The Compliance and Administrative Costs of Taxation in Canada 2013

There are a number of economic costs associated with taxes, some of which unfortunately, are almost always ignored or misunderstood. The direct and most visible cost of taxes is simply the tax itself. It is the amount of earnings that individuals or businesses forego when they pay taxes. Put simply, an individual earns income but only receives a portion of it after paying for taxes. This is the direct cost of taxation: loss of income.

Another cost of taxes?which is often recognized but frequently not taken sufficiently into account in public policy discussions?is the incentive effects of taxes. As noted above, taxes create a wedge between what individuals and businesses earn and what they actually receive for their efforts. The incentive costs from taxes are a result of changed behaviour and foregone opportunities. For example, workers might decide to work less overtime because they deem the reward (that is, extra earnings) insufficient to compensate them for the extra effort. Similarly, businesses might decide to forego expansion or investing in new businesses if the after-tax reward (adjusted for risk) is insufficient. In both these cases, society is less well off because of decisions that were made, in part, due to the effects of taxes.

The costs associated with complying with the tax code are almost always ignored in public policy debates. Compliance costs include the time required to collect and organize receipts, accounting and other professional fees, the time required to complete tax forms if professionals are not used, appeal costs if applicable, and the general costs of remitting returns. Similarly, the administrative costs incurred by governments to administer and collect taxes are often ignored. In both cases, one explanation of this is the lack of quantitative estimates of these costs. This study will facilitate taking these costs into account.

In 2011, between $19.2 billion and $24.8 billion was spent complying with the personal and business tax system in Canada. An additional $6.6 billion was collectively spent by governments across the country administering the tax system. Should Canada choose to embark on fundamental tax reform, this could reduce these costs by simplifying the tax system.