By Theo van de Kletersteeg, The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organization of 38 member countries, founded in 1961 to stimulate economic progress and world trade. Notably, and regrettably, China is not a member. The OECD’s goal is to shape policies that foster prosperity, equality, and opportunity. As part of its work, it collects data and performs exhaustive analysis on a wide range of topics. Among those is a review of government revenues among member nations, along with breakdowns of the nature of those revenues.
During the past two years Canada has seen an explosion of public debt, particularly arising from dealing with Covid-related issues, but also arising from substantial expenditures related to settlement of outstanding indigenous issues, disaster recovery, environmental issues and climate change and, of course, an ever-larger and well-paid bureaucracy. In round numbers, aggregate provincial and federal debts are presently in excess of $2.1 trillion, and continue to grow at alarming rates. Even if the pandemic were to disappear tomorrow, balanced budgets are not in sight, and government spending of amounts that will be significantly higher than revenues are expected to continue for many years to come. It is likely, though, that governments will begin to realize that such excessive spending will destroy the economy, and for that reason will have to start raising taxes. Broadly speaking, which sources of economic activity look particularly attractive for governments to tax more intensively?
For greater clarity, the OECD calculates its numbers on the basis of a percentage of GDP. However, although GDP represents some measure of a country’s ability to raise taxes, debt repayment takes place in dollars, not GDP. Moreover, there are variations in GDP per person between countries, which introduces opportunities for misinterpretation. Despite those limitations, the comparisons are still useful, particularly when comparingeconomies of similar size and structure.
For OECD countries as a whole, average government revenues (i.e. tax revenues from all sources) in 2020 represented 33.5 per cent of GDP. At 34.4 per cent of GDP, Canadian government revenues in 2020 were slightly above the OECD average. Still, 22 countries (out of 38) had higher levels of overall taxation than Canada, and all of those were European countries.
If we restrict the search to G7 countries, Canada fits in the middle, with France (45.43%) topping the list, followed by Italy (42.91%) and Germany (38.34%). Ranking lower than Canada are the UK (32.77%), Japan (31.41%) and the US (25.54%). Of particular concern to Canada are taxation rates in the US which are dramatically lower than in Canada. The US, of course, is Canada’s largest single trading partner and, given the closely integrated nature of their economies, corporations and individuals can move from one country to the other with relative ease. If tax differentials between the two countries were to widen, not only would such a development prompt a review of Head Office locations in many corporate Boardrooms, they would also have an impact on foreign (non-North American) corporations setting up, moving or expanding North American operating facilities. Taxes matter, a lot.
In terms of personal income taxes, Canada ranks as the highest taxed country in the G7 (12.5%), followed by Italy (11.5%), the US (10.5%), Germany (10.4%), France (9.6%), the UK (9.5%), and Japan (6.0%). The G7 average is 8.0%, as is the OECD average. Within all OECD countries, Canada’s high ranking is only topped by Finland (12.6%), Iceland (15.3%) and Denmark (25.3%).
In terms of corporate income taxes, once again Canada is the highest taxed country in the G7 (4.24%), followed by Japan (3.14%), the UK and France (each 2.32%), Italy (2.1%), Germany (1.65%) and the US (1.3%). The G7 average corporate income tax rate is 2.98% of GDP. Within OECD countries, Canada’s high ranking is topped only by Colombia (4.6%), Luxemburg (4.61%) and Chile (4.7%). The OECD average is 2.98%.
Lastly, in terms of goods and services taxes, Canada is at the low end of the scale. In terms of G7 countries, France tops the list at 12.29%, followed by Italy (11.52%), the UK (10.15%), Germany (9.85%) and Canada at 7.43%. Following Canada down the list are Japan (6.58%), and the US (4.32%). The G7 average is 10.75%.
Considering the above numbers, it seems clear that, with Canada already being at the high end of tax collections in terms of personal income tax and corporate income tax, there is not much more blood that the federal and provincial governments can extract from Canadian taxpayers. However, there appears to be lots of room for additional taxation with respect to GST, HST and various provincial sales taxes.
My advice? If you have a shopping list with a number of very expensive items on it, consider purchasing those items sooner rather than later, for two reasons: First, our governments are a lot keener to tax the wealthy than to tax the poor, so if a Porsche or a Maserati is on your list, rest assured that your income tax rates will not be reduced. Secondly, assuming sales tax rates will be raised, incremental sales tax rates on very expensive items represent lots of dollars. And lastly, who knows whether one or more governments will get really creative, and introduce graduated sales tax rates, for example a GST rate of 0% on groceries (as is presently the case), a 5% rate on all other goods except single items that cost in excess of $2,000, which might attract a GST rate of 10%.
Very, very few citizens were concerned about government deficits of 2020 and 2021, and somehow figured that we would soon see the end of deficit spending. Nope, that wasn’t going to happen, and isn’t going to happen. It’s taxpayers that will ultimately have to pay the taxes to allow governments to meet their debt obligations. If there is any good news in all this, it is that Canada was far from alone in its public spending of 2020 and The Economist tracks changes in GDP, current account balance, budget balance and other economic indicators on a quarterly basis of 42 countries. Its latest Q3-2021 numbers reported positive GDP growth in all but three countries, a positive current account balance in most countries (including Canada), but budget deficits in all countries, except one (Norway). Of the 42 countries, only four (the US, Britain, Greece and Italy) will have estimated budgetary deficits greater than Canada (9.5 per cent of GDP). The worst performer is expected to be the United States with a budget deficit of 12.4 per cent of GDP.
Although many smaller groups of people, such as many owners of small businesses, have suffered financially during the pandemic, incomes of the population at large have been propped up by generous government supports, which may have led many to believe that there is no real price to be paid for Covid. However, with or without a pandemic, government spending is horribly out of control, and the price that next generations will have to pay to restore economic growth and economic opportunity will be greater than any generation since World War II.