Canada has 99 problems but a high tax regime ain’t one

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Claude Lavoie is a contributing columnist for The Globe and Mail. He was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023.

A majority of people are tired with the Liberal “bigger government agenda.” Close to 60 per cent of Canadians believe that the government is spending too much and 75 per cent feel overtaxed. That is a lot of unhappy people. The recent tax hikes on capital gains and financial service firms just added to this discontent.

But is big government necessarily bad? According to the latest World Happiness Report, the happiest people are those living in countries such as Finland, Denmark and Sweden – countries with far higher taxes and government spending. The average personal income tax rates in Finland and Sweden are nearly 50 per cent, compared with 33 per cent in Canada.

Maybe we are looking at the issue the wrong way.

We generally believe that our well-being mostly depends on our level of income and consumption, and that unbridled market competition is the best mechanism for maximizing both. These tenets are the backbone of our economic policies.

There’s some truth to them. After all, higher consumption of fundamental products like quality food, shelter, leisure and health care certainly improves people’s well-being.

But for many other products, particularly luxury and so-called positional products – goods that confer some social status – higher consumption increases people’s well-being only to the extent they feel it elevates their social status. This is the forgotten part.

Often it is not what you consume – but what you consume relative to your peer group – that matters. Studies have shown that getting a new car is good, but getting a nicer car than your peers’ is what really makes us happy. As it is with the arms race, this leads to wasteful ratcheting-ups and excess consumption (and debt). This is why, despite our families becoming smaller, our average house size has increased over time – without making us happier.

Similarly, we’ve long believed in the virtues of competition and the search for profit, which encourage businesses to introduce continuously improved products and cost-saving innovations that provide consumers with increasingly better products at ever-lower prices. As it does in nature, competition weeds out the weakest and makes the population stronger. However, as it does in nature, competition can also can at times be detrimental to the overall population.

For example, to get ahead of their peers, people will work long hours or take excessive safety risks (and their peers will do the same). About 10 per cent of men in Canada work more than 50 hours a week on a regular basis, but among higher-earning individuals, this proportion goes up. According to the Harvard Business Review, it is not rare to see some professionals and executives working more than 80 hours a week on a regular basis. Studies show this has negative implications.

This is why higher taxes aren’t necessarily bad. High progressive taxes discourage consumption of positional products but have no effect on individuals’ well-being, because all their peers are similarly affected. But the additional tax revenues can increase the general sense of well-being if they are used to help lower-income individuals afford more essential products, or to finance better public goods and services. High taxes on detrimental things like pollution and waste also make everybody happier by making our planet more livable.

Some taxes or regulatory incentives discourage people from working insanely long hours and do not change their social status because their peers are also incentivized to work fewer hours. And because they have more leisure time, they are happier.

Working fewer hours does not necessarily hurt the economy. Those in countries like Sweden work fewer hours than in Canada, yet they have a higher GDP per capita. One potential reason is that high tax rates and generous social programs create a safety net that makes taking risks easier.

Other studies find that changes in corporate taxes have a limited impact on growth and that higher capital-gains taxes are not that detrimental to the economy.

So, if higher taxes and larger governments can make us happier, why aren’t we for it?

We lack a very important condition: a government that people trust to manage their taxes well and ensure spending will benefit the entire population. About 70 per cent of people in Sweden and 78 per cent in Finland trust their governments, compared with about 50 per cent in Canada (and 31 per cent in the United States).

The issue isn’t what we pay. What matters is how satisfied we are with what we get from our tax dollars. The road to greater societal happiness may depend more on improving our institutions rather than shrinking the government and cutting taxes, though we’re hearing the opposite from some politicians. Continuous government blunders in Canada (e.g. ArriveCan, Phoenix, Northvolt, Greenbelt, foreign interference, etc.) and simplistic rhetoric right across the political spectrum suggest there is a lot of work to do.

Editor’s note: A previous version of this article overstated the average income tax rates in Finland and Sweden at 57 per cent and 53 percent, respectively. The average rate in both countries is close to 50 per cent. This version has been updated.