The tax bill for the average Canadian family has soared 1,600% in the past 45 years, new research by the Fraser Institute shows. This staggering rise has a serious impact on investment by both individuals and the business sector.

Growing tax loads also mean there is less incentive for individuals to work longer and harder, especially high-end earners, because the government is only going to take a big chunk of the paycheque, says Brian Lee Crowley, president of the Atlantic Institute of Market Studies.

“There’s no doubt the tax system has a powerful influence on people’s willingness to invest,” he says, adding that companies are also less likely to reinvest their money in such things as training programs and upgrades if taxes are eating away at profits.

Although increases in property and gasoline taxes affect disposable income, the taxes that directly affect savings and investment are of most concern to the financial services industry and the economy, says Jack Rando, assistant director of capital markets at the Investment Industry Association of Canada in Toronto: “The savings and investment process is fundamental to business growth.”

The process has not been working well for some time. David Beazley, president and CEO of Acadian Securities Inc. in Halifax, puts that time frame starting roughly two decades ago, when the federal government developed what it felt was a fair and equitable approach to taxation, he says: a buck is a buck is a buck. For many firms, that meant paying taxes without necessarily producing income.

“It’s very unfair and a real impediment, especially to venture capitalists and small companies in their formative years,” he says.

The Fraser Institute’s report, entitled Tax Facts 14, attempts to put tax growth in Canada in perspective over the past 45 years.

Escalating taxes, which amount to an additional $26,792 for each family, are not everything with which the average Canadian household has had to contend, says Niels Veldhuis, co-author of the report and the institute’s associate director of fiscal studies.

Clothing expenses have jumped 439% and food 481%, he notes, while housing costs have risen 1,006%. Offsetting some of the increases has been a 1,100% hike in salaries.

Over time, however, only two of the myriad expenses Canadians meet have experienced real growth, says Crowley. When inflation is factored into the equation, real increases have occurred only in housing — and taxes.

The increase is mirrored in the tax rate. In 1961, the average Canadian family paid 22.1% of its total income in taxes. By 2005, the tax bill had hit 29.8%.

“[Taxes are] eating up more and more of our income,” says Veldhuis.

Still, from an overall economic standpoint, the rising tax burden must be weighed in terms of value provided. “Not all taxation is bad,” says Barbara Amsden, the IIAC’s director of capital markets.

Tax dollars pay for essential services such as health care and education, help attract businesses and tourists to communities, keep the military supplied and maintain the infrastructure, such as roads, sewers and utility services.

Economists, however, say that can all be done more efficiently and with fewer tax dollars.

“There is a point past which the tax burden becomes a drag on the economy,” says Crowley. In statistical terms, that point occurs when a country generates more than 30% of its GDP from taxes.

In Canada, as of 2003, the figure had hit 33.8%. In comparison, the level is 25.6% in the U.S. and 25.3% in Japan. On the other hand, taxes account for 35.5% of GDP in Germany and 43% in France.

The comparison also underlines another point. Canada’s tax bill and the effects of the cost is not just a domestic problem. “This is also a competitive issue,” says Amsden. “Some investments might head south, where the tax regime is perceived to be better.”

It is also a psychological issue. “Businesses feel we are overtaxed compared with competing nations,” says Scott Wyper, partner of taxation services at KPMG LLP in Burnaby, B.C.

They are not alone, and the feeling translates into investment action and preferences, says Beazley: “There is a psychological disincentive to get involved in the equity markets or the capital markets.”

That sentiment may help explain an investment anomaly in the Canadian economy at the moment. “Corporate profitability, which drives investment, is at a very high level in Canada in historical terms, yet investment is at relatively low levels,” says Crowley.

@page_break@Two other factors are also at play when it comes to the impact of taxation and investment. First, there is awareness of the benefits of investment, regardless of the tax climate. “The [financial services] industry overall has done a good job of educating investors. A lot of investors are fully aware of the dire straits they could be in come retirement,” says Rando.

Such insight, ironically, is coupled with a refusal to look too closely at taxes, says Beazley: “People know what they take home every two weeks. They’d just as soon not know what the tax burden is. They want to hide from it.”

Veldhuis wants to see Canadians came out of hiding. Indeed, he says, the purpose of Tax Facts 14 is to help individuals and businesses understand the lay of the land regarding taxes and note how it has changed since the 1960s.

Understanding the change will bring action. If Canadians are unhappy, they should vote accordingly, he says.

There may be a swing vote in the offing. Taxes have recently been going down in Canada, and new measures, such as the decrease in the dividend tax rate, are a boon to investors, says Amsden: “In recent budgets, there’s been a peeling away of taxes, especially those affecting savings and investments. That’s a good thing.” IE