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A Canada Revenue Agency sign in Ottawa on March 1, 2021. Justin Tan/The Canadian Press
Claude Lavoie is a contributing columnist for The Globe and Mail. He served as director of the Department of Treasury's Office of Economic Research and Policy Analysis from 2008 to 2023.
A majority of Canadians are fed up with the Liberal government's “expansionist” policies. Nearly 60% of Canadians believe the government spends too much, and 75% believe it taxes too much. Many Canadians are dissatisfied. Recent increases to capital gains taxes and financial services companies have only exacerbated this discontent.
But is big government necessarily bad? According to the latest World Happiness Report, the happiest people are those who live in countries such as Finland, Denmark and Sweden, where taxes and government spending are much higher. The average personal income tax rates in Finland and Sweden are 57% and 53%, respectively, compared to 33% in Canada.
Perhaps we are looking at this issue the wrong way.
We generally believe that our well-being depends primarily on our levels of income and consumption, and that unrestrained market competition is the best mechanism for maximizing both. These beliefs form the backbone of our economic policy.
There is some truth to what they say: after all, greater consumption of basic goods like quality food, shelter, entertainment, and health care certainly improves people's well-being.
But for many other products, especially luxury goods and so-called status products (goods that confer social status), increased consumption increases people's happiness only to the extent that it increases their social status. This is the part that gets forgotten.
Often, it's not what you consume that matters, but what you consume relative to your peers. Research shows that while buying a new car is nice, buying a better car than your peers really makes you happy. Just like the arms race, this leads to wasteful expansion and overconsumption (and debt). This is why the average home size has increased over time, even though families are getting smaller, and we're not getting any happier.
Similarly, we have long believed in the virtues of competition and the pursuit of profits, which encourage businesses to introduce continually improved products and cost-reducing innovations, providing consumers with increasingly better products at lower prices. Just as in nature, competition strengthens populations by eliminating the weakest. But just as in nature, competition can sometimes have adverse effects on the population as a whole.
For example, people work long hours or take excessive safety risks to gain an advantage over their peers (and then their coworkers do the same). About 10% of men in Canada regularly work more than 50 hours a week, with higher rates among higher earners. According to the Harvard Business Review, it's not uncommon for professionals and executives to regularly work more than 80 hours a week. Research shows this has negative effects.
This is why higher taxes are not necessarily bad. Highly progressive taxes discourage consumption of high-status goods, but do not affect individual happiness, because all peers are affected equally. However, if increased tax revenues enable lower-income earners to purchase more necessities or are used to improve public goods and services, they can increase overall happiness. Higher taxes on harmful things like pollution and waste make everyone happier by making the planet more livable.
Although some tax and regulatory incentives discourage people from working inordinately long hours, their social status remains the same because their coworkers are also incentivized to work less, and they become happier because they have more leisure time.
Working fewer hours doesn't necessarily have a negative impact on the economy: Countries like Sweden work fewer hours than Canada and still have a higher GDP per capita. One reason for this is that higher taxes and generous social security systems create a safety net that makes risk taking more likely.
Other studies have found that corporate tax changes have limited impact on growth, and that raising capital gains taxes is not very harmful to the economy.
So if raising taxes and expanding government would make us happier, why aren't we in favor of it?
We are missing a very important condition: people trust their government to manage their taxes well and ensure that spending benefits the people as a whole. About 70% of people in Sweden and 78% in Finland trust their government, compared with about 50% in Canada (and 31% in the United States).
The issue isn't how much tax we pay; it's how satisfied we are with what we get from our taxes. Improving institutions may be more important to increasing social happiness than shrinking government and cutting taxes, although some politicians are arguing the opposite. A string of Canadian government missteps (ArriveCan, Phoenix, Northvolt, Greenbelt, foreign interference, etc.) and simplistic rhetoric across political lines suggest there is a lot of work to be done.
