How Fair Are Our Taxes?

BY ROBERT KIENER

FOR YEARS we have heard that Canadians -- rich and poor and those in between -- disagree about tax fairness. According to conventional wisdom, the middle class and the poor think the rich should pay a heavy share. Supposedly, the rich think otherwise and manage to pay very little.

       True?

       Last December The Digest commissioned Gallup Canada to conduct an exclusive poll to discover what Canadians really think. Our key findings:

There is a strong consensus on the issue of tax fairness. When asked to name the highest total tax a family of four should pay, respondents across economic, ethnic, ideological and age lines answer with surprising uniformity: 29 percent.

Another crucial finding is Canadians' extraordinary personal unhappiness with the amount they themselves pay in taxes. An astounding 83 percent of respondents feel their own total tax payments are "too high."

THE READER'S DIGEST/GALLUP CANADA poll was administered by phone last December to a cross section of 1,014 Canadians. For each question, we asked respondents to think about "not just federal income taxes but all the taxes you pay to the federal, provincial and local governments, including income and sales taxes, and local property taxes."

       We asked: "About what percentage of your total income do you think you pay every year when you add all these taxes together?" Then we asked respondents to consider the same question for various families of four, each of which earned a different income.

       Evaluating their mean responses, we found that respondents underestimated their own and other families' tax burdens by as much as 25 percent. For example, Canadians think a family earning $100,000 pays only 39 percent of their income in taxes when the figure is in reality over 50 percent. Asked to estimate their own overall tax burden, respondents do better. The mean response of 41.75 percent is closer to the actual national average of 48.2 percent.

       "It's not surprising that so many Canadians in your poll underestimated their own and other families' tax burdens," says Walter Robinson, federal director of the Canadian Taxpayers Federation. "We are so overtaxed -- paying everything from income to liquor to airport departure taxes -- that we have become numb to all these taxes." Robinson and others say Canadians are suffering from "total tax fatigue."

       Respondents we contacted after completing our poll were surprised that they had underestimated the taxes people pay.

       Such confusion over taxes is understandable. "Each year brings a new form of tax," says Linda Spencer, a 45-year-old financial claims analyst with Blue Cross in Moncton, N.B. "So it's hard to know how much we are paying in taxes." Spencer, a single mother of two who makes $25,000 a year, reports that because of higher and higher taxes she is "far worse off financially" than she was ten years ago.

       "I used to think I'd be able to get ahead once both children had grown and left home. But because taxes have increased so much, I'm worse off now than when they were living with me."

WE ALSO asked respondents about tax fairness. "What," we wanted to know, "is the highest percentage you think would be fair for a family making $200,000 a year to pay when you add all their taxes together?"

       A perennial claim is that taxpayers are angry because they think other Canadians aren't paying enough taxes. "People are especially frustrated when they hear about millionaires and corporations that don't pay their fair share of taxes," says Liberal MP Dennis Mills.

       But despite the often-heard belief that the poor and middle class resent "the privileged," our poll found that Canadians at every income level think we are all overtaxed.

       Canadians earning less than $30,000 think a family of four earning $200,000 should pay no more than 34 percent a year in taxes.

       In real life, such a family pays, on average, 51 percent of its total income in taxes. Nearly 40 percent of respondents feel those earning $200,000 are paying too much tax.

       When we worded the question a little differently, respondents cited an even lower rate as fair. This time people were asked to consider a family of four "that makes a high income." What is the "highest percentage that you think would be fair for any family to pay in all their taxes combined, no matter how high their income?"

       The maximum tax burden Canadians think a family of four should bear is 29 percent. That's not just federal income tax. That's 29 percent for all major levies combined -- federal, provincial and local -- including income, sales and property taxes.

       In fact, most Canadians pay far more than 29 percent: The average family of four pays 48.2 percent of their income in taxes.

       The consensus was striking; roughly 29 percent was suggested by those in their 30s and those over 65, English speakers and French speakers, even conservatives and liberals.

       "This consensus is startling and indicates a growing dissatisfaction with the government's taxation policies," says Gary Edwards, vice president and general manager of Gallup Canada. Edwards, who conducted the Reader's Digest poll, has over a decade of experience in survey research. "It is intriguing that taxpayers across Canada, regardless of their age, politics or class, had such a similar idea of what is the 'ideal' fair tax. It indicates an opinion that is pretty much nationwide."

TO A REMARKABLE degree, different groups of Canadians agree that they themselves pay too much in taxes. The percentage is the same for residents of British Columbia and the Atlantic Provinces (84 percent), virtually the same for men and women (84 and 81 percent) and for English and French speakers (82 and 84 percent). Liberals and conservatives differed by a mere eight percentage points: 87 percent of self-described conservatives feel their taxes are too high, compared to 79 percent of liberals.

       Canadians with children living at home are especially dissatisfied: An incredible 100 percent of those with three or more children between ten and 17 say they pay too much, versus 81 percent of those without children at home.

       Overall, just 15 percent of respondents say the taxes they pay are fair.

       This broad dissatisfaction has not always been the case. According to survey research from the Gallup Organization, as recently as 1962, Canadians were almost equally divided between those who thought their taxes were "too high" (47 percent) and those who thought they were "about right" (43 percent).

       Since then, though, the percentage of dissatisfied Canadians has risen steadily. By 1975, 66 percent thought their taxes were too high and only 27 percent were satisfied -- a 39-point gap. By 1987, the gap had widened to 49 points, with 72 percent dissatisfied and 23 percent thinking their taxes were fair.

       What happened? According to Michael Walker of The Fraser Institute, people began to lose confidence in the government -- as their taxes went up, up, up. The tax bill for the average Canadian family increased by 139 percent (after inflation) between 1961 and 1998. "Since the 1960s, Canadians have watched public services deteriorate as more and more of their tax dollars are used to pay interest on the public debt. Everything from health care to road maintenance to education has been cut back," Walker says.

       Poll participant Douglas S. Thompson, 73, of Amherst, N.S., feels strongly that the government doesn't need to take 50 cents out of every dollar Canadians make. Thompson, retired from the Department of Transportation, where he worked for over 30 years as a road grader and superintendent, says: "I know. I've seen the waste and the expensive, needless bureaucracy of government firsthand. You could easily get the same services for half the cost."

RESPONDENT Beth Mathison and her husband run a small subcontracting company in Sylvan Lake, Alta. "We never feel we are getting ahead." says Mathison. "If we make more money, our taxes get higher; it makes me not want to work harder than I already am."

       Their employees agree, claiming they are penalized when, after a few raises, they find themselves in a higher tax bracket. Mathison does the payroll for her firm and confides she is shocked at how much money she has to deduct from employees' wages for taxes. All that money goes into the government's pockets, not the workers'. "I understand why they are frustrated. Higher and higher taxes stifle initiative," says Mathison.

       Poll respondent Paul Pridham, a Vancouver husband and father of three young children, works two jobs to cover expenses. "Taxes are too high and there are too many of them. It seems that every time I get a raise, the government wants a raise," he says.

       Some politicians, sensing wide and profound dissatisfaction with the status quo, have proposed significant changes to the federal income tax. For example, MP Dennis Mills has called for a single tax system to replace the Income Tax Act (more than 1,500 pages long) of different rates and deductions with a single, low rate for everyone.

       Last March the Alberta government announced plans to set up a flat-tax system by the year 2002. Under the proposal, Alberta taxpayers across the board would pay 11 percent on taxable income after deductions. Period. (Fifty-four percent of the people we polled favour a flat tax.)

       Other politicians advocate allowing homeowners to deduct mortgage interest payments from their taxable income, as is done in the United States (62 percent favour this).

THE MAJORITY of respondents bemoan the fact that Canada's tax rates are so high. Indeed, no other G-7 country (the United States, Britain, Japan, Germany, France and Italy) takes as big a personal income bite out of its economy as Canada does: Canada's tax rate is 47 percent higher than the average G-7 rate.

       Canada's total tax burden is 14 percent higher than the U.S. rate, one reason Canada is losing many of its best and brightest to a "brain drain" south. [See "Are We Losing Our (Best) Minds?" Reader's Digest, January '99.] "The brain drain is a national disaster that could be largely averted by changing our tax laws," says Walter Robinson. Canadians pay the top marginal income tax rate (combined federal and provincial) of 52 percent on an income of just $59,000. Taxpayers in the United States pay the top rate of 47 percent only when their income hits the equivalent of $351,000 Canadian.

THE READER'S DIGEST/GALLUP CANADA poll clearly reveals that the vast majority of Canadians feel the present tax burden is unfair. There is in this country a sweeping and deeply held belief that we are all overtaxed.

What do you think of this country's tax system? To post your views, use the submission box in Join the Debate. Your comments may be used in a future issue of Reader's Digest magazine.

PHOTOS: (TOP) © DAN CALLIS; (BOTTOM) © CHICK RICE

ADAPTED FROM AN ARTICLE BY RACHEL WILDAVSKY