fpinfomart.ca

Caution: hidden taxes: A true picture of
government spending reveals non-tax revenue sources. When it comes to raising
revenue, governments are many-handed creatures
National Post
Mon 07 Jun 2004
Page: FP15
Section:
Financial Post: Comment
Byline: Yvan Guillemette and Jack
Mintz
Source: Financial Post

During the current election campaign, parties have
taken quite different positions on tax policy: The New Democrats advocate tax
increases, the Conservatives a tax cut and the Liberals want neither. In
evaluating these positions, many Canadians may wonder how Canada's tax levels
stack up against those of other industrialized nations.

In comparing total government tax levels among OECD countries, including
Canada, commentators often quote tax-to-GDP ratios, while ignoring such
non-tax revenues raised by governments as oil and gas royalties, as well as
user fees and profits of public enterprises. Unlike taxes, payments that are
independent of any service or benefit provided to the public, non-tax revenues
are usually a compulsory payment made by an individual or business for a
specific public service; for example, driver's licence fees are non-tax
revenues, while the new Ontario health premium is a tax.

Canadian governments raise a relatively large amount of revenue:
$497-billion in 2003, close to 41% of national income, or $15,770 per capita.
That was down a little from 2001 -- the most recent year for OECD data
comparisons -- when Canadian government revenues reached a record 44.1% of
GDP.

Canadian governments are neither high nor low tax collectors when only
traditional taxes are considered (see table). Canada's tax-to-GDP ratio was
35.1% in 2001, the 18th highest for the 25 OECD countries. Canada's tax-to-GDP
ratio is significantly higher than that of its largest trading partner, the
United States, as well as that of the fastest growing economy among all
countries, Ireland, and resource-based Australia. On the other hand, Canada's
tax-to-GDP ratio is well below most European countries, including the United
Kingdom.

However, this comparison masks a critical fact. Although governments in a
lot of countries raise more revenue than Canada, very few use non-tax sources
to the extent that Canada does. In 2001, all government revenues other than
tax amounted to 9% of GDP in Canada, far outranking most other nations -- only
Sweden, Norway and the Slovak Republic collected more non-tax revenue as a
share of GDP than Canada.

Compared with most OECD countries, then, Canadian governments rely on
substantially more revenues derived from non-tax sources. The most important
categories include resource revenues and profits from government enterprises
and user fees, sales and fines which, taken together, accounted for more than
9% of GDP. When adding all other types of government revenues to tax revenues,
Canada moves up to 14th among the 25 OECD countries and joins the ranks of an
average European country; in fact, it has an even higher revenue-to-GDP ratio
than the United Kingdom.

Part of the growth in non-tax revenues can be attributed to resource
revenues, which have grown sharply due to oil-price shocks and increased
provincial levies. However, Canadian governments have increasingly turned to
other non-tax revenues to fund their activities.

Perhaps as a sign of the times, greater reliance on user fees is not
surprising. Income taxes, the primary source of revenue, are highly distorting
because they undermine incentives to work, invest and take on risk. User fees,
which are payments for public services, are less distorting since Canadians
contribute to the cost of specific services that are of benefit to them.
Administrative fees, sales, fines and charges have increased 21-fold from
0.14% of GDP to 3.03% of GDP between 1975 and 2001.

However, Canadians have two concerns with user fees and other compulsory
payments. For one thing, such fees are often raised by a monopolist -- the
government -- without competitive pressure to keep the cost of public programs
as cheap as possible. For another, some fees, such as student tuition costs,
may be difficult for low-income Canadians to pay unless they are provided
transfers or exemptions.

In 1966, after the introduction of most social programs in health care,
public pensions, old age security and unemployment insurance, Canadian
governments actually absorbed a smaller share of the economy, with tax and
non-tax revenues at about 31% of GDP. This was similar to the United States,
where the revenue-to-GDP ratio was 28%. However, since then, Canadian
governments have grown faster and now absorb almost 10 points more than the
United States.

So depending on the measure, Canada does look like a high tax collector
when taking into account the substantial revenues it raises from non-tax
sources. Canadian governments do not have to tax as much to fund program
services because they receive substantial resource and fee levies to pay for
them.

Because Canadian governments still absorb more than two-fifths of Canadian
incomes to fund their programs, Canadians should ask them why they cannot
reduce taxes and other levies to levels found in some dynamic economies such
as Ireland and Australia, which also have good social services, as well as
those of our most important economic partner, the United States. And when
politicians promise to raise, lower or keep taxes at their current levels,
Canadians should remember that when it comes to raising revenue, governments
are many-handed creatures -- what they do not take in taxes they can take
through several other means. They have done just that, with increasing zeal,
over the past 30 years.

Illustration:
• Chart/Graph: National Post / THE
OTHER REVENUE: Government sector revenue, 2001: (See print copy for complete
chart/graph.)

Edition: National
Story Type: Business; Opinion

Note: Jack Mintz is president and CEO, Yvan Guillemette is
an analyst, at the C.D. Howe Institute.
Length: 849 words