Have you ever wondered how much you actually pay in
taxes each year? While tax returns help us understand how much income tax we
pay, it’s difficult for most Canadians to calculate their total tax bill.
In Canada we pay many different taxes to the
federal, provincial and local governments. Some of these taxes are visible but
many are hidden, which adds to the confusion about how much we actually pay.
Not only do we pay income taxes, we also pay property taxes, payroll taxes such
as the Canada Pension Plan, health taxes, sales taxes such as the GST, carbon
taxes, taxes on gasoline, taxes on imported goods, “sin” taxes and so on.
To be clear, Tax Freedom Day does not measure the
benefits or quality of services Canadians receive from government in return for
their taxes. Rather, it looks at the price paid to receive a product in the form
of government. Understanding your family’s total tax burden is important to
assess the value you receive from government services and income transfers.
It’s ultimately up to Canadians to decide if they receive good value for these
services.
In 2020, we estimate the average Canadian family
(consisting of two or more people) earning $115,735 will pay $43,671 in
total taxes — or 37.7 per cent of their income.
In other words, if you paid all your taxes for 2020
up front, you’d give government every dollar you earned before May 19—Tax
Freedom Day. After working the first 139 days of the year for government,
you’re now working for yourself and your family.
However, there isn’t much to celebrate this
year.
This year Tax Freedom Day comes much earlier than
usual because the estimates of income and total taxes for average Canadian
families have been significantly impacted by the COVID-19 recession.
In other words, the earlier date has nothing to do
with either the federal or any provincial government reducing taxes. When the
economy slows and incomes decline, the average family’s taxes tend to be
reduced to a greater extent than its income. There are several reasons for this
including Canadians falling into lower income tax brackets due to lower incomes
and reductions in sales taxes paid due to reduced consumption.
Canadians may rightfully also be thinking about the
economic and tax implications of the budget deficits our federal and provincial
governments will run this year.
Specifically, the federal government projects a
$252.1 billion deficit in 2020 while cumulative deficits for the provinces are
forecasted to reach $63.1 billion.
Of course, today’s deficits must one day be paid
for by taxes. This means the combined projected federal and provincial
government deficits of $315.2 billion should be considered as deferred taxes.|
To illustrate this point, if Canadian governments
had to raise taxes to balance their budgets instead of financing spending with
deficits, Tax Freedom Day would arrive more than two months later on July 26.
The economic responses to COVID-19 will undoubtedly
have large implications for levels of taxation and the state of government
finances for both the federal and provincial governments.
May 19 may seem early for Tax Freedom Day, but
without a significant change in policy direction, all signs point to a much
later day in the future.
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