Martin's Misinformation on Taxes and Healthcare

Paul Martin and the Liberals are trying to make healthcare the wedge issue in this election. Their contention is that Canada cannot reduce tax rates, as proposed by the new Conservative Party, while simultaneously providing socialized healthcare. Martin’s assertion is based largely on a comparison between tax levels and health spending in Canada and the United States. Surprisingly, Mr. Martin as a former finance minister seems grossly misinformed about the link between public healthcare spending and taxes.

Unfortunately, the mythology that Canada needs high taxes to finance socialised healthcare is an all too common belief shared by many Canadians. This myth impedes a full and frank discussion regarding both healthcare reform and tax relief and as with any myth, the only way to fully dispel its lure is through the examination and dissemination of facts.

Let’s first look at the difference in taxes between Canada and the United States. According to the latest Economic Outlook (December 2003) published by the Organisation for Economic Co-operation and Development (OECD), Canadian governments extracted 41.2 percent of all goods and services produced in Canada (GDP) in 2003. Governments in the United States, on the other hand, collected 31.0 percent of GDP. In other words, Canadian governments took one-third more than their southern counterparts as a percent of the economy (GDP).

Some of the explanation for this difference is obviously bound in the fact that the U.S. is running a large deficit while Canada is generally in a balanced position. The U.S. government is currently spending almost 5 percentage points of GDP more than it is collecting in revenues. Some of that largesse relates to military spending but there is a significant component of discretionary spending in areas such as education, agriculture, and transportation.

The myth that taxes equal healthcare argues that this rather large difference is required in order to provide public healthcare in Canada. The implication being that public (i.e. government) spending on healthcare in Canada must be large enough relative to that of the US to explain most of the differences in taxes. The reality is, however, quite different.

In 2001, the most recent year for which comparable data is available, US governments spent 6.2 percent of GDP on public healthcare while Canadian governments spent 6.9 percent of GDP, a difference of 0.7 percentage points. Interestingly, the amount spent by U.S. governments on public healthcare is set to soar due to a generous prescription drug benefit that was recently added to Medicare. Canadians tend to conveniently forget the two massive public healthcare programs in the United States: Medicaid (for the poor) and Medicare (for the elderly).

More interesting is the fact that U.S. governments actually spend more per person on public healthcare than Canadian governments. According to the latest data on healthcare from the OECD, Canadian governments spent $1,978 per person in 2001, measured in U.S. dollars using Purchasing Power Parity (PPP)--a fancy economic method to translate currencies based on differing costs of goods and services. In the same year, U.S. governments spent $2,168 per person on healthcare. On a PPP-adjusted dollar basis, then, American governments actually spent $190 more per person than Canadian governments. The difference would increase significantly if nominal exchange rates were used.

One simply cannot explain the huge tax-and-spending gaps between the United States and Canada based on a difference in public healthcare spending of less than 1 percentage point of GDP. It just doesn’t add up even though it sounds reassuring to those who favour high taxes and big government.

Healthcare is sure to be a front burner issue in the federal election. It’s time that Canadians realize that high taxation equals healthcare is a myth. In recognizing the fallacy we can then move on to a more fundamental discussion of how we can best reform our healthcare system to better serve Canadians while at the same time providing greater tax relief.