for corporate Canada have been enormously successful in their campaign for lower taxes. For effrontery, you can’t beat this, from Thomas d’Aquino of the CCCE: “Lower corporate taxes pay for all Canadians.”

In the Conservatives’ 2006 budget, corporate manufacturing statutory tax rates were to be cut to 5.1 percent below U.S. rates by 2010, and Canada’s marginal effective tax rate will be lower than the U.S. rate.

Quickly, on to some other tax topics. Let’s start with one that costs you personally, as a taxpayer, a bundle every year — tax havens.

In March of 2005, Statistics Canada revealed that between 1990 and 2003, Canadian assets in tax havens increased from $11-billion to $88-billion. The largest growth was in Barbados, Bermuda, the Cayman Islands, the Bahamas, and Ireland. Most of the assets were in the financial sector.
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A 2004 University of Quebec study said that since 1991 our major banks have used tax havens to avoid paying $10-billion in taxes. One 2005 estimate by the Tax Justice Network put the tax revenue lost to tax havens by governments around the world at $255-billion (U.S.) annually.

Have you ever wondered why Canadian direct investment abroad is so high in the figures trotted out in an attempt to balance concerns about the buyout of Canadian industries by foreign companies? Here’s something you probably didn’t think of. A large and increasing share of that “investment” is tax avoidance. Money is being sent to tax havens at a rate now double what it was a decade ago. Canadian direct investment abroad in “offshore financial centres” increased eightfold between 1990 and 2003 to $88-billion, or about a fifth of all Canadian direct investment abroad. As you probably know, Paul Martin’s Canada Steamship Lines paid some of their taxes in Barbados at a 2.5 percent tax rate. And, of course, every dollar Canadian governments lose in tax havens is a dollar that comes out of the pockets of readers of this book.

By the way, a favourite trick of our corporate and “think tank” anti-taxers is to include a long list of tax havens in their overall combined list of country tax comparisons, giving, for example, the same tax weight to, say, the Cayman Islands as the United States, producing highly misleading results.

There are those, including myself, who have long suggested increasing the basic income tax exemption so fewer low-income Canadians have to pay tax. But as Roger Martin, dean of the Rotman School of Management at the University of Toronto, has aptly pointed out, increasing the basic personal income tax exemption across the board is poor
public policy, because as much as 67 percent of the tax benefit will go to people who are not low-income earners. Says Martin, “It’s a poor way to help the target group.”

Also poor public policy are the 2006 Conservative tax changes which saw the highest-income families, the top 5 percent, get 28 percent of the tax savings, while the lowest half of Canadian families saved only 20 percent.

While recent federal tax changes are nowhere near as lopsidedly in favour of the already well-to-do as they are in the United States, there’s no question that they mostly benefit the well-off while ignoring good public policy such as increases to the Child Tax Credit for low-income families, or an earned-income supplement for the working poor.

Meanwhile, incredibly, one-third of Canadian families with incomes of $100,000 or more are receiving a GST credit.
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In fact, only a quarter of the families receiving the GST credit in 2003 were classified as low-income.
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How’s that for great public policy?

I can’t leave the topic of taxes without a brief discussion of Ireland. If you pay any attention to the anti-taxers, Ireland is the shining new example of what low taxes can do for a country. Neil Brooks and Thaddeus Hwong in their CCPA study say,

There is little reason to suppose that tax cuts had much to do with the Irish economic miracle. Ireland reaped the advantages of huge European Union subsidies, particularly in the late 1970s and in the 1980s (reaching 6 percent of GDP), and even in the early 1990s. Ireland invested those subsidies in infrastructure, including free higher education. It had an English-speaking, well-educated, under-utilized labour force.…

It seems reasonably clear that the Irish miracle is due to a unique set of circumstances that cannot be duplicated in other countries simply by trying to imitate its beggar-thy-neighbour corporate tax rate strategy.

What I have found almost amusing and yet disgusting at the same time are the numerous corporate, individual, and media complaints about how the well-to-do have been paying more than their share of the tax burden. But what the press reports often somehow fail to mention is that the same people pay a higher share of taxes because they take in much more than half the income and have much more than half the wealth, as you have seen in the preceding chapters.

I have been writing and speaking about the major problem caused by excessive foreign ownership and tax revenue lost in transfer pricing in Canada for years, but alas there is no room to do this important topic justice here. In 2004, there was finally a major court decision that shed further light on the problem. Mr. Justice Peter Cumming of the Ontario Supreme Court ruled that the Ford Motor Company had been cheating Canadian shareholders for years by unfairly transferring profits out of the country, disregarding the interests of Canadian investors while the U.S. parent company manipulated prices on vehicles and parts sold to and purchased from its Canadian subsidiary to avoid Canadian profits and taxes. My own educated guess is that transfer pricing has cost Canadians close to $20-billion a year in lost tax revenue. (For an excellent article on transfer pricing see the March 2007 issue of the CCPA’s
Monitor
, written by a former vice-president of Pfizer, Peter Rost, who knows something about the topic.) Of course, while corporate taxes are now lower in Canada, transfer pricing for tax reasons should be less of a problem, but foreign firms will undoubtedly continue to charge their Canadian affiliates unfairly for goods and services, if only to avaoid sharing profits with their Canadian shareholders.

As for the great baloney from the Fraser Institute, Conrad Black, and the
National Post
on the supposed brain drain from Canada to the United States, late in 2006 Statistics Canada supplied even more evidence showing that the number of men and women leaving Canada was exceedingly low, about 0.1 percent in any year, and that the numbers have been dropping substantially in recent years. In the words of Queen’s University’s respected economist Ross Finnie, “What people thought was rising inexorably has come down substantially — even dramatically.”
My only regret is that the once-departed Conrad Black has indicated that he would eventually like to regain his citizenship, though I personally would not regard his permanent departure as any kind of a lamentable brain drain.

The Harper government has announced plans to reduce the GST from what was once 7 percent to 5 percent. While this may be good politics, it is not very good economics if we look at the available alternatives. For example, as we have seen, personal income taxes in Canada are higher than the OECD average and higher than the EU15 average. However, if we look at federal and provincial taxes on goods and services as a percentage of GDP, of all the 30 OECD nations, 26 have a higher tax. Canada, at only 8.8 percent in 2003, was far below the OECD average of 11.5 percent, and even further below the EU average of 12.2 percent.
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So, since we were already way down in 27th place in taxes on goods and services, and since our personal income taxes have long been so high, why cut the GST to even lower levels? True, someone buying expensive jewellery or an expensive home or new Bentley will save a bundle, but a 1 or 2 percent saving on even inexpensive household items represents only pennies. Yes, pennies to a poor person are important, but 2 percent of the cost of a million-dollar house could pay for a big pile of groceries for many poor families.

When the GST dropped from 7 to 6 percent, the cost to the national treasury was in the billions of dollars a year. Imagine what that sum could do for a child-care program or for housing for the homeless, or to help feed hungry children, or to provide more scholarships for low-income students, or to help implement the abandoned Kelowna Accord.

The anti-taxers, in the words of Carol Goar of the
Toronto Star
, “refuse to believe that the public services they get — health care, good schools, reliable pensions, clean water, livable cities — are worth the taxes they pay.” What organizations like the C.D. Howe Institute and the Fraser Institute (both essentially funded by the very same big-business corporations) have been able to do is disconnect the benefits we receive from the taxes we pay.

Linda McQuaig puts it well:

Clearly, we can’t have the kind of public services Canadians say they want without paying for them. Just as there’s no free lunch, there’s no free health care — or free garbage pickup. But this fundamental fact is omitted from the fantasy world presented to us by the right-wing tax-cutters.

Meanwhile, the people of Europe and Scandinavia pay a lot more tax, but they get a lot more services — like national day care, extensive parental leaves, comprehensive home care and drug programs, free dental care for children, free university tuition — things that would be dismissed here as pie-in-the-sky dreaming.
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