Every schoolboy knows that Canadians have always loved big government. But this platitude—like so much of the new mythology taught since the 1960s—is false. For most of Canada's history its government was smaller than America's. In 1931, during the Great Depression, when U.S. president Herbert Hoover increased public spending to a record peacetime level, prime minister R.B. Bennett proposed to follow suit. Liberal opposition leader Mackenzie King responded, "The promises of yesterday are the taxes of today." Today Canadians are paying for a lot of promises; so much so that for the first time in history they are significantly poorer than their American cousins.

Canadian income is falling in absolute terms, as well. According to figures released two weeks ago by Statistics Canada, from 1990 to 1995 average before-tax household income dropped 4.8% to $54,583, after adjusting for inflation, while individual income dropped 6% to $25,196 (all figures in this story are in Canadian dollars). In B.C. average household income fell 3.3% to $50,667, while individual income fell 4.9% to $26,295. In Alberta average household income fell 2.6% to $56,916, while individual income fell 4.2% to $26,138.

Statscan blamed the decline largely on the recession of the early 1990s. But even relative to 1980 average household income in Canada has climbed by only 2.8%, despite a dramatic increase in female workforce participation, while individual income has dropped 2.2%.

Gross income is falling, yet taxes continue to rise. According to 1995 figures from the Organisation for Economic Cooperation and Development (OECD) Canada now has the highest personal income tax level of any G7 country, measured as a percentage of gross domestic product, at 13.9%. The OECD average is 10.4%, the U.S. rate 10.1%.

Federal Finance Minister Paul Martin has boasted he has balanced the budget without raising tax rates. True enough. Yet tax revenues have increased significantly at a time when, as Statscan has revealed, incomes have fallen. Since the Liberals took office in 1993 changes in the rules regarding deductions, combined with the government's refusal to index tax brackets to inflation, have resulted in a 15% increase in the proportion of the amount the average family paid in personal taxes from 1992 to 1996, according to Statscan. Personal income taxes are now by far the largest single family expense.

"Bracket creep" has led to a contraction of Canada's middle-class; according to the OECD, 18% of tax-filers were forced into higher tax brackets from 1988 to 1998. Current tax bracket thresholds of $29,590 and $59,180 would have risen to $35,941 and $71,883 if the system had not been deindexed in 1988. The result is that Ottawa's total tax revenues have jumped from $116 billion in 1993 to $148 billion this year, pushing the average taxpayer's federal contributions to $11,335, an increase of 17%, compared to a compound inflation rate of 6%

According to figures from the Fraser Institute, and the Tax Foundation in Washington, D.C., the average Canadian's total tax burden is now 49.3% of income, compared to 37.6% in the U.S. The disparity is worsened by the fall in Canadian gross income. An internal federal government report released last month, titled Canada 2005, indicates that from 1991 to 1994, the average disposable income climbed an average of 1.6% a year in the U.S., compared to an average decline of 0.3% a year in Canada.

For a family with two wage earners, the average household income is now $65,561 in Canada, compared to $76,874 in the U.S. After taxes those figures shrink to $33,239 and $47,969 respectively. In other words, a typical American family now has a disposable income 44% higher than its Canadian counterpart. Even assuming private medical insurance costs of $6,570 per year, in the unlikely event that neither spouse has an employer-funded scheme, the American couple would still be earning 25% more.

Canadian Taxpayers Federation national director Walter Robinson notes that the disparity increases still further at higher income levels, particularly in B.C. For British Columbians earning $65,000, the marginal tax rate is 54.2%, the highest in North America. By contrast, Washington State has no state income tax, and the highest U.S. federal marginal rate of 39.6% does not kick in until annual income reaches $389,830.

The typical Canadian response to this data is likely to be that while Americans have more money, Canadians more than make up for it with social benefits. But according to David Perry, senior research associate at the Canadian Tax Foundation, Canadians have not yet grasped that Ottawa's refusal to reform the funding of healthcare, education and old age security has reduced the quality of Canadian social programs significantly. "We've gone from a European level of public service in the early 1980s, with a U.S. level of taxation, to an American level of public service with a European level of taxation," he says.

High taxes are not only not buying us a first-rate safety net anymore, they are responsible for falling wages as well, as the Canada 2005 report acknowledges: "A nation's ability to attract and retain quality investments and innovation activities critically depends on its ability to develop, attract and retain highly educated and skilled professionals and technicians." As corporate innovation wanes, jobs and wages decline. Moreover, companies come under increased pressure to follow their ex-employees south.

And Canadians have yet to suffer the full effects of perhaps the most powerful job killer—the 73% hike in Canada Pension Plan premiums. Over the next five years CPP deductions will rise to 9.9% of employee earnings. Malcolm Hamilton, an actuary with William M. Mercer Ltd. in Toronto, says that far from preserving CPP, the premium hike will place additional strain on the fund by reducing young peoples' disposable income to invest in RRSPs.

Given that the CPP premiums are split evenly between employees and employers, the payroll tax will further shrink average income, as businesses find it harder to hire workers and raise salaries, says the CTF's Robinson.

Yet despite the evidence of taxation's debilitating effects, there is little popular or political support for relief. Poll results indicate that Canadians' highest priorities remain social spending and debt reduction, with tax reduction a distant third.

Supply-side economists maintain that if Canadians are truly concerned with maintaining the integrity of their social programs, tax cuts ought to be their first priority. They cite Ontario's dramatic economic turnaround after a 15% tax cut in 1995 as evidence that a reduction in crushing tax rates yields an increase in government revenues. This is not yet a majority view, however. There are even those who argue that the key to increasing gross income is increasing, not reducing, public spending, particularly in B.C. where economic growth is forecast at only 1% this year, the lowest rate in Canada.

David Robinson, a Vancouver economist with the Canadian Centre for Policy Alternatives, says businesses that relocate are less concerned with taxes than the cost of labour, land and resources. He argues that B.C.'s shrinking wages are not the fault of high taxes, but a poor labour market caused by the collapse of the Asian economy. His solution is "investment" in infrastructure. Mr. Robinson cites a 1997 study by the left-wing research firm Informetrica that claimed a $1-billion government investment in personal income tax cuts would generate only 12,000 jobs, compared to 26,000 jobs by investing in infrastructure. "You're also providing capital investments for the future," he says, citing the NDP's recently announced upgrade of Lions Gate Bridge as an example.

This is Mr. Martin's approach. Despite a reported budget surplus of $4 billion for 1997-98, he has ruled out immediate tax cuts and has instead earmarked the surplus for the $2.5-billion Millennium Scholarship Fund. Mr. Martin has blamed Canada's brain drain on a shortage of university research and development opportunities, and called his scholarship fund an investment in human capital. "If taxes were the only reason, the Cayman Islands would become the most populated area in the world," he said.

This Keynesianism will result in a continued decline in competitiveness, warns Wall Street Journal editorial writer John Fund. "The issue is not should Canada be more American. The issue is whether you want to resist an international trend and go your own way. Canada is paying a price for having a tax regime out of kilter with the rest of the world." Mr. Fund notes that, beginning in the early 1990s, left-wing Labour governments in New Zealand, Australia and most recently Britain have all implemented tax cuts. "It's not that Canada needs to cut its way of life; it needs to modernize."

It is no surprise that B.C. is lagging behind Canada in economic growth, says Mr. Fund, who caused an international furore when he wrote a Journal editorial three years ago calling Canada an honorary member of the Third World. "You can't go against human nature. When you have a school administrator in B.C. earning $80,000 who has to pay a marginal rate of 54%, versus one in Seattle who pays a rate of 28%, something's wrong. Over time, you're discouraging work and innovation."

Even left-wingers like Simon Fraser University business professor John Richards, a former Saskatchewan NDP MLA, finds David Robinson's spendthrift remedy difficult to swallow. "[B.C.] has been the most reluctant to accept that we have to hold spending down," the author of Retooling the Welfare State declares. "Everywhere else, left and right-wing [provincial] governments have accepted that truth and reduced government expenditures."

Prof. Richards is particularly critical of the federal scholarship fund, calling it an unaffordable intrusion into provincial jurisdiction. Mr. Perry concurs, adding that Canada's healthcare system is already on the verge of collapse as a result of the federal government's refusal to devolve authority for funding decisions to the provinces, most recently by blocking Alberta's attempt to introduce private clinics. The Liberals have slashed transfer payments for health and social assistance to the provinces, while leaving them no means to cut their own spending through institutional reform of public services. "This will make it very difficult for the provinces to cut taxes," Mr. Perry says.

Rather than further increase the Canadian tax burden, Prof. Richards would prefer to see the $2.5-billion scholarship money put into repayable student loan program, as in Australia, whereby an extra portion of graduates' future wages is garnished. That way, the government would fulfil its education objective at no net cost.

Yet while he opposes new program spending, Prof. Richards agrees with Mr. Martin that immediate federal tax cuts would be imprudent. He would eventually like to see a $5-billion investment in expanded child benefit credits for middle-income families who have been hit hardest by bracket creep. "But I don't think we can start talking about tax cuts until we've put government accounts back in the black," he says, adding that debt levels are still too high.

Casey Vander Ploeg, a research analyst at the Canada West Foundation in Calgary, dislikes targeted tax reductions (as advocated, for instance, by the federal Reform Party). He is troubled by their use tools of social policy tool. Ottawa, he says, has already introduced income-dependent disparities in child tax benefits that have the effect of encouraging women to work outside the home; for instance, by increasing the Child Care Expense Deduction from $5,000 to $7,000. Likewise, the Liberals amended the Divorce Act in 1997, revoking income tax exemptions on maintenance payments paid by non-custodial parents, and transferring the exemptions to the recipient.

Yet despite a 22% increase in women's share of the full-time Canadian workforce from 1980 to 1995 (to 39.9%), average household income barely climbed in that period. This was largely because female wage gains were at the expense of men, who took the hardest hit in income loss—a 4.6% decline since 1980. Statscan figures show that female workforce participation peaked in 1991 and has declined marginally ever since. Moreover, 40% of full-time working women have reportedly asked for reductions in hours to devote more time to their families.

Mr. Vander Ploeg would prefer to see an across-the-board tax cut, and the sooner the better. While agreeing with Prof. Richards that debt is a concern, a Canada West budget analysis released in January concludes that if a recession equal in impact to that of 1982 were to suddenly strike—a distinct possibility given shrinking wages—the federal deficit would balloon back up to $30 billion within two years. "Once you've reached a certain level of taxation, every incremental increase produces less and less revenue," he says. "Eventually you reach a level of tax where there is no revenue and it acts as a drag on the economy."

Mr. Vander Ploeg says a tax rate cut would better prepare the federal government for the next recession. That view is shared by Osgoode Hall law professor Patrick Monahan, who analyzed the relationship between personal tax rates and revenue in Ontario. After the NDP government hiked provincial tax rates 9.5% in 1991, revenues dropped 12% to $13.5 billion in 1992-93. But when Premier Mike Harris cut tax rates 15% in 1995, revenues jumped 4.5% to $16.3 billion. (Ontario has just announced another 15% cut.)

Fraser Institute executive director Michael Walker concedes that the Ontario recovery is due partly to a healthy business cycle. But he maintains the tax cuts helped create a "virtuous circle" of investment and economic growth. It is a lesson that not only the federal government should heed. As Mr. Fund says of Glen Clark's B.C., "You'd have to go as far as Cuba to find a more brutal tax environment."

—Dave Cunningham

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