04/09/2017

The 100th Anniversary Of A Wealth Destroyer

The Rev. Ben Johnson, Acton Institute

Like the United States, Canada instituted its federal income tax 100 years ago. In the states, the progressive income tax was a demand of the original Populist movement and, after being deemed unconstitutional, was adopted into the U.S. Constitution in 1913. But Canada – which marks the 100th anniversary of its income tax this year – saw the tax as a patriotic contribution to war. The origins and unforeseen growth of the personal income tax is the subject of a new collection of essays compiled by the Fraser Institute released on Thursday: From Zero to 50 in 100: The History and Development of Canada’s Personal Income Tax. (The full book may be downloaded as a PDF here.)

As the book illustrates, in its present form, the income tax discourages economic growth, investment, and initiative while punishing far more than those who pay Ottawa’s tax assessments each year.

War and “the conscription of wealth”

Unlike the United States, where the graduated income tax had been a matter of mere class contention and sectionalism, Canada adopted a Personal Income Tax (PIT) against the backdrop of physical warfare. From the first, the PIT came into policy cloaked in the guise of national unity. After three years of the Great War, Canada turned to conscription to fill its military needs. The Military Service Act passed in August 1917, and over the next two years 100,000 Canadian men aged 20 to 45 would be drafted. The armed forces swelled to an incredible 500,000 out of a total population of eight million.

The idea of conscripting able-bodied men to fight and die in World War I intensified calls for a “conscription of wealth.” Yet Sir Thomas White, the Finance Minister and a Conservative, rebuffed those efforts for years. William Watson of McGill University writes:

What changed Minister White’s mind? In a word: conscription. In the summer of 1917, the Commons debated and approved compulsory military service, which until then had been avoided. Quebec separation aside, conscription was the most divisive issue Canadian politics ever contended with. In the election of December 1917, it badly split both the Liberal Party and the country. Both morally and practically, however, conscription was key to the income tax.

Sir White finally bowed to pressure, introducing the Personal Income Tax (PIT) as a more modest alternative to levying a tax on private fortunes. The PIT received Royal Assent two months after its introduction, on September 20, 1917.

The “War Income Tax,” as it was known, affected few Canadians. Only two to eight percent of citizens had to file and, as Lakehead University’s Livio Di Matteo points out in his essay, the personal tax exemption in inflation-adjusted dollars was more than double what it is today.

In both the United States and Canada, the Roaring Twenties brought lower tax rates and prosperity. As U.S. Treasury Secretary Andrew Mellon slashed the top U.S. tax rate from 77 percent to 29 percent, Canadian Finance Minister James Robb cut the PIT by more than 60 percent in 1926 and 1927. In a perceptive essay, Watson sleights Robb for missing the opportunity to do away with the income tax altogether after the war, as Sir Thomas White had suggested upon its introduction.

Perhaps the most important service rendered by this book is the way it documents the wealth-destroying aspects of the personal income tax.

Yet the same historical development would mainstream the income tax as part of everyday life on both sides of the U.S-Canadian border: World War II. The original, four percent PIT rate ballooned to 44 percent, personal withholding began in 1943, and eligibility expanded as the state sought funds for the war effort. While the postwar years saw taxes pared back, they have substantially exceeded their pre-war level in Ottawa and Washington. After the war, Canada dropped the name “Wartime Income Tax” and with it the pretense that the system was tied to just one-half of the welfare/warfare state.

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Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

 

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