Hot! Tax-happy Uncle Sam

NationalPost.com – Full Comment
December 28, 2013.   Mark Milke

For some present-day Canadians, it is often assumed that our identity rests upon a higher tax burden vis-à-vis the United States. Actually, the historical record is that Canada’s identity was originally found in an attachment to limited government, moderate taxes, and more robust desire for British liberty in contrast to the United States. In the later 19th century, the idea that citizens existed as vassals for the state, to be emptied of money at the whim of a government that wanted revenue for higher purposes, was largely absent from Canada’s founders. Theirs was a classic liberal world, in which the role of the state was to protect the citizen from government and to provide basic services, albeit defined rather narrowly.

Take, for instance, a 1940 Royal Commission described Canada at Confederation as a country that “followed the prescription of Adam Smith”: “Government was thought to have met its purpose when it provided for adequate defence, the enforcement of the general law through the equal administration of justice and maintenance of a few essential public works. Within this framework of order provided by public authority, individuals were expected to work out their own destiny unrestrained and unassisted by governments. There was a general conviction widely confirmed by contemporary example, that Providence helps those who help themselves.”

The Royal Commission noted that British North American governments did not “concern themselves with the daily regulation of the daily pursuits of the people” or assume significant responsibility for welfare. “They took seriously their responsibility for maintaining internal order but they carried them with frugal care.”

Politicians trumpeted Canada’s lower taxes, an advantage British North Americans asserted was needed to ensure citizens and would-be immigrants were not lost to the Yanks

At Canada’s founding then, and for decades afterward, the country’s leaders argued moderate taxation and limited government were necessary for the country’s well-being. For Canada’s earliest founders and finance ministers, attracting immigrants and investment to Canada through the promotion of a low-tax regime vis-à-vis the American rebel nation was the stated goal. The Dominion’s leading politicians trumpeted and contrasted Canada’s lower taxes and less intrusive government with the tax-happy Americans, an advantage British North Americans asserted was needed to ensure citizens and would-be immigrants were not lost to the Yanks.

On specific taxes, the Liberal party of the day disliked the main revenue source at Confederation, tariffs. The Liberals, who at the time understood themselves as disciples of Adam Smith and stood in the tradition of English free traders and economic liberals, thought higher tariffs were not only uneconomic but morally questionable, this because tariffs (unlike most taxes) had political appeal and could be used to stoke protectionist sentiment and win votes. In 1876, the first post-Confederation finance minister for the Liberals, Sir Richard Cartwright, responded critically to the call for higher tariffs. He pointed out that such a hike would be injurious to most Canadians, as it transferred wealth from the many in rural Canada that bought a good to the few in the cities who might manufacture or import the product.

“To enrich a very few and seriously impoverish the great mass of the people,” he said, “is not to add to any great extent to the population of the country, but to promote an artificial transference from the rural districts to the towns and cities at the expense of the agricultural interests.”

Cartwright’s attitude to tariff hikes was buttressed by his philosophy towards taxes in general, which was in line with the classic liberal thought of the late 19th century, which by default favoured open trade with the Americans. It was notably distinct from liberalism one century later in Canada and the U.S., where “liberal” and “socialism” were at times nearly interchangeable. That was not the liberalism of the Cartwright’s time as his 1878 budget speech makes clear: “All taxation is a loss, per se. 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.”

Another Liberal expressed much the same sentiment in the closing decade of the 19th century. In an 1894 speech in Winnipeg, Liberal opposition leader, Wilfrid Laurier (later to become Prime Minister in 1896) attacked the Conservative government’s protectionist policies. He emphasized freedom in a manner that today might be equated with modern American political rhetoric.

The good Saxon word, freedom; freedom in every sense of the term, freedom of speech, freedom of action, freedom in religious life and civil life and last but not least, freedom in commercial life.

In the specific case of an income tax, Canadian politicians between 1867 and 1917 routinely dismissed any call for such a tax as a political death wish

Laurier’s attitude was the predominant one for at least the first 50 years after Confederation. Between 1867 and the introduction of the wartime income tax in 1917, budget speeches from the Dominion government had two central themes: attract people to Canada and build the country. As tax historian Irwin Gillespie has written, Confederation-era politicians assumed a policy of taxes lower than the United States as crucial to filling the country with immigrants and with investment. Both were the natural conditions necessary for prosperity: “Dominion governments feared losing potential immigrants, as well as those immigrants who were newly settled in Canada, to the United States. Thus the principle applied to numerous tax rate changes was that they should not exceed the tax levels in the United States. Competition for those mobile human resources, not to mention the capital with which these immigrants (be they farmers or businessmen) arrived, was fierce. Consequently, all Dominion governments were determined to keep tax rates low.”

The preference went beyond just lower taxes in general; in the specific case of an income tax, Canadian politicians between 1867 and 1917 routinely dismissed any call for such a tax as a political death wish. In 1893, George Foster, the Conservative finance minister, remarked that “I would like to see the man who could be elected in any constituency on a policy of direct taxation.” In addition, many politicians thought a federal income tax would constitute interference with the taxing jurisdiction of the provinces and urban areas of the country that already levied such a tax. As late as 1915, the federal finance minister, a Tory, noted the fact of income taxation in many municipalities and two provinces as one more reason why the Dominion government should not impose an additional income tax.

So what changed? A combination of events and American policy. The money necessary to finance the First World War is the most obvious example of how an event propelled the introduction of a previously forbidden levy. But while events provided the justification, new American policy often provided ready examples and legislation. When Canadian politicians imposed additional and higher taxes in the late 19th and early 20th centuries, they invariably did so only after the Americans taxed first. As well, there were direct legislative influences on Canadian tax laws both federally and provincially. Think of almost any modern Canadian tax: federal income, gasoline, property, and corporate; almost all have American origins.

For example, the Americans brought in a federal income tax briefly in 1862, during the Civil War, abandoned it in 1872, and then after a skirmish in the country’s Supreme Court in the 1890s re-introduced income tax again in 1913. Also, the first provincial corporate tax, in Quebec in 1884, came from an American precedent. The taxation of personal property, common in many Canadian municipalities at Confederation, was also American in origin, not British, as that country abandoned such taxes centuries before. When Ontario and the other provinces introduced succession duty levies (known also as estate taxes or more bluntly as “death taxes”), the influence of American legislation in the Canadian versions was clear. As tax historian Harvey Perry writes, “The Canadian provincial legislation was inspired by and modelled after legislation of the American states.”

The pattern established in the last 20 years of the 19th century, where Canadian governments copied the taxing habits and the legislation of American governments, continued unabated into the new century. Canada’s federal income tax, introduced in 1917, 55 years after the first American federal income tax, bore the mark of U.S. legislative influence. Canada’s first federal income tax, brought into being by the Dominion Income War Tax Act of 1917 “bore an unmistakable resemblance to the similar 1913 American legislation,” wrote one historian.

The combination of events and American influence is also obvious in the incidence of Canada’s first gasoline taxes. With the provinces responsible for road construction during this period, the burgeoning growth in vehicle ownership in Canada necessitated new taxes to pay for the additional blacktop. The first gasoline tax in Canada was levied by Alberta in 1922 at a rate of two cents per gallon. But Alberta was hardly the first North American jurisdiction; 19 states placed a tax on gasoline before Alberta. But once the “wild rose” province taxed gasoline, other Canadian provinces soon followed with only Saskatchewan holding out until 1928, and taking pride in having waited that long.

National Post

Excerpted from Tax Me I’m Canadian! A taxpayer’s guide to your money—and how politicians spend it. Thomas & Black, 2013.

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