Some myths are just so hard to debunk. For instance, people in Québec generally assume that they are the most taxed in North America. IRIS tackled the well-rehearsed allegation in a recently published socio-economic notice. The reply resounded of what Edward S. Herman and Noam Chomsky have presented in Manufacturing Consent as flak. Here’s a short demonstration of how strongly myths are defended in Québec nowadays.
Our demonstration was quite simple. We compared tax rates in various countries using OECD methodology. At the OECD, they compare the net tax burden for eight typical households. We calculated the net tax burden of all eight OECD-selected households (explained in Table 1) in Québec and compared each with the net tax burden found in the other countries.
Table 1: The eight typical households selected by the OECD
|Living arrangement||Attributed income (% average salaries)|
|Single-parent family (2 children)||67|
|Couple without children||100 and 33|
|Couple with 2 children||100|
|100 and 33|
|100 and 67|
What did we find? First, that Québec is far from being a scandinavian state in North America, as is sometimes claimed. We are always closer to the English-speaking countries (UK, Canada, United States, Australia) than to countries with high taxation rates like Germany, Denmark, or Norway.
The living arrangements we studied (single persons, single-parent families, couples with and without kids) cover nearly all of existing household types according to Statistics Canada. We compared the income selected by the OECD (in % of the average salary) to the median income in Québec for people living in that type of household. The median income was similar or inferior to the income of the households studied, which already pay less income tax than in the United States or the rest of Canada. Hence, on the one hand, half of the population earns an income inferior to the median and, on the other hand, Québec taxes poorer people less than its neighbours in comparison. Therefore, the myth regarding Québec’s fiscal burden being the highest in North America is disproven for a majority of Québeckers.
The reaction was sharp and immediate. La Presse ran two financial columns (from Mr Dubuc and Mr Vailles) and an open letter to disprove our findings. The Association des économistes québécois also published on its website a disparaging blog post on our research.
Wikipedia gives the following definition of “flak”, following Chomsky and Herman:
“The term “flak” has been used to describe what Chomsky and Herman see as efforts to discredit organizations or individuals who disagree with or cast doubt on the prevailing assumptions which Chomsky and Herman view as favorable to established power. Unlike the first three “filtering” mechanisms — which are derived from analysis of market mechanisms — flak is characterized by concerted efforts to manage public information.”
Faced with such a sustained barrage of criticism, we were obviously concerned about having let a mistake slip through the cracks. Especially given the harshness of the criticism. In the end, the objections were restricted to these three themes: our research didn’t address the situation of the rich enough and didn’t take into account, on the one hand, consumption taxes and, on the other, the tax revenue-to-GDP ratio.
We wrote a rebuttal, which La Presse published, to counter the first objection. Roughly speaking, we are accused of caring about the majority of people and not about the richest 11% of taxpayers. Our answer was quite simple: by concentrating on a more affluent minority, our critics do not realize that the situation they describe and decry does not apply to most people.
Following the publication of our notice, many people said: “Yeah, but what about consumption taxes?” We didn’t include them in our calculations simply because the OECD itself, in its comparative data, doesn’t. It would not have been conclusive, now would it, had we included them when the data with which we were comparing it did not! But since people raised the question, we took a second look in another blog post at the situation of the households under study and added in consumption taxation.
Result? Actually, if we compare the typical household at or under the median income in Ontario and Québec, we realize that adding sales and gas taxes does not bring down Ontarians’ tax burden lower than that of Quebeckers, as shown in Table 2. We did not include single-parent families because data is insufficient. However, Québec’s tax rate for those households is just so much lower than elsewhere that it’s impossible that including sales tax would make a difference.
Table 2: Net tax burden, Québec and Ontario, including sales and gas taxes
|Person living alone (67% of the average wage)||22.3 %||23.3 %|
|Couple with children (167% of the average wage)||22.5 %||23.2 %|
|Couple without children (100% et 33% of the average wage)||24.3 %||22.2 %|
GDP and tax
In his piece, La Presse columnist Alain Dubuc refers to the tax revenue-to-GDP ratio to determine which countries are most taxed. Economist Jean-Claude Cloutier measurement also put forward that measurement on the Association’s website.
It’s a good thing that they mention that indicator, which is indeed of interest. It’s a stable and comparable indicator which can establish a verifiable ratio in different countries. From that perspective, Québec does indeed seem slightly more taxed than its neighbours.
As can been seen in Table 3, in 2009, according to Statistics Canada’s data, the taxes paid by individuals in Québec corresponded to 12.6% of its GDP, whereas in Canada, the proportion was 12.1%. According to OEDC, the ratio was 8.1% in the United States the same year.
Table 3: Individual tax revenue-to-GDP ratio, Québec and Canada, 2009
|Taxes collected by Ottawa||114,321||Taxes collected by Québec||21,806|
|Taxes collected by provinces and territories||74,901||Taxes collected by Ottawa||18,147|
|Tax revenue / GDP||12.1 %||Tax revenue / GDP||12.6 %|
Sources: Statistics Canada, CANSIM, Table 385-0001 and Data Tables from the Provincial and Territorial Economic Accounts.
As Mr. Dubuc also signals, Québec would thus have higher taxes than Norway (10.3%). He also mentions Sweden, but according to OEDC data, in 2009, the Swedish people were slightly over the people of Québec (13.4%).
Wait a minute, Norway and Sweden? These countries which in all our typical cases are systematically more taxed than in Québec, and by many percentage points? Strange, isn’t it?
Even Germany gets a 9.5% ratio according to the OEDC, very close to the United States, whilst they are with Denmark (26.3%) systematically at the bottom of the list for each typical household. Indeed, they tax a person living alone and earning 167% of the average wage a tremendous 44% of his or her income (nearly more than 15 percentage points more than in Québec!). So they’re less taxed than us, you say?
In contrast, New Zealand has a tax revenue-to-GDP ratio of 13%, superior to that of Québec. However, the Fraser Institute elevates it as a model of economic freedom —i.e. a model for low taxation rates, amongst other things— according to its Economic Freedom Index. Indeed, its maximal marginal tax rate is 33% whereas it’s 53% in Québec. Marginal tax rates are not everything, but such a great difference should surely have an impact on the tax revenue-to-GDP ratio?
So what explains these surprising situations? Well, it’s simple: the fact that, despite simplistic presentations, there is no direct causal link between tax payments and GDP size: the link is indirect and multifactorial.
The GDP being an aggregate, a series of factors can cause variations from one country to another. Firstly, economic productivity is not necessarily linked to wages, which explains in part the German case. The Germans are very taxed, but their economy produces so much wealth that, when we compare the GDP with the collected taxes, they don’t seem to be paying that much in tax. However, it doesn’t mean that taxes do not eat into their personal income. A simple comparison of the tax revenue-to-GDP ratio completely hides this reality.
Another variation influences the result: the portion of services offered without a profit being made. Smaller states offering a large number of free public services (such as Denmark or Québec) are thus at a disadvantage because it artificially lowers their GDP compared to other countries.
Same thing for the portion of value production which is not related to work (and thus to the increase in personal income) in the GDP. It results in a greater GDP without correspondingly increasing the tax revenue.
All in all, attacking tenacious myths provokes vociferous reactions. However, despite all the commotion, the staunch advocates of the myths are not convincing.
This article was written by Simon Tremblay-Pepin, a researcher with IRIS—a Montreal-based progressive think tank.