In Canada today, it is often assumed that our identity rests upon a higher tax burden vis-à-vis the United States. Debates over the proper size of government aside, the historical record is that Canada’s identity was originally found in its attachment to limited government, lower taxes and more robust desire for liberty in contrast to the United States in the 19th century.
For our earliest founders and Finance ministers, attracting immigrants and investment to Canada through the promotion of a low-tax regime was the stated goal for at least the first 50 years of our country’s existence. The Dominion’s leading politicians trumpeted Canada’s lower taxes compared to the tax-happy Americans, an advantage they argued was needed to ensure citizens and would-be immigrants were not lost to the Yanks.
This view was true as it concerned taxes in general, but was also held by the Liberal party of the day as it concerned the main revenue of the day: tariffs. That tax, unlike most, had political appeal, as it could be used to stoke protectionist sentiment where a politician thought it would win votes. The Liberals, who in that age understood themselves as disciples of Adam Smith and thus stood in the tradition of English free-traders and economic liberals, thought higher tariffs were not only uneconomical but also morally questionable.
In 1876, the first post-Confederation Finance minister for the Liberals, Sir Richard Cartwright, responded critically to the call for higher tariffs. And 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 free markets. 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 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.”
For the 50 years between Confederation and the introduction of the wartime income tax in 1917, Canada’s budget speeches had two central themes: Attract people to Canada and build the country. Our Confederation-era politicians assumed a policy of taxes lower than the U.S. as crucial to filling the country with immigrants and with investment, as both were the natural conditions necessary for prosperity:
So what changed? A combination of events and American policy, actually. World War One and the federal income tax is the most obvious example of how an event propelled the introduction of that previously forbidden levy. But while events provided the context, new American policy often provided the justification. When Canadian politicians imposed additional and higher taxes in the late 19th and early 20th century, they invariably did so only after the Americans acted first. Think of almost any modern Canadian tax: federal income tax, gasoline taxes, property taxes, and corporate taxes; all those just noted have American origins.
As well, there were direct legislative influences on Canadian tax laws both federally and provincially. For example, 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 (i.e, “death taxes”), the influence of American legislation in the Canadian versions was clear. As tax historian J. Harvey Perry writes: “The first Canadian Act was drafted in the office of the Attorney General for Ontario and was modelled upon the Acts of New York passed in 1887… The Ontario Act of 1892 was purely American in its origin.”
The pattern established in the last twenty years of the 19th century—where Canadian governments copied the taxing habits and also the legislation of American governments—continued unabated into the new century.
Canada’s federal income tax, introduced in 1917 and three years after the 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.
Thus, far from low taxes being “American,” they were once a most Canadian trait.
Excerpted from Tax Me I’m Canadian – Your Money and How Politicians Spend It, by Mark Milke, published by Thomas & Black.
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