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A brief history of high taxes and government meddling

History shows that high taxes and interventionist governments are U.S. inventions, but modern politicians in Canada have perfected them, writes Mark Milke


 

Canada Revenue Agency

As the end of tax filing season nears, it is inevitable that someone will assert a variation of these two claims: First, paying taxes is good for you; it’s akin to what my mother told me as a child about cod liver oil. Second, some will argue higher taxes and a more interventionist government is what separates Canadians from the Americans—that it is ostensibly what makes Canada a better country.

Finance Minister Bill Morneau gave a variation of both justifications last month in Frankfurt, Germany, to G-20 leaders. There, the Liberal minister noted his approach was a “bit of curiosity.” Morneau pointed to his combination of “tax increases for the rich and tax cuts for the middle class.” He urged the other G-20 finance ministers to follow his lead, arguing for more redistribution, to “better share our success with others”.

For the record, a government that chopped the amount it allows Canadians to deposit into a tax free savings account, nearly in half (to $5,500 from $10,000), is less friendly to the middle class than advertised. And increasing taxes on the rich is not exactly new policy anywhere in the world. All governments start there before levying new and higher taxes on the rest of us. Exhibit A: Remember that the federal government plans a new carbon tax which will hit the middle classes and the poor the hardest. There’s a reason such taxes are labelled a tax on everything—because they are.

That aside, happy-tax nostrums often result from reflexive interventionists who can occasionally be anti-American—not Morneau, but some among the chattering classes. So ponder this: If you love higher and newer taxes and more interfering government, it was the Americans who “invented” all that. Canada’s earliest governments and politicians were latecomers. They did not reflexively think that government and taxes could cure most societal ills if only perfectly calibrated with help from our wallets.

Consider the federal income tax. The Americans introduced their first version in 1862, during the Civil War. It was abandoned a decade later and re-introduced in 1913. Canada’s federal income tax was instituted four years later.

Or gasoline taxes: Nineteen American states began to tax gasoline before the first Canadian province did so (Alberta, in 1922). Likewise, provincial sales taxes in Canada showed up only after American states ventured into territory first (again, Alberta, in 1936 and only for one year before it was cancelled).

Canadian earliest governments deliberately dragged their collective feet on such matters and for good reason: From the time of Canada’s founding and until at least the Second World War, our governments competed to keep the taxes of Canadians lower than the Americans for reasons of immigration and investment.

Tax historian Irwin Gillespie pointed this out when he wrote that “the principle applied to numerous tax rate changes was that they should not exceed the tax levels in the United States.” Then, as now, politicians were right to worry about the deleterious effect of too-high taxes on potential immigrants and investment. “Competition for those mobile human resources, not to mention the capital with which these immigrants arrived, was fierce,” noted Gillespie.

Back to American influence: Recall the oft-heard cliché that “Taxes are the price we pay for civilization.”

That observation came from the U.S. Supreme Court justice Oliver Wendell Holmes Jr., in 1927.

He had a point but within limits. I prefer my governments lean and focused on practical matters and even those varieties (obviously) require taxes. But that basic acknowledgement cannot reasonably be extrapolated to justify modern, unfocused, overly interventionist Leviathan governments and the tax burdens which allow for unjustifiable spending.

Fact is, modern governments shovel our tax dollars into corporate welfare and also award raises to unionized government employees while running regular red ink, and might for decades. Point: They have room—lots of it—to be more prudent.

Besides, some of us can count. Ninety years ago when Justice Holmes Jr. offered his quip, tax levels in the United States and Canada were much lower than today.

Near to the time of Holmes’ observation, taxes as a percentage of the Canadian economy amounted to about 13 per cent (in 1929); by 1933, with a shrunken Great Depression economy, taxes were equivalent to 18.5 per cent. As of 2015, that figure was 38.6 per cent—not the highest ever, which in recent decades was in 1998 at 43.7 per cent of GDP.

To be clear: I would argue that the federal income tax, introduced in 1917, was utterly necessary given Canada was at war. And I would not argue that tax levels and government activities in 1929 or 1933 were necessarily ideal.

But with tax receipts circling 40 per cent of GDP over the last half-century, new and higher taxes cannot today be justified when governments mostly blithely ignore the spending side of their budget and any reforms there. Thus the finance minister is not reasonable in even considering new taxes—for anyone and in any form—at such levels.

The big picture: Instead of an American justice or the present Liberal finance minister’s take on taxes, consider the first post-Confederation Liberal finance minister who recognized both the necessity of taxation but also natural limits for the same.

It was Sir Richard Cartwright, who in his 1878 budget speech made clear that responsible government included limited government: “All taxation is a loss per se,” he said. “It is the sacred duty of the government to take only from the people what is necessary to the proper discharge of the public service; and that taxation in any other mode, is simply in one shape or another, legalized robbery.”

Thus did Cartwright give a classic liberal and Canadian defence of peace, order, good and limited government—at a “tax price” Canadians could afford.

 

Mark Milke is author of Tax Me I’m Canadian: A taxpayer’s guide to your money and how politicians spend it.

 

 


 

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