Monday, September 25, 2006

Your data doesn't say what you think it does

via The Prairie Wrangler, the CD Howe institute has released a report (PDF link here) claiming that Canada has among the highest tax rates on investment in the world.

First off, this is a red herring. Of course Canada has among the highest rates of taxation in the world. The Canadian government does a lot of things, and the biggest-ticket items - health insurance, national defense, regional development - are things that the Canadian people overwhelmingly want the government to do. Indeed, Canadians regularly say they want more spending on defense and health care, as well as a bunch of other stuff besides. So the fact that Canadians pay higher taxes than Botswana doesn't tell us much, except possibly that Botswanans are poorly-served by their government.

Secondly, the CD Howe Institute doesn't even get the conclusions to it's own data right. Canadians have one of the highest standards of living in the world, and our taxes are already lower than Germany or the United States according to the CDHI's own data. In fact, if you look at the G8 nations, Canada's taxes on investment are decidedly moderate - not as high as some, lower than others. A fair description would be that Canada's investment taxes are on the high end of the range for the most developed countries, though by no means the highest.

What headline do you think the CDHI picked for it's news release?
The 2006 Tax Competitiveness Report scores 81 developed and developing countries according to their tax treatment of business investment, and finds that highly taxed Canada ranks a disappointing 8th...
but of course, to make this press release truly absurd, you need to read the rest of the sentence:
- the investment-hostile Republic of Congo ranks first.
Well, thank God for the Howe. How else would Canadians know how lucky they are not to live in the Congo?
Republic of Congo Per Capita GDP: $1,300
Canada Per Capita GDP: $34,000
Maybe something like that?

It would be nice if the people who think tax cuts solve everything (this category does not include Prairie Wrangler, btw) would ever think about how silly they look before they say silly things.


Red Jenny said...

Good post. I'm going to link to you from a discussion about US health care... "sure Canadians have socialized medicine, but they pay sooo much in taxes."

Olaf said...

Ok, let me get this straight, Canada should have among the highest corporate and investment tax rates in the OECD, 3rd highest out of 30 (which is, in my opinion, the most relevant selection, although probably only because it supports my argument), because we have alot of big ticket social spending items?

However, many of the countries that have far more generous social spending regimes (eg. the Scandinavian countries, many Western European countries) have lower effective tax rates on capital. Also one of the two countries with higher capital tax rates has a much less generous social spending regime (the US), while the other, Germany, is probably comparable. Doesn't your argument kind of eat itself here?

And before you point it out, I know that the US also has ridiculously high military spending commitments. But I think (hope?) my point still stands.

john said...

A few points, Olaf:

1) For a variety of reasons, no two countries will have the same level of taxation, even if you assume exactly the same level of service - France and the UK, for example, are unitary states and can, by definition, offer national services without fighting the provinces tooth and nail.

2) I didn't say Canada's tax rate should be high, only that it's going to be higher than the developing world for obvious reasons. Comparing Canada to Botswana, Zambia, Tanzania, or any other country in the developing world and then yelling from the rooftops that Canada's taxes are "among the highest in the world" is dishonest.

3) The universal nature of Scandinavian welfare states - which in my opinion is more important than their generosity - comes with a lot of extra efficiencies. Most welfare programs in Canada are means-tested, most programs in Scandinavia are not. Means-testing programs is inherently more expensive and less generous, but it's something Conservative politicians have sold as cost-controlling, though Liberals embraced it later as well.

Olaf said...


1) I agree.

2) Ok, I see what you're saying when compared to developing countries, and I agree that including them is a bit of a distortion, but Canada also has one of the highest when compared to OECD countries (3rd highest), which I think is a fair comparison.

3) I do not understand these concepts (means-tested), so I cannot comment.

john said...

Comparing within the OECD is fair, but needs a lot of caveats. The CD Howe institute doesn't do caveats - instead, they write misleading headlines.

Means-testing is just a way of saying that the poor will be investigated when they apply for welfare. It sounds common-sense enough, until you realize that it's obscenely expensive to actually do - in the most extreme cases, it literally involves people watching welfare recipients many days of the week to make sure they aren't getting help from third parties (like family) and are really "as poor as they claim."

It's cruel and inefficient, and most Scandinavian countries don't do it. Canada does. We could gain huge efficiencies by abandoning it.

Mike said...


Universal = everyone gets the benefit, no matter what your level of income (our healthcare system)

Means tested = only persons in certain tax brackets or lower get the benefit - think welfare.

What john is saying is that the cost of administration of a means tested program can actually make the program more expensive than a universal one. One of the little ironies that Conservatives prefer means tested because they think it will cost less.

Olaf said...

Mike and John,

While I understood the concept of universal, I appreciate the explanation on means tested (I'm not sure how I hadn't come across it).

As I didn't even know the term, I'm surely not familiar with the particular arguments for and against each. However, I can quote a recent article I read in the economist:

The official unemployment rate is 6%. But Sweden is a world champion at massaging its jobless figures, which exclude those in government make-work programmes, those forced into early retirement and students who would prefer to be working. Sweden's suspiciously large number of workers on long-term sick leave are counted as working, and included in the employment rate (sickness benefits account for 16% of public spending). Absenteeism is common.

Earlier this year the McKinsey Global Institute, a think-tank, studied Sweden's labour market. It found that the rate of employment among working-age people had declined in the past decade. Indeed, Magnus Henrekson of the Research Institute of Industrial Economics says that Sweden has created almost no net private-sector jobs since 1950* (see chart 2). Youth unemployment is among the highest in Europe. The McKinsey boffins conclude that the “true” unemployment rate is around 15-17%, which puts Sweden among the worst job-fillers in the EU. It translates into more than 1m people without work.

I'm assuming this would be the argument against a means-tested approach, in that it makes it easier to collect welfare/sickness benefits? In any case, I think it's clear that there is no silver bullet, as is always the case.

Anyways, good talk as always.

ps the source is here if you're interested: