17 March 2018

Pay As You Go

"I made almost $5000 today!" she exclaimed triumphantly the other day, returning from an afternoon spent with the tax advisor. Spring is tax season, and she had just filed her (two!) declarations with the provincial and federal government.

As I have discovered many years ago, Canada operates a tax-withheld-at-source system, meaning that employers deduct the expected income tax amount from each paycheck and remit it directly to the government. Taxpayers then file their returns and, depending on the various tax breaks, credits, subsidies and exemptions they are entitled to, will get some part of these previously withheld taxes back.

When I first learnt about this system in 2010, I saw how it shifts the balance of power towards the taxman. Essentially, the government gets its money up front and doesn't have to run after it with a laborious collections bureaucracy. The onus to file a tax return is on the individual, who will not get anything back unless he completes the annual paperwork.

The above certainly still holds true, but over the years I've come to realize that there is another reason for the tax collection to work the way it does. And that reason lies in the relative financial immaturity of the typical Canadian.

A recent study found that the average Canadian has over $8500 in consumer debt, i.e. not including any mortgages. However, as 46% of respondents reported no debt, this means that the other 54% each shouldered an average of over $15'000, typically in high-interest vehicles such as revolving credit cards and lines of credit.

Another survey, back in 2012, noted that a third of Canadian households lives paycheck to paycheck, i.e. they don't manage to put any money aside at all. The study found the household savings rate at a paltry 3.8% of income, down from 19.9% in the early 1980s.

These are the kind of numbers that make this debt-averse Swiss author pale. But they are indicative of a culture where basic financial literacy is scarce, and discouraged. Start with the tax example: She didn't "make" $5000 by filing her tax returns, she reclaimed money that she had already earned and her employer had withheld in excess. Consequently, a tax refund shouldn't be any more reason to go on a spending spree than a regular paycheck would be. And yet an entire seasonal custom has formed about "what to spend your tax refund on".

Speaking of paychecks, the law stipulates that these need to be issued no less often than every 16 days. Meanwhile, in Switzerland parents switch from handing out pocket money every week to every month when their kids turn 15 or so, in order to teach them financial responsibility. Many Canadians simply wouldn't manage to spread their salary evenly across a month, even though the amount of money per period wouldn't change at all.

Finally, and most egregiously, the government is complicit in the greatest of all deceits, by allowing retailers to advertise their prices without taxes. Time and again, I hear friends talk about this great sofa or that cool gadget that they were able to snag for "only $999". In reality, they spent $1151 on it, with the 15% difference going to the government. But it's cash out the door just the same, no matter how hard both buyer and seller try to deny it.

Which brings us back to the tax system. I understand now that the other reason for it being pay-as-you-go is that too many people simply would not be able to hold on to the cash for deferred payment if they ever got their hands on it. That's a sad and troubling thought.

If there is one place where the Swiss, and Europeans in general, really love pay-as-you-go, then it is with cheap cell phone plans. As any traveller on a shoestring has found out, the best way to stay connected in Europe, Asia and many other parts of the world is to buy a local SIM card, upload a few dollars' worth of airtime, and then use it up bit by bit. In Canada, the oligopoly of three large telcos and their subsidiaries has entirely prevented this customer-friendly pricing concept from taking hold. In the Great White North, home to some of the highest wireless fees in the developed world, "prepaid" plans simply mean that customers must upload money first, and are then still charged monthly fees of $10 or more, irrespective of usage.

In a nutshell, we have financial immaturity, deceitful and inflated pricing, and soaring household debt. Could there possibly be a connection? Let the penny drop.

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