Who Pays for Canada?: Taxes and Fairness 9780228002598

Table of contents :
Copyright
Contents
Tables and Figures
Foreword Tax Transparency and Perceptions of Fairness: What It Means, How to Get It, and Why It Matters
Acknowledgments
Introduction Broadening the Tax Conversation
The Comparative Politics of Tax Fairness
1 Funding the State: Taxation in Canada from a Comparative Political Economy Perspective
2 Taxation and Self-Government
The History of Tax Fairness
3 Jealousy of Taxes
4 “Set Apart for the Children of Colored Taxpayers of the Entire Town”: Race, Schools, and Citizenship in Nineteenth-Century Chatham, Ontario
5 How History Helps Us Think about the Politics of Tax Fairness
The Economics Of Tax Fairness
6 How to Sell Tax Reform: Lessons from Canada’s Three Major Postwar Tax Reforms
7 The Limits of Taxation for Reducing Income Inequality
8 Who Pays for Municipal Governments? Pursuing the User Pay Model
The Gender Of Taxation And Tax Breaks
9 Tax Fairness for Families: Evolution of an Idea
10 Are Tax Loopholes Sexist? The Gender Distribution of Federal Tax Expenditures
11 Gender Inequality and Canadian Fiscal Policy: From “Taxing for Growth” to “Taxing for Gender Equality”
The Making Of The Modern Taxpayer
12 Tax Fairness and the Party System: A History
13 Knowledge and Attitudes regarding Taxation
14 Exposing the Political Chameleon: Insights into Canadian Taxpayers’ Perceptions of Tax Fairness
Obstacles To Democratic Tax Accountability
15 The Rock Is a Hard Place: Redistributing Wealth in Twenty-First-Century Newfoundland
16 Who Dies for Canada? How Settler Colonial Dispossession Funds the State
17 Canadians Shaping Tax Havens
Contributors
Index

Citation preview

w h o pay s f o r c a n a d a ?

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Who Pays for Canada? Taxes and Fairness

Edited by e . a . h e a m a n a n d d av i d t o u g h

McGill-­Queen’s University Press Montreal & Kingston • London • Chicago

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©  McGill-Queen’s University Press 2020 ISBN ISBN ISBN ISBN

978-0-2280-0123-2 (cloth) 978-0-2280-0124-9 (paper) 978-0-2280-0259-8 (eP DF ) 978-0-2280-0260-4 (eP UB)

Legal deposit third quarter 2020 Bibliothèque nationale du Québec Printed in Canada on acid-free paper that is 100% ancient forest free (100% post-consumer recycled), processed chlorine free This book has been published with the help of grants from the McGill Institute for the Study of Canada and the Symons Trust Fund for Canadian Studies of Trent University.

We acknowledge the support of the Canada Council for the Arts. Nous remercions le Conseil des arts du Canada de son soutien.

Library and Archives Canada Cataloguing in Publication Title: Who pays for Canada?: taxes and fairness / edited by E.A. Heaman and David Tough. Names: Heaman, E. A. (Elsbeth A.), 1964– editor. | Tough, David, 1971– editor. Description: Includes bibliographical references and index. Identifiers: Canadiana (print) 20200234269 | Canadiana (eb o o k ) 20200234277 | IS BN 9780228001232 (hardcover) | ISB N 9780228001249 (softcover) | IS BN 9780228002598 (P D F ) | ISB N 9780228002604 (eP UB) Subjects: LC S H: Taxation—Canada. | L CS H: Fiscal policy—Canada. Classification: L CC HJ 2449 .W46 2020 | DDC 336.200971—dc23

This book was typeset by Marquis Interscript in 10.5/13 Sabon.

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Contents



Figures and Tables  ix



Foreword: Tax Transparency and Perceptions of Fairness: What It Means, How to Get It, and Why It Matters  xiii Kevin Page

Acknowledgments xix Introduction: Broadening the Tax Conversation  3 E.A. Heaman and David Tough



t h e c o m pa r at i v e p o l i t i c s o f ta x fa i r n e s s

  1 Funding the State: Taxation in Canada from a Comparative Political Economy Perspective  37 Olivier Jacques  2 Taxation and Self-Government  66 Clarence T. Jules and David Paul



t h e h i s t o r y o f ta x fa i r n e s s

 3 Jealousy of Taxes  81 E.A. Heaman   4 “Set Apart for the Children of Colored Taxpayers of the Entire Town”: Race, Schools, and Citizenship in Nineteenth-Century Chatham, Ontario  113 Barrington Walker

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vi Contents

  5 How History Helps Us Think about the Politics of Tax Fairness 129 Shirley Tillotson



t h e e c o n o m i c s o f ta x fa i r n e s s

  6 How to Sell Tax Reform: Lessons from Canada’s Three Major Postwar Tax Reforms  153 William Watson   7 The Limits of Taxation for Reducing Income Inequality  167 Stephen Gordon   8 Who Pays for Municipal Governments? Pursuing the User Pay Model 183 Lindsay M. Tedds



t h e g e n d e r o f ta x at i o n a n d ta x b r e a k s

  9 Tax Fairness for Families: Evolution of an Idea  201 Frances Woolley 10 Are Tax Loopholes Sexist? The Gender Distribution of Federal Tax Expenditures 222 David Macdonald 11 Gender Inequality and Canadian Fiscal Policy: From “Taxing for Growth” to “Taxing for Gender Equality”  240 Kathleen A. Lahey



t h e m a k i n g o f t h e m o d e r n ta x pay e r

12 Tax Fairness and the Party System: A History  287 David Tough 13 Knowledge and Attitudes regarding Taxation  300 Antoine Genest-Grégoire, Luc Godbout, and Jean-Herman Guay 14 Exposing the Political Chameleon: Insights into Canadian Taxpayers’ Perceptions of Tax Fairness  320 Jonathan Farrar, Dawn Massey, and Linda Thorne

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Contents



vii

o b s ta c l e s t o d e m o c r at i c ta x a c c o u n ta b i l i t y

15 The Rock Is a Hard Place: Redistributing Wealth in Twenty-FirstCentury Newfoundland  337 Robert C.H. Sweeny 16 Who Dies for Canada? How Settler Colonial Dispossession Funds the State  356 Anna Stanley 17 Canadians Shaping Tax Havens  379 Alain Deneault Contributors 395 Index 401

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Tables and Figures

ta b l e s

1.1 9.1

9.2

10.1 11.1 11.2 11.3 11.4 11.5 11.6

11.7

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Arguments about the institutional causes of tax policy distinctiveness 58 Income taxes payable by an unattached individual, Canada, US, and recommended rate, reproduced from the Carter Report 209 Income taxes payable by a family with two children, Canada, US, and recommended rate, reproduced from the Carter Report  210 Tax expenditure costs (mil) and proportion of benefits going to men (2018)  226–7 Human development, gender, and tax ratio indicators, ­selected countries, 1995 to 2015  251 Revenue holes created by 1997–2005 and 2005–2016 ­federal income tax and GST cuts, 2016  254 Distribution of $52.3 billion in cumulative 1997–2016 ­personal income tax cuts, by decile and gender, 2016  256 Allocation of selected personal income tax expenditure items, by gender, 2013  259 Tax/transfer expenditures supporting women’s unpaid vs paid work, Canada, 2018  264 Total tax paid plus childcare costs as percentage of full-time earned income for second-parent and single-parent earners, selected OE C D countries, 2015  266 Change in after-tax income with Netherlands federal income tax rates, Canada, by gender and decile, 2016  270

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x

Tables and Figures

11.8 Change in after-tax incomes of individualization of all tax/ transfer provisions, Canada, by gender and decile, 2016  272 13.1 Average scores for the different knowledge sections  305 14.1 Usage of “tax fairness” in Canadian federal budgets, 2009–2018   321 14.2 Important comparisons in the tax context  325 14.3 Framework for Canadian taxpayers’ perceptions of tax fairness 329 15.1 How the top 1 percent of St John’s fared compared with the other 25 metropolitan areas in Canada   349 15.2 Changes in the net worth of Newfoundlanders by quintile, constant 2012 dollars  350 figures

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 7.1 7.2 8.1 8.2 9.1

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Tax revenues as percentage of G D P , O E CD countries, 2015 41 Tax progressivity, O E C D countries, 2005  42 An inverse correlation between tax progressivity and total revenues 43 Proportion of each type of taxes as a share of the total tax burden, 2015  44 Pensions and unemployment benefits depend on social ­security contributions  45 Taxes on goods and services, percentage of G D P , O E CD countries, 2015  47 Property taxes, percentage of G D P , O E CD countries, 2015 48 Ratio of capital taxes to labour taxes, 2012  49 Interprovincial differences in tax revenues, 2016  50 Corporate income tax rates and revenues in O E CD ­countries, 1981–2016  174 US top incomes and Canadian top income shares  176 Share of own-source revenue raised by source and level of government, 1998 vs 2016   190 Share of own-source revenues by municipal governments by province, 2016  191 Taxes paid by married couple with two dependent children, one earner, in Canadian dollars, 1966: UK, Canada, US, and Carter Commission recommended rate  207

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9.2 10.1 10.2 10.3 10.4 10.5 11.1

11.2

11.3 13.1 13.2

13.3

13.4 13.5 13.6 13.7 13.8 15.1 15.2 15.3 15.4 15.5

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Tables and Figures

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The Carter Commission’s recommended rate schedules  211 Top five large tax expenditures for women (2018)  228 Top five large tax expenditures for men (2018)  231 RR SP gender impact disaggregated (2018)  232 Federal transfers benefit by gender (2018)  235 Total tax expenditures compared to total transfers (2018) 237 Personal, corporate, social contribution, and consumption tax revenue as percentage of total revenue in low-, medium-, and high-income countries, 1990  244 Personal, corporate, social contribution, and consumption tax revenue as percentage of total revenue in low-, medium-, and high-income countries, 2014  245 Average market income, by gender and age (estimated) Canada, 2016  255 In your opinion, which of these income sources are taxable or non-taxable?  303 Based on the following list of products and services, state whether the Quebec sales tax (Q S T ), the goods and services tax (GST ), or both taxes are applicable  304 When you contribute $1,000 to a registered retirement savings plan, the tax refund that you get is about the same regardless of your level of income  304 Weighted effects of personal characteristics on global score 308 Objective classification  312 Subjective classification   312 Self-assessment errors  313 Opinion on tax burden of high-income earners  314 Net profits compared to wages and salaries  339 The evolution in provincial revenues, 2000–2017  340 Rapidly changing fortunes: people and income in 2007 and 2015 compared  342 Basking in the sunshine: provincial income tax as a ­proportion of total income  343 Contrasting experiences of poverty for women in Newfoundland and Canada, 2004–15  351

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Foreword

Tax Transparency and Perceptions of Fairness: What It Means, How to Get It, and Why It Matters Kevin Page

In his Prison Notebooks, written in the 1920s, Antonio Gramsci said presciently, “The crisis consists precisely in the fact that the old is dying and the new cannot be born. In this interregnum a great variety of morbid symptoms appear.” I share this feeling that from many perspectives – geopolitical, environmental, social, and economic – the world is stuck in a gap between paradigms. The “morbid symptoms” play out on the nightly news – Brexit and the possible weakening of the European project; severe storms that reminds us that we do not have infrastructure to deal with climate change; suicides by young indigenous people or veterans dealing with P T S D ; a US economy turning inwards with an America First trade strategy. Hebrew University history professor and popular author Yuval Noah Harari raises a number of questions in his 2015 book, Homo Deus: A Brief History of Tomorrow, that policymakers of all types must grapple with in this century: “What will happen to the job market once artificial intelligence outperforms humans in most cognitive tasks? What will be the political impact of a massive new class of economically less useful people? What will happen to relationships, families and pension funds when nanotechnology and regenerative medicine turn eighty into the new fifty? What will happen to human society when biotechnology enables us to have designer babies, and to open unprecedented gaps between the rich and poor? We do not

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Kevin Page

know the future. As Maynard Keynes said: ‘the future is not uncertain, it is unknowable.’”1 What if Professor Harari has it right? What if he is even half right? What are the implications for effective public policy – including tax policy – and the principles, institutions, and processes that must support it? I want to thank the McGill Institute for the Study of Canada for organizing the 23rd Annual Conference around the theme of taxes and fairness. It is a great topic for our times. For the past few decades, much of the policy discussion in Ottawa and most provincial capitals has been around tax reduction and economic growth. Budgetary deficits have returned at federal and provincial levels. Debt continues to rise even though recent economic growth has closed the estimated output gap. The deficits are now structural in nature. Tax fairness should be front and centre of public debate, and so should transparency. Governments need to be strongly encouraged to be more transparent. pbo experience

My experience as the Parliamentary budget officer from 2008 to 2013 underscored the truism that there is no accountability without transparency. Between election periods, more often than not, the government of the day demonstrated reluctance to share analysis that supported their decisions on new initiatives. Without this analysis and a supporting plan with objectives, there was very little made available to Parliament to carry out their fiduciary responsibility to hold the government to account. No financial analysis was provided to support their decision to move forward with changes to the criminal code (the “tough on crime” agenda). No analysis was provided to support their position that the Old Age Security program was not sustainable. Only under political duress and in a minority Parliament scenario did the government provide information on their assumed cost of deficitfinanced corporate tax reductions. A scathing Auditor General Report was necessary to get the government to provide a transparent costing of the proposed procurement of a fighter plane. The government refused to provide Parliament with a plan on how they would achieve significant fiscal savings to operations necessary to return the budget to balance. Without adequate transparency, the level of discourse and debate by our policymakers is restricted. We did not properly debate the quality of our veteran benefit programs in the 2008 election when the

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Foreword

xv

cost of the Afghanistan war was an issue. We did not debate the fiscal sustainability issues on the reductions to sales and corporate taxes, or the corresponding policy impacts resulting to changes to the Canada Health Transfer or Old Age Security, or the multi-year freeze on operational spending resulting from the revenue shortfall. Take away transparency, it becomes very difficult for parliamentarians to hold the government to account. But there are other issues as well. Debate suffers, which hurts future policy development. For example, we should have had a debate on the array of options to be “tough on crime,” including prevention. Fairness issues were everywhere in the policies that were being proposed and unfortunately nowhere in the debate. s h i n i n g a l i g h t o n t r a n s pa r e n c y

Public finance practitioners owe a debt of gratitude to philosophers, political scientists, and media experts for deepening our understanding of the concept of transparency. To be frank, the more I look at the concept of transparency through their eyes, the more complex and less transparent the concept is. Dictionary definitions of transparency are the easiest to grasp. “The characteristic of being easy to see through.” “The quality of being done in an open way without secrets.” To be frank, it is not so easy to connect these definitions of transparency to our tax system in Canada. Transparency theorists add some necessary complexity to the discussion. They give us tools to deepen our understanding of the relationship of transparency to principles of taxation. David Heald, the University of Glasgow professor, describes transparency as the principle of enabling the public to gain information about the operations and structures of a given entity.2 Transparency is given a sense of direction – upwards, downwards, outwards, and inwards. To draw from Einstein, it is all relative to where you are when policy is being made and taxes are being administered. Governments tend to like upward transparency. They want to know what is in the minds of taxpayers in their pre-budget consultation exercises. They are not always as transparent when it comes to downward transparency; it is much easier to tell taxpayers how much they will save with a new tax expenditure than to tell other taxpayers how much more they must pay as a result of entering a higher rate or bracket adjustment.

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Kevin Page

Open government, on the other hand, is about outward and inward transparency. The fall 2017 audit report on the Canada Revenue Agency indicated that Canadians were not treated honestly and fairly when making enquiries. Data on call centre performance was being inappropriately manipulated to enhance perceptions of CRA customer performance. There were stresses on both outward and inward dimensions to transparency. According to transparency theorists, there are a number of varieties or dimensions to transparency – backward looking (changes to historical tax rates and brackets) versus real time (revenues reported in the latest Fiscal Monitor); events (e.g., Budget 2017) vs processes (e.g. the 2017 small business tax reform consultation); nominal transparency (i.e., the measurement of transparency in the Open Budget Survey and effective transparency (i.e., the capacity of Tax Commissions to report to citizens on the state of taxation). I mention this framework because it could be very useful in developing new frameworks to enhance tax transparency. I think the real contribution of transparency theorists is their reminder that transparency is not an absolute value. There are limits to our knowing. Citizens very often depend on third-party intermediaries to help explain policy changes, in addition to information provided by governments. Many citizens struggled with the changes to income splitting and small business taxation in 2017. Very often, the higher the level of information costs, the less useful transparency. Governments provided information but much of it goes above the heads of average citizens. Taxation is complicated. Information costs are high. t r a n s pa r e n c y a n d p e r c e p t i o n s o f ta x fa i r n e s s

The search for fairness in taxation is a journey with no end. Events like the 2008 financial crisis – the factors that lead to the crisis and the policies subsequently implemented – can reshape ideas and perceptions. It was a learning moment for many citizens. Unemployment rates skyrocketed. Banks were bailed out even though they played a key role in the creation of the crisis. Bad behaviour was excused. Government debt has gone up since then, and future taxpayers will get the bill. There is an ongoing tension between what is desirable and what is possible. Citizen reaction to Liberal reforms to income tax rates in

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Foreword

xvii

2016 were more muted than the strong and organized reaction to changes proposed to small business taxation in 2017. Both changes were made in the name of fairness and both were accompanied by reasonable amounts of transparency. The government backtracked. Small business tax rates were lowered. Fairness comes with a price. I think there is more or less general agreement that the principles that dominated textbooks on taxation have proven to be durable. Economists continue to talk about fairness in terms of horizontal and vertical equity. The framework to examine fairness – ability to pay, who benefits, fairness between generations and jurisdictions, and process fairness – remain useful and largely intact. The new work being done by scientists and behaviour economists may shape the way we think about fairness and taxation as we grapple with those big policy issues highlighted by Harari for the twenty-first century. Scientists are studying the neural basis of perceived unfairness using experiments and brain imaging. Their findings suggest that perceived fairness and social decisions are part of a complex interaction between fairness norms, self-interest, and reward.3 It should come as no surprise that perceptions of fairness are shaped by self-interest. In a paper published in the America Economic Review in 2011 entitled “The Limits of Transparency, Pitfalls and Potential of Disclosing Conflicts of Interest,”4 the authors make the case that while disclosure is inherently desirable, the extent that the information provided improves outcomes depends on what information is delivered, how it is delivered, and how it is utilized. To me this means that perceived tax fairness is dependent upon a comprehensive approach to transparency. I have been impressed with the way climate change scientists are evolving and grappling with transparency. Michael Oppenheimer, one of the authors of the I P C C Fifth Assessment Report in 2014, made the point quite clearly: “The process by which scientists give advice to policymakers should be the exact opposite of the climactic scene in ‘Wizard of Oz’ – we want them paying attention to the people behind the curtain.”5 The conversation is broadening beyond future changes to the climate system to include the consequences to human populations. Can policymakers be more transparent about the social, economic, and fiscal consequences and perceived fairness issues about future changes to the tax system to address climate change or income inequality, if we try to be clearer about the impacts on citizens?

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is the future closer than we think?

William Gibson, the Canadian science fiction writer, famously said, “The future is already here – it’s just not evenly distributed.” My hunch is that big tax policy changes are coming over the next few decades to address global economic and environmental issues. Tax fairness will be a major issue. We will need a comprehensive approach to transparency to enhance trust and facilitate change. Some time ago, Finance Canada would regularly publish a document titled Where Your Tax Dollar Goes. Should we bring this document back? The Global Initiative for Fiscal Transparency (G I F T ), a think tank centred in Washington with broad support from international organizations like the OECD, the IMF, and the World Bank, has a set of public finance principles with a focus on transparency. What if we borrowed from the work of the transparency theorists and made a comprehensive capacity check on how Canada is standing up for tax transparency? The United Kingdom has moved aggressively since the 2008 financial crisis to promote transparency. They have launched initiatives like a Taxpayer Charter. The O E CD Global Initiative for Tax Transparency is making progress on information exchanges to reduce tax gaps. They are now providing estimates of increased revenue resulting from these initiatives. Could Canada learn from the UK and OEC D efforts?

notes

  1 Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow (New York: Harper, 2017; translation by author of the 2015 Hebrew edition).   2 Christopher Hood and David Heald, eds., Transparency: The Key to Better Governance (Oxford: Oxford University Press, 2006).   3 Bidhan Lamichhane, Bhim Mani Adhikari, Sarah F. Brosnan, and Mukesh Dhamala, “The Neural Basis of Perceived Unfairness in Economic Exchanges,” Brain Connect 4, 8 (October 2014): 619–30.   4 George Loewenstein, Daylian M. Cain, and Sunita Sah, “The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest,” American Economic Review 101, 3 (May 2011): 423–8.   5 Michael Oppenheimer, “The Fire through the Smoke: Working for Transparency in Climate Projections,” Research brief on IPC C reasons for concern regarding climate change risks, Nature Climate Change 7 (January 2017): 28–37.

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Acknowledgments

This book began as a conference at the McGill Institute for the Study of Canada in February 2018. That conference had many supporters to whom we remain extremely grateful. The Social Sciences and Humanities Research Council of Canada supported it with a Connections grant. Further financial support came from the L.R. Wilson Institute for the Study of Canada, and Canadians for Tax Fairness, steadfast allies. At McGill, we received support from the Department of History and Classical Studies, the Dean of Arts Development Fund, and the Max Bell School for Public Policy. Thanks to Ian McKay, Max Dagenais, Dennis Howlett, David Wright, Antonia Maioni, and Christopher Ragan; thanks also to Principal Suzanne Fortier and Provost Christopher Manfredi for moral support. But it was, above all, Charles Bronfman’s magnificent endowment for the McGill Institute for the Study of Canada that enabled us to host and support this conversation. Warm thanks to the Board of Trustees of the McGill Institute for the Study of Canada, most particularly to Ann Dadson, another steadfast ally. The administrative staff at the McGill Institute for the Study of Canada worked heroically to make the conference a success, especially Adriana Goreta, Petros Psarudis, Johanne Bilodeau, and above all, Alexandra Tselepi, who bore the greatest burden with unfailing professionalism and efficiency. Maureen Donato helped with the grant application; Cynthia Lee and Ann Lagacé Dowson helped us to get the word out. Academic debts are too numerous to itemize in full, but a special debt is owed to Bill Watson, Chris Ragan, and Andrew Potter, who helped to get the project off the ground and to rope in colleagues; also to Kevin Page for his support. The speakers, chairs, and discussants

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xx Acknowledgments

brought amazing intellectual firepower to the conversation and imparted a lasting momentum. As well as the authors represented here, we owe a debt of gratitude to Brigitte Alepin, Sébastien Breau, Allison Christians, Bill Curry, Michèle Dagenais, Peter Dietsch, Allan Downey, Joseph Heath, Jack Jedwab, Juliet Johnson, Laura Madokoro, Jack Mintz, Irma Mosquera, Vida Panitch, Stephanie Paterson, Martin Petitclerc, Robert Raizenne, Christa Scholtz, Chelsea Vowel, Daniel Weinstock, and Will Wilkinson. Both the program and an insightful analysis of the conference written by Olivier Jacques can be found on the website of the McGill Institute for the Study of Canada. Heaman owes a special debt to Shirley Tillotson, who phoned her up one day to persuade her that taxes were interesting enough to be the focus of a new, collaborative research project. That was the beginning of a terrifically stimulating conversation that continues to pay off, every day, in new insights and an ever-heightened sense of respect and gratitude for collegiality. Jonathan Crago at McGill-Queen’s University Press championed this book from the beginning and the current director of the McGill Institute for the Study of Canada, Daniel Béland, generously supported the costs of publication. We also gratefully acknowledge aid from the Symons Trust for Canadian Studies at Trent University. We thank, also, the peer reviewers for their helpful advice. Thanks also to Finn Purcell and Kathleen Fraser, Jennifer Roberts and Filomena Falocco, who helped us to get the book into a readable and a marketable shape, to JoAnne Burek for the index, and last but not least, to Susan Glickman, our painstaking and wonderful copyeditor.

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w h o pay s f o r c a n a d a ?

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introduction

Broadening the Tax Conversation E.A. Heaman and David Tough

Are Canadians fair or is that just a story we tell ourselves? Can we reconcile claims to fairness with the evidence from history, politics, economics, and law? Some see in Canada’s national development an arc of justice, others systemic injustice, still others a muddle of “one damn thing after another.” Different views can add up to a cacophony of arguments with scant likelihood of intellectual or political closure. But there is much to be learned from the ways that different ideas of fairness have prevailed at particular times and places. Modern states that legitimate themselves in reference to public opinion cannot dispense either with taxation or with claims to the fairness of that taxation.1 There can be no fairness without tax fairness: tax policy is where we negotiate the relationship between wealth and poverty, equality and inequality, according to our conceptions of human autonomy, dignity, and necessity. So long as there are both rich and poor, there will be incompatible demands for lower and higher taxes. Taxes, as “compulsory payments to an established authority,”2 speak to the most essential questions of political and legal legitimacy. Most laws aim to protect persons and property, but they must first encroach on both persons and property in order to shoulder that role. Charles Tilley argues that to protect their lands, people, and wealth, monarchs had to fight wars; to that end they had to tax and conscript. Michael Mann similarly remarks that the “subordinate classes” were “caged into national organization, into politics, by two principal zookeepers: tax gatherers and recruiting officers.”3 More efficient taxation reached a broader spectrum of the population and made itself more politically accountable to the democratizing public, resulting, in the twentieth

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4

E.A. Heaman and David Tough

century, in mass democracy and mass taxation. Taxes, thus, encroach to protect and, as such, they annoy taxpayers and they trouble liberal theorists who invoke John Locke’s arguments for the autonomy of property as a guarantee of liberty. As summarized by Jeremy Waldron: “‘The reason why men enter into society,’ says Locke, is the preservation of their Property,’ and that, as he said, presupposes that people already have property and that property is neither the work nor the plaything of public law.”4 Tax complaints are as inevitable as complaints about the weather. Robertson Davies’s fictional newspaperman, Samuel Marchbanks, was never more an everyman than when he complained that “the Canadian male is so hounded by taxes and the rigours of our climate that he is lucky to be alive.”5 Was he right to complain about his taxes? A conservative economist would argue that he was overtaxed and is well-served by recent tax cuts. A progressive social democrat, on the other hand, would see selfishness beating out social solidarity and undermining the state’s mandate to carry the protection of persons and properties into the realm of social welfare. That’s an old debate that shows no signs of abating. It has produced a lot of political platforms, op eds, and cartoons, some funny, some foolish, some profound. Canadians, for all their reputation as docile taxpayers, have the usual spectrum of wit and wisdom, resentment and anger, around tax debates, as this collection seeks to show as it wrestles with Canadian ideas and practices regarding tax fairness. There’s no monolithic voice in operation: a wide range of disciplinary and political perspectives is provided. There’s no agreement here about how to define tax fairness. But collectively these essays seek to build intellectual bridges and take the argument to larger questions about individual and collective rights, freedoms, obligations, and governance. Tax debates focus on the material side of such questions, recognizing that, pace Boethius, rights and freedom require material measures, not just subjective ones. Every time the state taxes and spends a penny, it is performing an act of fiscal reallocation and redistributing that penny at the expense of someone else. Some such reallocations have a Robin Hood effect: they take from the rich and give to the poor. But others look more like something the Sheriff of Nottingham might have dreamed up: they transfer wealth from the poor to the rich. Philip Alston and Nikki Reisch argue, in their recent collection of essays Tax, Inequality, and Human Rights, that “in many countries, the net transfers from the government budget to the wealthy will be far higher than

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any of the comparable amounts paid out in welfare or other public services to the poor.”6 That seems counterintuitive. Historically, the argument against democracy was that wealth could not survive it because the poor would use the state to seize the wealth of the rich. And yet, time and again, we see widespread popular support for what Isaac Martin Smith calls “rich people’s movements” in favour of tax cuts. Some tax cuts are accomplished by disenfranchisement, but some genuinely reflect public consensus. These are complicated debates with complicated evidence about whom the tax falls on – its incidence – amidst the contemporary proliferation of overlapping and contradictory taxes. Even if the incidence of personal income tax can be traced, McGill legal scholar Allison Christians argues, it’s harder to measure the incidence of corporate taxes that might or might not fall on workers, managers, shareholders, or consumers. She concludes: “the consensus is that there are too many variables to make analysis meaningful.”7 But lack of consensus doesn’t stop economists from advising one tax after another as more likely to fall on one group than another, or from denouncing other taxes as ill-advised. Politicians, economist Glen Hodgson recently argued in the Globe and Mail (“Canada’s most authoritative newspaper”), ignore “considered analysis” to adopt policies “first and foremost to win popular support, regardless whether there is any hard evidence that it would be good for the economy and society. Numerous recent examples spring quickly to mind.” The one provided: that an increase in the top marginal rate meant that eastern Canadian high earners took home “less than 50 cents of every additional dollar earned above $210,000 when combined with provincial income taxes.” But what strikes Hodgson as self-evidently unfair might be seen from another angle as reflecting reasoned local choices and circumstances.8 Readers’ comments ranged from pro- to anti-tax, with an emphasis on anti, including one “Chad Chen” outraged that any tax from any single man might go towards “child poverty reduction.” Questions of fairness raise questions as to whether there’s such a thing as a broader public good that transcends self-interest and whether states can rationally pursue it. Modern tax history began when Adam Smith cast that basic premise into doubt with his argument for the “invisible hand” of the marketplace. Following David Hume, Smith argued that the market produced better economic outcomes than did human beings acting politically. His Wealth of Nations was an indictment of state capture. But it indicted some taxes, not all

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taxes. Smith recommended four principles for fair taxation: taxes should be proportionate to ability to pay, non-arbitrary, convenient, and efficient. These were empirical criteria and economists developed mathematical and statistical methods to measure them. Hodgson softpedals his evidence but does urge evidence-based taxation. If the first century after Wealth of Nations saw a tendency towards the dismantling of unfair taxes, the second century saw a tendency towards what we might call the “remantling” of better, more evidence-based taxes reflecting Smith’s criteria. Canada’s introduction of progressive income tax in 1917 reflected ability to pay and underwrote a significant expansion of state taxation and redistribution that peaked half a century later, around the time of Canada’s centenary. But now, another half century later, we see a marked global and national turn away from the visible hand of the state and towards a more liberal view that rejects not just unfair taxes but the very principle of taxation itself. Prime Minister Stephen Harper memorably observed in July 2009: “You know, there’s two schools in economics on this. One is that there are some good taxes and the other is that no taxes are good taxes. I’m in the latter category. I don’t believe that any taxes are good taxes.” Historian-columnist Jeffrey Simpson described that theory as ludicrous, wrong, and scary,9 but it has its supporters amongst the “Chad Chens” of this world. Wealthy interests try to make tax hikes not just unlikely but unthinkable. They have also funded think tanks to do that work for them. The Fraser Institute, with which Glen Hodgson is affiliated, for example, has taken money from the notoriously antitax Koch brothers – as have another 300-plus universities and schools10 – and has consistently advocated low-tax regimes. That doesn’t make any of them corrupt, but it does raise questions about whether the vociferousness and vehemence of a tax grievance may mask rather than reveal the reasonableness of the complaint. Policy scholars across Canada and beyond have traced a shift from fairness to efficiency and, with it, the “fading” of redistributive policies.11 Most agree that there’s been a global tax cut since around 1980 – one that began a little later in Canada and has recently begun to reverse by means of tax increases on very high earners.12 But if recent skepticism sounds Smithean, it’s a great deal more pessimistic. Smith’s argument for the invisible hand was increasing prosperity and economic equality that freed “the inhabitants of the country” from war and “servile dependency.” But recent evidence by economist Thomas Piketty and historian Walter Scheidel suggests that the “natural”

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tendency of economic growth is towards increasing economic inequality that has only been reversed by violent catastrophe, never by peaceful policy.13 An economic realism carries the day as both the statist left and the anti-statist right argue that redistributive unfairness infects most state interventions most of the time.14 The right privileges the market; the left, distrusting market outcomes, must posit alternative or improved mechanisms of collective action to achieve justice. Occam’s razor hands victory to the former. But if fairness can do without the state, the state cannot do without fairness. It’s hard to imagine justifying deliberation and legal compulsion without some norms of fairness. Try dishing out ice cream to the kids without regard to fairness. We continually negotiate fairness in our private and public lives. Every time the state makes a decision, it has to claim that some sort of deliberation went into the decisionmaking and that due regard was given to fairness, even if that fairness is constrained by scarce resources, questions of efficiency, and the like. Even a minimal night-watchman state needs its minimal revenue and must defend as “fair” its ways of extracting that revenue. Politicians are not likely to stay in power if they tell an empowered public: “Well, this time round, I decided that I’d be unfair.” They might whisper it to their cronies in back rooms, but they must tell the public that they make their choices deliberately and with regard to fairness. The state cannot eschew fairness as an ideal in taxation any more than it can eschew fairness in criminal justice. When state claims to fiscal fairness are too little credible, widespread tax evasion tends to result. Libertarians might welcome such evasion but the erosion of trust carries some economic penalties. Distrust intensifies corruption and undermines such public goods as schools, courts, and elections. High-trust societies prosper better than low-trust societies that cannot deliver goods impartially.15 Attacks on the state as irredeemably corrupt become self-fulfilling prophesies that erode public goods, and wealthy, unregulated corporations may find it easier to discredit smaller states for their lower taxes than bigger ones for their higher taxes. The line between fair and unfair taxes, like that between legitimate tax avoidance and criminal tax evasion, is open to continual redefinition. All sorts of people, rich and poor alike, seek to avoid all the taxes they think they reasonably can. Accountants don’t usually tell their clients that they decided to forego some tax exemptions. But precisely because the distinction is fine, there will always be tax scandals. If there aren’t really big ones – such as the Panama and

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Paradise papers that revealed massive Canadian investment in offshore havens – then there will certainly be smaller ones. Canadian tax rates have fallen by several percentage points in recent years, observes Andrew Jackson, without any obvious slackening of “populist tax rage.”16 So long as there is the slightest sliver of a state, in short, there will be complaints that taxes are impairing what used to be called “a living wage” and “a living profit.”17 Debates about fair taxation are where you get to, when you begin to think about what counts as too poor, and perhaps, also, what counts as too wealthy. Libertarians see only jealousy and resentment in tax demands and insist that wealth is a private matter. Many scholars agree: the rich man’s wealth is no injury to the poor man and equality must aim at equality of opportunity not of outcome.18 Equality seems to demand identity, the “equal every which way” of Kurt Vonnegut’s repellent story of handicapping, “Harrison Bergeron.” Other scholars argue that wealth can exercise too much power and influence, in ways that concretely hurt the poor. A story in The Economist in December 2017, for example, suggested a link between polygamy and fragile states.19 Having multiple wives isn’t like having multiple cars: poor young men compete for a smaller pool in the first scenario. Try telling anyone too poor to marry or mate that life is fair. They’ll have their own ideas. Many young people in Canada see themselves as heavily taxed and as too poor to buy a home or raise a family. It’s going to take a lot of statistics to persuade them that Canada is fiscally fair. Despair at any prospect of getting ahead is like despair at any prospect of fairness and the two tend to converge so as to cause material and measurable harms. American economist and Nobel laureate Angus Deaton and co-author Anne Case have written extensively about “diseases of despair” grounded in economic inequality.20 British and American statistics show a recent and “stunning” reversal in life expectancies, some of it attributed to high rates of death from drugs, alcohol, and suicide.21 The worst example of toxic and oppressive wealth is slavery. Wealth in slaves was particularly vast and influential in the early United States, amounting to $3 billion on the eve of the Civil War, almost as much as railways and factories combined, and it exerted a long and toxic influence on American public life.22 Only a powerful national state representing a democratic will could check it. Nothing less can check other kinds of toxic wealth, such as the kind that causes environmental devastation. If there can be military norms against scorched-earth

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policy (as there were when James Wolfe inflicted it in Quebec in 1759), developers surely cannot claim a free pass. Wealth must be subjected to public standards of morality and fairness in some form or another in a democratic society. That’s why the fathers of Confederation opposed democracy almost to a man. Canada’s political history shows persistent tensions between the extension of the franchise and the legal and political protection of wealth. To say that economic interests are always hardwired in tax disputes is not to vitiate such disputes as irretrievably biased but to say they are not merely technical ones. An important textbook on taxation begins a chapter on “Fairness” with the remark: “we must make a frank admission: fairness is not in the end a question of economics.”23 Fairness is like objectivity: it dissolves into subjectivity when you try to put your finger on any particular example of it. But the ideal of impartiality remains hardwired wherever knowledge exists, on and off campus. Objectivity is a form of intersubjectivity: knowledge that is rigorous, persuasive, and impartial enough to win over an unbiased interlocutor. Those criteria enable us to distinguish between analysis and propaganda, fact and “alternative” fact. The same is true of fairness. We don’t need unanimity, but we do need an orchestrated solidarity around some basic norms and evidence appropriate to the circumstances of the time and place. And here we move towards the business of this book: an interrogation of the different ways of talking about tax fairness in contemporary Canada. The collection rests on the premise that when different kinds of scholars and activists debate tax fairness amongst themselves, they are making specialized knowledge and experience accessible to non-specialists and thereby popularizing their facts and norms. Tax debates are wide-ranging and eclectic: everybody has an opinion about their taxes. They overlap and circulate expressions of opinion across the full spectrum. No particular genre or venue is more legitimate or expert than another because no one can or should define other people’s interests. Of course, some voices are louder than others and the quieter ones can be drowned out.24 History shows that the wealthiest interests have been particularly likely to influence finance ministers. Liberals complained that Canada’s first prime minister, John A. Macdonald, effectively handed over the tariffs on sugar, flour, and cotton to the millionaire manufacturers of those products. Thus did the Waterloo Advertiser complain in 1893 that sugar baron and senator George Drummond “is worth as much as a whole county. Is it such

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a hardship to say that for the future he shall keep his hands out of the pockets of the five million consumers who are obliged to buy his sugar?”25 The tariff’s upward fiscal redistribution was defended on grounds of nationalism but it remained a persistent challenge to an ordinary, workaday sense of fairness – to what E.P. Thompson, a historian of law and economics in eighteenth-century England, described as “the essential precondition for the effectiveness of law,” namely, “that it shall display an independence from gross manipulation and shall seem to be just.”26 The important binary around tax fairness is not objectivity versus subjectivity but the presence or absence of gross manipulation or bias. Bias here doesn’t just mean a particular perspective: all tax debates hear some version of the age-old claim: “don’t tax him, don’t tax me, tax the fellow behind the tree.” Bias requires rank unfairness or active predation. The head tax on Chinese immigrants introduced in Canada in 1885 was biased; so too were special registration taxes for Chinese miners as well as some taxes that never mentioned the word “Chinese” but aimed at goods they particularly consumed such as unpolished rice.27 Chinese taxes were considered to be fair at the time because Chinese immigrants were accused – on distinctly weak and contested evidence – of tax evasion. Some of those taxes survived court challenges, others did not. In retrospect the head tax was so unfair that the government of Canada apologized for it and paid compensation. It’s hard to imagine that we could ever formulate a rigorous and consensual account of what would be fair taxation of Chinese Canadians. But we can identify instances of unfair taxation so blatant as to generate a kind of consensus around them, a kind of objectivity, based on agreed-upon facts and norms. That’s what lends scientific knowledge its rigour: agreement on facts and norms. The imagined community of the Canadian nation will never command that amount of shared intellectual capital. But with public schooling, newspapers, and other mechanisms of communication, it can have enough in common to achieve a broad measure of consensus for particular political and fiscal policies. The retrospective condemnation of the Chinese head tax commands that kind of widespread consensus in modern-day Canada. That’s an improvement in self-understanding and knowledge that merits the word “progress.” It’s the fruit of scholarly reflection and public debate.

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The head tax example must prompt us to scrutinize complaints of tax evasion carefully for accuracy and bias. We should always require hard evidence. Fiscal animosities can reflect deeper, non-fiscal animosities, including those of race, or region, or gender. They can also reflect animosities of wealth and poverty. All identities have their own tax burdens and lobbies; all accuse others of failing to pay a fair share of taxation. But what, then, is the proper share of taxation? To borrow a response from Philip Larkin: Ah, solving that question Brings the priest and the doctor In their long coats Running over the fields. *** Unlike happiness (the subject of Larkin’s poem), taxes lend themselves to professional analysis and management. There’s a whole history behind that development, one documented by tax historians and economists.28 Expertise has close connections to the modern, researchbased university and research continually remakes it. Tax expertise and university expertise have an intertwined history: if universities did not produce experts able to give tax advice to politicians and private interests, then some other rival organization would do the job, to the detriment of the universities. Tax expertise is like medical expertise in that respect. Tax expertise spans a variety of academic disciplines, represented here by law, accounting, economics, philosophy, history, geography, and politics. And yet economists have achieved a certain hegemony as policy advisors. That’s not just a story about taxes but it’s a story with taxes at its core. American political scientist Daniel Drezner argues that “From Adam Smith onward, economics has been able to preach a ‘win-win’ doctrine. If individuals pursue their self-interest, society as a whole will benefit, as if guided by an invisible hand.” But evidence also plays a role in the story. Economics emerged as a discipline around claims of professional expertise and predictive powers. Economists’ criticisms of government policies could be shrugged off in good times but not in bad times. In 1820s–30s Britain and 1920s– 30s Canada, it’s possible to see a transformative leap forward in the internal organization and political influence of political economy, and

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to see parliamentarians, in joining debate with economists, making themselves more accountable to that expert opinion than to the voting public. In the 1820s–30s, the outcome was economic liberalization; in the 1920s–30s, the outcome was economic managerialism. Economics is not a monolith: terrific debates rage about the pros and cons of government intervention at any given time. But over the last half century we see two distinct trends: on the one hand, the ­victory of the “win-win” arguments for tax cuts; on the other hand, repudiation of forms of knowledge that might challenge low-tax economics. The anti-tax prescriptions from economists began to redirect public policy towards tax cuts from around 1980.29 Those cuts increased economic inequality and created a new super-rich class able and motivated to patronize anti-state, anti-tax economics and economists.30 According to economist Simon Wren-Lewis, austerity economists shaped public policy “not because they were influential, but because they were useful to provide some intellectual credibility to the policy that politicians of the right wanted to pursue.”31 But that usefulness has given the low-tax economists a particular public and academic prominence at the expense of other arguments and other disciplines. According to the comparative sociologist Marion Fourcade, economists “have supplanted lawyers in government and historians in the public sphere.”32 Historian Robert Skidelsky and his son, philosopher Edward Skidelsky, similarly assert: “Economics is not just any academic discipline. It is the theology of our age, the language that all interests, high and low, must speak if they are to win a respectful hearing in the courts of power.” They attribute that development to the breakdown of institutional authority.33 Anthony Kronman, longtime dean of law at Yale, recently argued that “One might without exaggeration say that economics is today the science of administration and policy-making – that every weighing of costs and benefits in pursuit of the greatest good (which is what policy-makers are expected to do) is either a form of economic analysis or an ad hoc judgment with no discipline at all.”34 Such arguments might seem to justify literary scholar Terry Eagleton’s description of universities as “scuppered by their conversion into pseudo-capitalist enterprises under the sway of a brutally philistine managerial ideology … The death of the humanities is now an event waiting on the horizon.”35 If priests and politicians cannot tell you what’s good for you, that leaves only self-interest and the market, which economists claim a particular power to interpret. Sometimes they have refused to

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recognize any but their own rules. As one senior economist explained: “If you don’t follow certain rules, you are not an economist. So that means you should derive the way people behave from strict maximization theory.” To argue by example is considered “anecdotal.”36 According to economist Jack Hirschleifer’s account: “There is only one social science. What gives economics its imperialist invasive power is that our analytical categories – scarcity, cost-preferences, opportunities, etc. – are truly universal in applicability … Thus economics really does constitute the universal grammar of social science.” It’s not clear, muse economists Michel Beaud and Gilles Dostaler (the former based in Paris, the latter in Montreal), “what is left to investigate in anthropology, psychology, political science, sociology and other human sciences, when economics is conceived as the general theory of human behaviour.”37 One is reminded of the classic joke by Dave Allen about the fellow being shown around heaven by Saint Peter who, after inspecting the Muslims, Jews, Anglicans, etc., asks why there’s a big wall. He is quickly shushed: “Oh, behind the wall, you see, we have the Catholics … They like to think that they are the only ones here.” But most economists are more open minded and in truth, in practice, the differences between economics and other disciplines have been recently diminishing, and their conversations cross-fertilizing one another, prompting methodological renewal across the board. Margaret Levi, a prominent political scientist with an important book on taxes, Of Rule and Revenue, criticizes mainstream economic reasoning as long on theory but short on facts: “neoclassical economics and its increasing mathematization and formalization is powerful and parsimonious, but it tends to rely on stylized facts rather than on the observations and details that enrich both the narrative and our confidence that we have explained an actual occurrence.” Her work leans heavily on philosophy and history as well as economics and politics. That push back from empirical research and disciplines, the massive upsurge in available data, and the rise of behavioural economics have all conduced to a recent “data revolution” or empirical turn in economics. Bloomberg columnist Noah Smith cites a series of recent studies to argue that: “the changes are real and substantial. First, the profession has become much more empirical, increasingly emphasizing evidence and data over theoretical conjecture. Second, economists are much more concerned with inequality these days. And finally, economists are more willing to question basic assumptions, such as the premise that economic actors are perfectly rational.”38 The empirical

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turn in economics has set the stage for better interdisciplinary conversations about key norms and data in the different disciplines. So did the Crash of 2008 and the recession that followed. Economists’ failure to predict it discredited narrow modelling. It was also an invitation to the non-economics disciplines to think harder about finance capital, debt, and oversight in their economic, social, and political causes and consequences. The C O V I D -19 crisis invites another such rethinking. Historically, Canadian economists have tended to eschew extreme economic reductionism, to prefer facts to abstractions, and to take a strong interest in social, cultural, and political perspectives. Canadian economics has always had a pronounced historical streak, beginning with Adam Shortt at Queen’s University in 1887 and his contemporaries William Ashley and James Mavor at the University of Toronto and continuing through Harold Innis, and Jacob Viner at Chicago during the interwar years. Innis’s work on the relationship between economics, communications, and statist/imperial configurations continues to be widely cited across the disciplinary spectrum. Postwar Canadian economists were generally statists, especially in Quebec,39 and contemporary tax debate is profoundly inflected with comparative contextual analysis and interdisciplinary debate. That’s not to say that Canadian economists haven’t supported the global trend towards economic deregulation and tax cuts. In 2008, McGill economist Christopher Ragan noted the “remarkable acceptance across the political spectrum of small-c conservative economic principles, ranging from monetary and fiscal discipline to skepticism regarding government ownership and regulation.”40 But a decade later, smallc conservatism puts Ragan at the forefront of the fight for carbon taxes, pitted against more extreme anti-tax positions. Margaret Wente observed in a Globe and Mail column that the dispute lines up “liberals, environmentalists and economists,” for whom “carbon taxes are a virtually painless way to get us to act virtuously, by cutting down on fossil fuels” against Ontario premier Doug Ford for whom “A tax is a tax is a tax.” Wente agreed with Ford: “Forking over billions for the government to use however they like does not strike me as part of the solution.”41 Wente and Ford echo Harper’s anti-tax argument but without deferring to economists as Harper did. And other columns have been even more critical of what Tony Clement, an MP and Treasury Board chair, called “the chattering classes.” There are lots of good grounds for criticizing scholars, but serious criticisms need evidence. Another Globe and Mail columnist, Deborah

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Soh, who has a PhD in “neuroscience” (psychology), offers something like disciplinary ad hominem grounds to “help a non-academic discern whether a study should be taken with a grain of salt.” Soh warns that any affiliation with “gender studies, philosophy, education and English” can vitiate even “hard science.” Another pointer: “See if their online university profile contains progressive buzzwords like ‘inequality,’ ‘lived experience,’ or makes reference to their race, sexual orientation, or status as a woman or feminist.” Such claims, she argues, are incompatible with academic objectivity.42 Kronman takes the same position, as does Wente. That’s a misreading of academic objectivity. Explicitly gendered and racialized scholarship doesn’t bring in bias so much as it corrects pre-existing errors and biases, the kind that could describe, as Barrington Walker has shown, “civilization” as biologically white and claim that “There never was found a nation, tribe, or society, however small, of white savages.”43 That’s the bias that upheld the Chinese head tax, diverted Black-paid taxes to white schools, and insisted that Indian band councils had “no power” to tax white-held property on reserves. A diversity of voices makes for a diversity of interests and findings; there is no better check on bad knowledge and bad policies. The point is so far from arcane academese that it underwrites mainstream comedy, as seen in the satirical Walking Eagle News headline, “Indigenous people relieved white males remain arbiters of what constitutes racism.”44 “I’ve been thinking about the flat tax and how it would inflict hardship on the poor, and I can live with that,” remarks one upscale cartoon diner placidly to another.45 “I would not be opposed to a cat tax,” remarks one cartoon dog to another.46 The politics of inequality are so hardwired that we cannot make sense of history without them. It’s impossible to write objectively about inequality if “objective” means value-free. Concepts of wealth, poverty, and property itself are intrinsically subjective and value-ridden but that does not vitiate all knowledge about them.47 The voice of “lived experience” is the voice of the pleb rebelling against the Olympian view of the philosopher or the patrician, the voice that Shakespeare brings to life at the beginning of Coriolanus: “What authority surfeits on would relieve us,” exclaims a self-styled “poor citizen” complaining of popular leanness and patrician abundance and authority, and calling for revenge “with our pikes, ere we become rakes.” Literature and philosophy no less than popular ire have shaped tax debates from the beginning and to ignore them in favour of conjectural categories is to misunderstand the ways that people think and organize and act,

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including the ways they may claim a special kind of authority, as Soh does. You, the reader, may or may not support redistributive taxation, but you won’t know whether taxes are upwardly or racially or sexually redistributive unless you study the causes and effects of inequality and – history teaches us – you actively correct for regressivity. Poverty matters for tax purposes, and taxes are not some small sideline on “Western Civ” but its very meat and marrow. That’s equally true of Canadian history. Repudiating Piketty’s egalitarian tax proposals, Wente argues that Canadians have never been interested in inequality. “They simply don’t perceive a problem … The obsession with inequality is overwhelmingly a concern of the liberal policy elites – the people who live in rich liberal coastal states, or Toronto’s Annex, or Ottawa’s Glebe.” Wente mocked “a bunch of experts,” the Toronto Star, and the CBC for weighing in on the data and suggested that the real social divide in Canada may not be rich versus poor but policy elites versus masses.48 Actually, the fight for progressive income in 1917 was a real fight, amidst rhetoric as overheated and polarizing as anything seen before or since. Half a century later, Canadians threw themselves into a prolonged constitutional crisis not because Quebecers were merely different but because social science data showed that they were measurably and disturbingly unequal.49 They suffered from a disproportionate poverty well understood to have social, economic, political, and constitutional causes and consequences. In the twenty-first century, it’s the disproportionate poverty of Indigenous peoples, especially children, that prompts “third world” references in headlines, depresses Canadian measures on international scales of well-being, and demands redress.50 Every one of these debates about inequality inspired columns that dismissed it as unworthy of national concern. Pundits who don’t know their history seem to want everyone else to be ignorant as well. To reject knowledge as “elitist” or “political” is a lazy sort of punditry. Better, Toronto philosopher Joseph Heath argues persuasively, to choose truth over the siren song of truthiness.51 To paraphrase one of the most Canadian of all phrases: “If you choose not to know, you still have made a choice.” Tax knowledge is some of the hardest-won and most urgently needed knowledge out there. The best tax knowledge owes something to all the different social sciences and humanities. Taxes and tax revolts are the stuff of modernity and the “thunder of history.” Of course, the different knowledge claims must be held up to the strongest possible tests. The essays presented here show a rich vein of scholarly and

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public debate around ideas, norms, and practices of fair and unfair taxation in Canada going back centuries. Canadian tax history and tax policy provide an excellent vista for thinking about what we do know, what we can know, and how we translate knowledge into fairness. The interest lies both in the internal logic and data of arguments and how they make their way in a wider world. However much individual economists may admire philosophy or politics or history, they aren’t obvious champions for them. Those disciplines need their own champions to take the lead in interdisciplinary conversations. And Canadians have been at the forefront of a broadening intellectual engagement with questions of tax fairness for many years. The “new” tax knowledge has challenged assumptions of fairness and of the very definition of taxation. Tax cuts have, for example, prompted some regressive alternatives to income and property taxes. One example is government funding by lotteries. Canadians pay hundreds of dollars per capita for provincial lottery tickets, a kind of voluntary tax paid disproportionately by poor people that doesn’t show up in the tax tables. Canadian research is lacking in this area, but American analysis shows that the bottom third of households buy over half of all lottery tickets.52 A narrow understanding of tax efficiency might screen some of those larger impacts. Some scholars call lotteries a “tax on poverty”; others apply that descriptor to bank charges, still others to traffic tickets. The latter is also called “taxation by citation”: something that is seen when local communities roll back taxes too far and then compensate by ramping up fines for such minor offences as jaywalking. Arguably, Michael Brown’s death at the hands of a policeman in Ferguson, Missouri, reflected that sort of “taxation by citation.”53 Openly predatory exactions aimed at vulnerable communities are unfair, biased, and predatory and they can have effects that stretch way beyond the merely fiscal or economic. Efficiencyminded scholars cannot ignore interdisciplinary research that carries causal reasoning into broader social or environmental consequences. Tax law has been particularly influential in that respect.54 For example, Olivier de Schutter, a Belgian legal scholar, points to recent evidence from the I MF (International Monetary Fund) that, far from slowing economic growth, redistributive taxes can actually improve it.55 Philosophy of taxation is a vibrant new area of scholarly investigation prompting us to rethink classic accounts of ownership and autonomy. Medicine and health, which are also foundational to the modern research university, also imbricate the economics of fairness, as

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evidenced by the work by Deaton and Case on those “diseases of despair.” But causal inferences are too complicated for wider public debate; better a fairness framework, argues Deaton.56 Kevin Milligan and Tammy Schirle, in a new study of the “longevity gap between rich and poor” find it significantly less pronounced in Canada than in the United States but they, too, warn against facile causal attribution.57 Fairness is less rigorous but more indispensable because it speaks to public opinion, to popular economies of fairness. The inner voice of fairness is like the inner voice of religious conviction: we all have the voice of Luther in our heads to say, at some point, “Here I stand, I can do nothing else.” Think of the beginning of the Arab Spring: the young, Tunisian fruit vendor, Mohamed Bouazizi, who immolated himself to protest fiscal tribute. His plight resonated widely because it offended a sense of fairness. Our goal here is to remind the public that it gets to decide what’s fair. Our institutions are accountable to public opinion, not the other way around. An early Canadian premier, Francis Hincks, said of Canada’s decision to take part in the Great Exhibition of 1851: “In a country where party politics run high, every action of the government is viewed with distrust. Government, therefore, had waited till the people themselves moved.”58 Public opinion alone can give the state the mandate and will to tax fairly. It alone can force governments to rein in propaganda and evasion. If the public doesn’t join in those debates, they deprive politicians of a mandate to act. Public impassivity shapes not just tax legislation but the enforcement of that legislation. Governments don’t tax corporations to the extent that the law permits because there’s not enough public pressure for them to do so.59 Business interests count on popular ignorance; some say they actively promote it. We need to stoke the sense of an informed and empowered public in conversation about fairness with officials and academics. We must acknowledge that such conversations will always generate “alternative facts” by biased parties seeking special deals, who benefit from paralysis caused by epistemological doubt and political polarization. There’s nothing new about lazy punditry or lies, polarization, or a lobbying, swaggering wealth. The democratic public has always bucked the odds. Broad consensus around facts and norms of taxation have underwritten progress in the past and can do so again in the future. We need to align public opinion, scholarly opinion, and state capacity around facts and norms in order to “achieve” our country.60 That’s not easy to do, but it’s a

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calling nonetheless. This collection aims to model that work. It shows past tax debates in that light – scrutinizing both failures and successes – and present norms, rules, and observations about the need and the scope for tax reform. There’s an extensive literature about taxes that deserves to be better understood outside specialized circles, and to be subjected to careful scrutiny and reconstruction so as to reflect a greater diversity in the Canadian public than has ever characterized Canadian economics or Canadian academe writ large. *** Who Pays for Canada? aims at setting new standards for interdisciplinary and town-gown conversations. All authors were asked to write something other than insider baseball. They were asked to explain their methods and their sources even as they made their arguments. That principle of public and interdisciplinary persuasion underlies every essay in this collection. It begins with the foreword by economist Kevin Page who was, between 2008 and 2013, Canada’s “first and indomitable Parliamentary Budget Officer.”61 As such, he fought to make budgets more accountable to public opinion and wrote up those experiences in a searing autobiographical account: Unaccountable: Truth and Lies on Parliament Hill.62 Here, he reflects frankly upon transparency as a public value in relation to taxes. Transparency is urgently necessary, he argues, to enable parliamentarians and the public more generally to hold the government to account. There’s no fairness without transparency but they are both complicated and demanding. The first section, “The Comparative Politics of Tax Fairness,” presents two very different perspectives on Canada as a taxing nation. First, Olivier Jacques provides a superb bird’s eye view of the meeting place of taxation and political science so as to convey some prominent features of Canadian taxation. He shows how political scientists became interested in taxes: where once they assumed that “taxing and spending were two sides of the same coin,” following the work of Sven Steinmo, they discovered that spending patterns can be understood as a kind of informal “bargain” negotiated around revenue patterns. Jacques identifies two such bargains in advanced democracies that see trade-offs between progressive and regressive elements. Some countries concentrate their taxes on the wealthy and then spend those taxes less redistributively. Others – and this is the European model – have a broader base and spend that revenue more redistributively. Canada

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follows the first pattern. Jacques accounts for that choice in terms of a number of factors, including the electoral system and the proximity of the United States. Quebec, he shows, tends to follow the European model of higher taxes and more redistribution. In the second essay, Clarence T. (Manny) Jules and David Paul, chief commissioner and deputy chief commissioner of the First Nations Tax Commission, present an Indigenous perspective on Canadian taxes that beautifully conveys the forcefulness of tax grievances. They point out that Canada’s federal government has pledged its support for nation-tonation relationships with the First Nations of Canada. But authority requires taxing powers. Indigenous Canadians suffer because they lack the mechanisms of fiscal agency and accountability that operate everywhere else in Canada. Taxing powers would enable First Nations to tax profits being made in and from their lands and also to attract much-needed investment capital. In the words of Paul, “You have a revenue-based fiscal relationship. We have a transfer one. The results of which one is superior are evident in the economic and social outcomes.” But this is no mere speculative reform: considerable progress and evidence can be seen under the existing First Nations Fiscal Management Act. Jules identifies more than a thousand tax laws already passed by First Nations, along with improving credit ratings that further enhance access to and use of investment. Such institutions of self-government already working successfully, argues Jules, “are the best bridge from the old Indian Act system to the new one of First Nation jurisdiction. The best way forward is to expand this system.” Under a Westminster-style constitution, such arguments are impeccably orthodox and strategic. The second section provides a historical retrospective on Canadian taxes. The first paper, by E.A. Heaman, identifies some key principles of political economy lending coherence and teleology to Canadian tax history. It argues that David Hume advanced a particular view of tax “modernity” that Canadians emulated in the eighteenth and nineteenth centuries. In the twentieth century, democratization and expertise reconstructed national tax attitudes and policies, but, Heaman argues, some core principles remain relevant to theories of fair taxation into the twenty-first century. The second paper in the section, by Barrington Walker, shows Jim Crowism at work in schooling and school taxes in Canada West (Ontario) during the 1850s. Public schooling has always been one of the most expensive undertakings of the modern state. Schools constructed and they also required a sense of community and

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shared citizenship. But where that sense of community is lacking, segregated schooling results. That story is well known in the United States but Canada, too, had its experiences of virulently anti-Black racism and mechanisms of segregation. Walker’s piece is a sober reminder of the ways that Canadian citizenship has been fiscally and racially contested. Shirley Tillotson, Canada’s leading tax historian, identifies an underlying consistency and rationale in Canadian tax history. She shows that, even though tax policies in the present day may feel particularly unsettling and political, that’s normal. There never was a golden age of certainty and consensus. All the more value, therefore, in understanding how some of the really major tax debates of the past ended. She focuses here on major reforms accomplished in 1948 and 1971. We can see in her analysis a genuine measure of progress in taxation: better knowledge brought to bear upon difficult fiscal and economic questions, and improved mechanisms of communication in a more democratic world, even amidst accusations of uncertainty about tax incidence and “collectivist indoctrination.” It took tremendous effort to command agreement across the broad array of interests affected by taxation, and there’s much to be learned from these moments of success. The next section, “The Economics of Tax Fairness,” showcases three prominent Canadian economists accounting for why particular taxes have succeeded or failed. Like Tillotson, Montrealer William Watson compares the past to the present, noting changes in the speed and scope of reform projects and focusing on some key reforms in the 1960s and the 1980s, and ending with the Wilson reforms of 1991, seen as the last major reform. Watson suggests that a long-running fiscal policy mantra, “Broaden the base and lower the rate,” has its uses and its limits. Watson also retrospectively sees a certain measure of success in the Carter Commission reforms that commissioner J.H. Perry considered a failure. Watson ends his essay with frank reflections on the limits of tax reform projects. Inefficiencies accumulate like barnacles on a ship’s hull, but because the many have so little to gain from any one tax reform and the vested interests so much to lose, vested interests dominate the debates. Nonetheless, historical example shows us how to get the job of reform done. Laval economist Stephen Gordon combines a remarkably concise account of how economists measure equality with an argument as to why taxes may be an inefficient route to greater equality. Canadian taxes, he argues, exist in the shadow of American taxes. If Canadians push up corporate or

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personal income taxes beyond what the taxed are willing to pay, the proximity of the United States with its lower taxes gives them considerable bargaining power. High earners can threaten to leave and can find ways to pass on the costs of higher taxation to others, possibly even increasing economic inequality in the process. Canada cannot simply tax its way to economic equality, thus, and may do better, Gordon agrees with Watson, by eliminating inefficiencies in the tax code that benefit the affluent. Finally, Calgarian Lindsay Tedds discusses municipal taxes. Municipalities merit better analysis than they have had. Tedds quotes Calgary mayor Naheed Nenshi arguing that you might live without federal or provincial services for some months or weeks but wouldn’t last nearly so long without municipal services.63 Municipal taxes levied for such services are particularly likely to be capital taxes or user fees. There’s a distinct set of “rules” around municipal taxation that Tedds here explains and measures against criteria of efficiency, equity, costs, visibility, and accountability. Canada has unusually high taxes on property compared to other countries and Tedds identifies some pros and cons of that approach. The fourth section takes a closer look at gender as a model case study for scrutinizing tax fairness in principle and practice. Tax codes used to be written by men and unreformed tax codes benefit men disproportionately. Proposed reforms take us deep into key questions of horizontal versus vertical equity, i.e. ensuring that taxes strike all similar people in similar ways and ensuring comparable outcomes in different kinds of people. Women’s distinctive social and economic profiles have tax consequences. They are more likely to spend time parenting than men and are more likely to be poor, and these two trends reinforce one another. How to ensure fiscal equity under such circumstances? How to translate family bonds – which rest on love, not economic rationality – into tax laws predicated on economic rationality? Some people have argued for income splitting as a means to fairness, but others see it as a means of reinforcing economic and fiscal unfairness. It has been described as a tax dodge and it is, Shirley Tillotson observes, hard not to see a tax dodge in a $20,000 gift from a Molson scion to his wife in 1925.64 But ordinary people who did not see themselves as wealthy resented restrictions on such donations, and American concessions towards wives and widows lent them ammunition. In this section, we see three scholars explaining the sexist consequences of current tax provisions, providing three distinct perspectives upon them. We see Carleton University economist Frances

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Woolley taking a deep dive into Canadian arguments and biases in regard to personal versus family income tax dating back to the Carter Commission in the 1960s and urging a sociological perspective. We also see Torontonian David Macdonald, who, as a senior economist at the Canadian Centre for Policy Alternatives and author of its annual “alternative budget,” has devoted his life to the kind of public outreach that makes for fiscally literate populations. Here he provides a lesson on how to read a budget so as to understand sexist consequences of loopholes that may seem impartial but that add up to gendered tax expenditures that privilege men over women, effecting a fiscal transfer from women to men. Finally, we see Queen’s University law professor Kathleen Lahey exploring a growing gap between Canada’s reputation for gender equity and its pursuit of that goal in tax policies. She tracks a turning from equity towards efficiency in recent years that shows Canada sinking dramatically on global equity scales. She shows that single mothers, for example, are taxed at higher rates than married couples to the tune of billions of dollars each year. She recommends a concrete list of reforms, including greater individualization. So far, all our authors have provided policy-focused analysis. The next section turns to the object of that policy: the tax-paying public. Fiscal accountability requires that the public understand the tax choices on offer to it. Arguments for and against popular rationality have raged since the Enlightenment and show no signs of stopping. Popular understandings of taxes are particularly interesting for such larger questions of the supposedly rational public sphere because taxes can be measured precisely. There’s a lot of tax resentment out there and it’s well worth understanding both the psychology of that resentment and its institutional props. Historian David Tough begins the section with a paper on the dynamic interplay between tax policies and tax publics. In the early twentieth century, the Canadian public grew exasperated by a two-party political system that refused to accommodate demands for fairer taxation, and forced the parties to accept tax reform despite themselves. Over the next two decades, the major parties remade themselves by situating themselves along a left/ right spectrum whose axis was measurable criteria of fair taxation. Fairness and modernity measured and legitimated one another. But, Tough notes, popular ideas of fairness tended more to collide than to dovetail with political economy. In the next paper, economists Antoine Genest-Grégoire, Luc Godbout, and Jean-Herman Guay scrutinize how much Quebecers know about their tax system and how they

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understand their own economic identity. Do people know the way taxes do or don’t apply to retirement savings, for example, or particular consumables (a sweater versus a novel)? Can they distinguish between a tax deduction and a tax credit? The authors correlate this information with educational and economic status, as well as age and gender. Upper and middle-income people, it turns out, know more about the tax system but they know less about their status than lowincome people. We see serious questions here about the relationship between self-knowledge and self-interest, with significant consequences for views on redistributive taxation. In the third paper, accountancy scholars Jonathan Farrar, Dawn Massey, and Linda Thorne investigate differences between how government and the public define fairness. They bring in procedural fairness and whether taxpayers see themselves in a respectful, two-way exchange of information with the state. When taxpayers cannot get their views across, or cannot get answers, or feel disrespected, they complain of unfairness. Procedural improvements alone cannot make taxes fair but it’s obvious that taxes cannot be fair if they are not procedurally fair. American economist Steven M. Sheffrin has recently argued that the public cares more about procedural than substantive fairness. Whereas scholars focus intensely on philosophical and political questions of inequality and redistribution, “To the average person, tax fairness means something else, primarily receiving benefits commensurate with the taxes one pays, being treated with basic respect by the law and the tax authorities, and respecting legitimate efforts to earn income.”65 The people are not misled: procedural corruption and bias can undo formal principles of fairness. In a country riddled with procedural corruption, even a driver’s licence may not be issued impersonally.66 Procedural corruption of that sort corrodes tax compliance, thereby creating a feedback loop: the state cannot raise enough taxes to administer tax collection fairly, therefore people evade their taxes. Historically, state incapacity was an argument for indirect taxes: John A. Macdonald made the argument explicitly in his final election campaign.67 Revenue Canada must be responsive as well as impartial to seem fair. Obstacles to democratic tax accountability appear as three case studies in the final section of the book. One such obstacle is the “resource curse.” Accountability to taxpayers is harder to achieve when revenue rests heavily on rents from resource extraction, as for example in oil-rich states. Canadians have a long, first-hand experience of that pattern: royalties on such staple products as timber, minerals,

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hydroelectricity, and oil long enabled Canadian provinces to stave off both direct taxation and democracy. H.V. Nelles’s classic account of “the politics of development” in Ontario accused the province of virtually abnegating responsible government by handing provincial policy over to developers. Here, Robert Sweeny and Anna Stanley show the persistence and renewal of such patterns in twenty-firstcentury Canada, Sweeny looking at Newfoundland and Stanley at Indigenous lands. Both see resource wealth pouring into provincial and national coffers, with inadequate return to local populations. In Newfoundland, Sweeny shows, half of the province’s oil reserves were pumped out between 2001 and 2008, and the consequence was a “fundamental shift in fiscal policy.” Progressive taxes on higher incomes were cut and regressive taxes on consumption were increased, so as to “leave the money in the pockets of those who earned it.” The greater the wealth, in short, the more apt it is to be described as private and as requiring protection from the public. Citing David Macdonald’s work, Sweeny denounces the emergence of a new kind of poverty in Newfoundland, one that exists, ironically, “not despite, but because of the greatest economic boom in our history.” This is a debate about who owns Canada and its wealth. Anna Stanley sees current fiscal transfers as ongoing dispossession. She marshals statistics to show that a “stunning wealth” pours from Indigenous lands into the nation state in the form of taxes on natural resources, especially mining, that go to pay for social services – but that Indigenous people receive a ridiculously small return on that stunning wealth, by reason of an institutionalized racism that denies them the same level of social services that non-Indigenous people receive. That’s a welfare story if you think of Indigenous people as impoverished, but it’s a tax story if you think of them as rightful possessors of the land and resources. Wherever “third world” conditions exist, as they do both in and out of Canada, there’s almost certainly a story of unfair taxation at its heart.68 It’s a great irony of Canadian history that Indigenous people were made poor by the modern, taxing state, only to have their interests and voices written out of tax conversations by reason of that poverty. To see them written in as a form of corporate tax credit and risk management is a new kind of commodification. Stanley shows corporations monetizing legal and political challenges to investment and to weak state assertions of sovereignty. That’s true for an internal history of Canadian taxes and all the truer if we take a transnational perspective on those Canadian taxes.

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Philosopher Alain Deneault shows why no consideration of fair taxation can be complete without that transnational perspective. He has long been at the vanguard of international tax studies and especially the history of international tax havens. In recent decades, a great deal of finance capital has essentially de-nationalized itself and largely exempted itself from national taxation. One study of 288 Fortune 500 companies that were profitable every year between 2008 and 2012 shows that 39% paid zero taxes at least one of those years. As Montreal philosopher Peter Dietsch remarks, “not paying taxes has become part of what it means to stay competitive.”69And Canadians, as Deneault has shown in an indispensable series of books and talks, played an outsized and ignoble role in that outcome. International tax havens are excruciatingly difficult to study because they trade on their invisibility. But it’s become increasingly obvious, thanks to hard work by journalists and scholars, that they are sheltering trillions of dollars of wealth from taxation and thereby driving down public revenues in countries around the world. Canada suffers from tax havens but Canada is itself “becoming a tax haven in that its economy is integrated with tax haven jurisdictions.”70 That’s no coincidence: Canadians actually set up some of the earliest Caribbean tax havens, as Canadians Harold Crooks, a filmmaker, and Brigitte Alepin, an accounting professor, have shown in the documentary film The Price We Pay, where Deneault appears as an expert. Canada cannot clean up its own tax house while sustaining international tax havens and harmful tax exemptions in impoverished countries. National tax fairness cannot be achieved without a measure of transnational tax justice. That may sound like bad news. But the work has taken on new momentum in recent years, in work on tax transparency and on base erosion and profit shifting, taken up by the G20 and executed through the Organisation for Economic Co-operation and Development (OECD), that boasts significantly better cooperation and transparency amongst more than 130 countries in order to reduce international tax avoidance. The O E C D boasts of a “major success story,” although scholars – especially those with expertise in the Global South – have been less impressed.71 There’s no escaping tax debates. Whether Canadians are negotiating taxes amongst themselves, or with other nations, or with new nations in the making, they will always need some sort of tax deal, just as Brexiteers still need a tax deal with the European Union. If there’s one thing that tax scholars know, it’s that pluralistic, democratic debates about taxes are an important route to a better social, political, and

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economic consensus and outcomes. They lend themselves to political accountability and to quantitative comparison. The more that we measure fiscal transfers and subject them to academic and public scrutiny, the fairer our norms and data are likely to be. Facts must always fuel fiscal fairness; there can be no fairness without recourse to objective measures. Useful arguments may elevate particular scholars and disciplines over others, but the more powerful such scholars and disciplines become the more critical feedback they may expect, because knowledge, as Michel Foucault observed, is drawn to power. Sometimes knowledge is used to justify the concentration of power and wealth, and sometimes to denounce it. Wealthy and powerful interests long denied the majority of Canadians the vote on grounds that property could only be secure where only taxpayers could vote. But Canadians historically repudiated such claims to unaccountable power or wealth. The original Tories, the ones who fought against responsible government, thought that they didn’t have to defend themselves to anybody but themselves. History proved them wrong. An informed and empowered public is the only thing that can hold wealth accountable to moral standards. Scholars and non-scholars alike may despair to hear bitter, blinkered arguments voiced during tax disputes, such as a recent scuffle between finance minister Bill Morneau and small business over tax reforms or the “Joe the Plumber” debate seen during the American election campaign of 2008 about whether tax hikes kicking in at $250,000 hurt “the rich” or “the American dream.” But to fantasize about an end to tax disputes is to fantasize about an end to the public sphere. This is what healthy public debate looks like. Open and informed debates about tax fairness nurture impartial knowledge and political accountability, consensus, and trust. There’s a long way to go: tax unfairness still rankles and still kills, and our choices are always constrained. We will never get fully consensual “fairness” or “freedom.” But we can equip ourselves to decide whether the balance of experience and evidence makes any particular tax choice more democratizing or more regressive. And so we should.

notes

  1 See, for example, Margaret Levi, Of Rule and Revenue (Berkeley: University of California Press, 1988); Charles Tilly, Coercion, Capital, and European States, AD 990–1990 (London: Blackwell, 1992); David

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Stasavage, Public Debt and the Birth of the Democratic State: France and Great Britain 1688–1789 (Cambridge: Cambridge University Press, 2009).   2 Allison Christians, “Introduction to Tax Policy Theory,” 3 (unpublished paper, May 2018): https://dx.doi.org/10.2139/ssrn.3186791.   3 Michael Mann, The Sources of Social Power, vol. 2 (Cambridge: Cambridge University Press, 1993), 25.   4 Jeremy Waldron, The Rule of Law and the Measure of Property (Cambridge: Cambridge University Press, 2012), 27.   5 Louis Eisenstein, The Ideologies of Taxation (Cambridge, MA : Harvard University Press, 2010).   6 Philip Alston and Nikki Reisch, “Introduction: Fiscal Policy as Human Rights Policy,” in Tax, Inequality, and Human Rights, ed. Alston and Reisch (Oxford: Oxford University Press, 2019), 4.   7 Christians, “Introduction to Tax Policy Theory.”   8 Glen Hodgson, “When Politics Crowds Out Good Tax Policy,” Globe and Mail, 28 April 2019.   9 Jeffrey Simpson, “A Very Scary PM : ‘I Don’t Believe That Any Taxes Are Good Taxes,’” Globe and Mail, 13 July 2009. 10 Henry Heller, The Capitalist University: The Transformations of Higher Education in the United States since 1945 (London: Pluto Press, 2016), 161. 11 Sven Steinmo, “The Evolution of Policy Ideas: Tax Policy in the 20th Century,” British Journal of Politics and International Relations 5, 2 (May 2003): 206–36; Keith Banting and John Myles, eds., Inequality and the Fading of Redistributive Politics (Vancouver: U B C Press, 2013); Richard Swift, ed., The Great Revenue Robbery: How to Stop the Tax Cut Scam and Save Canada (Toronto: Between the Lines, 2013); Alex Himelfarb and Jordan Himelfarb, eds., Tax Is Not a Four-Letter Word: A Different Take on Taxes in Canada (Waterloo: Wilfrid Laurier University Press, 2013). 12 Nicole Fortin, David A. Green, Thomas Lemieux, Kevin Milligan, and W. Craig Riddell, “Canadian Inequality: Recent Developments and Policy Options,” Canadian Public Policy 38, 2 (June 2012): 121–45; Income Inequality: The Canadian Story, eds. David A. Green, W. Craig Riddell, and France St-Hilaire (Montreal: Institute for Research on Public Policy, 2016). On recent tax cuts and tax loads, see Kevin Milligan, twitter thread, 7 August 2019: https://twitter.com/kevinmilligan/status/115925159 1146430465. 13 Thomas Piketty, Capital in the Twenty-First Century, trans. Arthur Goldhammer (Cambridge, M A: Harvard University Press, 2014) and

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Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century (Princeton: Princeton University Press, 2017). 14 Jürgen Habermas, The Structural Transformation of the Public Sphere: An Inquiry into a Category of Bourgeois Society, trans. Thomas Berger (Cambridge, M A: M I T Press, 1991). 15 Douglass C. North, John Joseph Wallis, and Barry R. Weingast, Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (Cambridge: Cambridge University Press, 2009). 16 Andrew Jackson, “Are Canadians Overtaxed? The Equation Is Complicated,” Globe and Mail, 23 December 2018. 17 Michael Bliss, A Living Profit: Studies in the Social History of Canadian Business, 1883–1911 (Toronto: McClelland and Stewart, 1974). 18 William Watson, The Inequality Trap: Fighting Capitalism Instead of Poverty (Toronto: University of Toronto Press, 2015); Vincent Geloso and Steven Horwitz, “Inequality: First, Do No Harm,” Independent Review 22, 1 (Summer 2017): 121–34; also Deirdre McCloskey, most recently “Manifesto for a New American Liberalism, or How to be a Humane Libertarian”: https://www.deirdremccloskey.com/docs/pdf/ McCloskey_ManifestoForANewAmericanLiberalism.pdf. 19 “The Link between Polygamy and War,” The Economist, 19 December 2017: https://www.economist.com/christmas-specials/2017/12/19/thelink-between-polygamy-and-war. 20 Anne Case and Angus Deaton, “Mortality and Morbidity in the 21st Century,” Brookings Papers on Economic Activity (Spring 2017); see also Angus Deaton, The Great Escape: Health, Wealth, and the Origins of Inequality (Princeton: Princeton University Press, 2013). 21 Patrick Collinson, “Life Expectancy Falls by Six Months in Biggest Drop in UK Forecasts,” Guardian, 7 March 2019; Betsy McKay, “U.S. Life Expectancy Falls Further,” Wall Street Journal, 29 November 2018. 22 James L. Huston, Calculating the Value of the Union: Slavery, Property Rights, and the Economic Origins of the Civil War (Chapel Hill: University of North Carolina Press, 2003). 23 Joel Slemrod and Jon Bakija, Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 4th ed. (Cambridge, MA : MIT Press, 2008), 60. 24 David Lewis, Louder Voices: The Corporate Welfare Bums (Toronto: Lorimer, 1972). 25 Waterloo Advertiser, 8 December 1893. 26 Thompson, Whigs and Hunters: The Origin of the Black Act, cited in John Snape, “The ‘Sinews of the State’: Historical Justifications for Taxes and

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Tax Law,” in Philosophical Foundations of Tax Law, ed. Monica Bhandari (Oxford: Oxford University Press, 2017), 24. 27 E.A. Heaman, “‘The Whites Are Wild About It’: Taxation and Racialization in Mid-Victorian British Columbia,” Journal of Policy History 25, 3 (2013): 354–84; Patricia E. Roy, A White Man’s Province: British Columbia Politicians and Chinese and Japanese Immigrants 1858– 1914 (Vancouver: U BC Press, 1989). 28 J. Harvey Perry, Taxes, Tariffs and Subsidies: A History of Canadian Fiscal Development (Toronto: University of Toronto Press, 1955); Shirley Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy (Vancouver: U BC Press, 2017); David Tough, The Terrific Engine: Income Taxation and the Modernization of the Canadian Political Imaginary (Vancouver: U BC Press, 2018). See also W. Irwin Gillespie, Tax, Borrow and Spend: Financing Federal Spending in Canada, 1867–1917 (Ottawa: Carleton University Press, 1995); Geoffrey Hale, The Politics of Taxation in Canada (Toronto: University of Toronto Press, 2001); Stanley L. Winer and Walter Hettich, “Debt and Tariffs: An Empirical Investigation of the Evolution of Revenue Systems,” Journal of Public Economics 45 (1991): 215–42; J. Stephen Ferris, Stanley L. Winer, and Bernard Grofman, “Do Departures from Democratic Accountability Compromise the Stability of Public Finances? Keynesianism, Central Banking, and Minority Governments in the Canadian System of Party Government, 1867–2009,” Constitutional Political Economy 23, 3 (September 2012): 213–43. 29 Historical statistics are available at Statistics Canada; see also William Watson and Jason Clemens, eds., Zero to Fifty in 100 Years: The History and Development of Canada’s Personal Income Tax (Fraser Institute 2017): https://www.fraserinstitute.org/studies/history-and-developmentof-canadas-personal-income-tax-zero-to-50-in-100-years; also Livio Di Matteo, A Federal Fiscal History: Canada, 1867–1917: https://www.­ fraserinstitute.org/sites/default/files/federal-fiscal-history-canada-1867– 2017.pdf. 30 Daniel W. Drezner, The Ideas Industry: How Pessimists, Partisans, and Plutocrats Are Transforming the Marketplace of Ideas (Oxford: Oxford University Press, 2017), 114–15. 31 Simon Wren-Lewis, “Mainly Macro,” blog posting, 21 August 2018: https://mainlymacro.blogspot.com/2018/08/the-biggest-economic-policymistake-of.html. 32 Marion Fourcade, “Economics: The View from Below,” Swiss Journal of Economics and Statistics 154 (2018): 5.

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33 Robert and Edward Skidelsky, How Much Is Enough? Money and the Good Life (New York: Other Press, 2013), 92. 34 Anthony T. Kronman, Education’s End: Why Our Colleges and Universities Have Given Up on the Meaning of Life (New Haven: Yale University Press, 2017), 222–3. 35 Terry Eagleton, Culture (New Haven: Yale University Press, 2016), 152–3. 36 Marion Fourcade, Etienne Ollion, and Yann Algan, “The Superiority of Economists,” Maxpo Discussion Paper 14/3 (2014), 4. 37 Michel Beaud and Gilles Dostaler, Economic Thought since Keynes: A History and Dictionary of Major Economists, trans. Valérie Cauchemez (New York: Routledge, 1995), 121. 38 Noah Smith, “How Econ Went from Philosophy to Science,” Bloomberg, 2 August 2018. 39 Robin Neill, A History of Canadian Economic Thought (London: Routledge, 1991), 162. 40 Christopher Ragan, “Canada’s Virtuous Cycle: A Triumph of Conservative Economics?” Policy Options (October 2008): 16–26. 41 Margaret Wente, “The Coming Carbon Tax Showdown,” Globe and Mail, 19 March 2018. 42 Debra Soh, “In Academia, Censorship and Conformity Have Become the Norm,” Globe and Mail, 28 November 2018. 43 Barrington Walker, “Immigration Policy, Colonization, and the Development of a White Canada,” in Canada and the Third World: Overlapping Histories, ed. Karen Dubinsky, Sean Mills, and Scott Rutherford (Toronto: University of Toronto Press, 2016), 51. 44 “Indigenous People Relieved White Males Remain Arbiters of What Constitutes Racism,” Walking Eagle News, 18 July 2019. 45 J.B. Handelsman, New Yorker, 11 March 1996. 46 Alex Gregory, New Yorker, 7 May 2012. 47 See Ian Hacking, The Social Construction of What? (Cambridge, MA : Harvard University Press, 2000). 48 Margaret Wente, “Who Cares about Inequality? Wonks,” Globe and Mail, 3 May 2014. 49 Valérie Lapointe-Gagnon, Panser le Canada: Une histoire intellectuelle de la commission Laurendeau-Dunton (Montreal: Boréal, 2018). 50 On the “0.2 per cent Economy,” see Arthur Manuel and Ronald M. Derrickson, Unsettling Canada: A National Wake-Up Call (Toronto: Between the Lines, 2015). 51 Joseph Heath, Enlightenment 2.0: Restoring Sanity to Our Politics, Our Economy, and Our Lives (Toronto: HarperCollins, 2014).

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52 Nikki Fleischner, “What the Lottery Has to Say about Poverty,” Global Citizen, 7 November 2015: https://www.globalcitizen.org/en/content/ what-the-lottery-has-to-say-about-poverty/. 53 Eric Schmitt, “Taxation by Citation Undermines Trust between Cops and Citizens,” Wall Street Journal, 7 August 2015; Patricia J. Meanes, “Equity in American Education: The Intersection of Race, Class, and Education,” University of Richmond Law Review 50, 3 (March 2016), 1077. A detailed account of the fiscal squeeze and its broader impact for diversity in policing, business, and demographics is Radley Balko, “How Municipalities in St. Louis County, Mo., Profit from Poverty,” Washington Post, 3 September 2014. 54 David Duff, “Tax Policy and the Virtuous Sovereign: Dworkinian Equality and Redistributive Taxation,” in Philosophical Foundations of Tax Law, ed. Monica Bhandari (Oxford: Oxford University Press, 2017), 167–89. 55 Olivier de Schutter, “Taxing for the Realization of Social, Economic, and Cultural Rights,” in Alston and Reisch, Tax, Inequality and Human Rights, 64. 56 Angus Deaton, “How Inequality Works,” Project Syndicat 21 December 2017. 57 Kevin Milligan and Tammy Schirle, Rich Man, Poor Man: The Policy Implications of Canadians Living Longer (C.D. Howe Institute 2018). 58 Quebec Morning Chronicle, 21 October 1850. 59 David Quentin, remarks, Tax Justice and Human Rights Symposium, McGill University, 19 June 2014. 60 Rosenfeld, Common Sense: A Political History (Cambridge, MA : Harvard University Press, 2014), 146; Richard Rorty, Achieving Our Country: Leftist Thought in Twentieth-Century America (Cambridge, MA : Harvard University Press, 1999). 61 Himelfarb and Himelfarb, Tax Is Not a Four-Letter Word, vii. 62 Kevin Page, Unaccountable: Truth and Lies on Parliament Hill (Toronto: Viking, 2015). 63 Naheed Nenshi, “Words of Welcome,” M I SC 20th Anniversary Symposium, McGill University, 23 September 2014: http://bcooltv.mcgill. ca/ListRecordings.aspx?CourseID=10562. 64 Shirley Tillotson, “The Family as Tax Dodge: Partnership, Individuality, and Gender in the Personal Income Tax Act, 1942–1970,” Canadian Historical Review 90, 3 (September 2009): 395. 65 Steven M. Sheffrin, Tax Fairness and Folk Justice (Cambridge: Cambridge University Press, 2013). 66 North, Wallis, and Weingast, Violence and Social Orders, 11.

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67 Sarah Katherine Gibson and Arthur Milnes, eds., Canada Transformed: The Speeches of Sir John A. Macdonald, a Bicentennial Celebration (Toronto: McClelland and Stewart, 2014): 382–3. 68 See Dubinsky, Mills, and Rutherford, Canada and the Third World. 69 Peter Dietsch, Catching Capital: The Ethics of Tax Competition (Oxford: Oxford University Press, 2015), 5. 70 Alain Deneault, Legalizing Theft: A Short Guide to Tax Havens, trans. Catherine Browne (Toronto: Fernwood, 2018), 38. 71 Mitchell A. Kaine, “Tax and Human Rights: The Moral Valence of Entitlements to Tax, Sovereignty, and Collectives,” in Tax, Inequality, and Human Rights; see also the work of Irma Mosquera Valderrama, including, with I.J.J. Berger, “Corporate Taxation and B EPS: A Fair Slice for Developing Countries?” Erasmus Law Review 10, 1 (2017): 29–47.

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t h e c o m pa r at i v e p o l i t i c s o f ta x fa i r n e s s

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1 Funding the State: Taxation in Canada from a Comparative Political Economy Perspective Olivier Jacques

Despite what many people might believe, the tax burden in Canada remains low in comparison to most other developed economies.1 With its heavy reliance on personal income taxes and property taxes and comparatively low levels of social security contributions and taxes on goods and services, Canada’s tax structure is more progressive than most European countries’ tax systems. Nevertheless, the tax structure in the country is far from uniform: interprovincial differences in terms of revenue levels are often more important than differences between countries. The difference between tax levels in Quebec and Saskatchewan is as large as the difference between Canada and Sweden. The first part of this chapter compares Canada’s tax structure with other developed economies to highlight our tax system’s distinctive features.2 The second part of the chapter explains the size and shape of Canada’s tax structure with theories derived from comparative politics and political economy. In political economy, taxation is conceived as a bargain between political actors regarding their expenditure and revenue-extraction objectives. There are two typical bargains in advanced democracies. The first is a low level/high progressivity tax structure, which does not generate high levels of government spending. The second bargain involves lower tax progressivity but higher tax revenues that are used to fund more generous government spending. Canada’s tax structure fits with the first type along with other AngloAmerican democracies, while more generous European welfare states rely on the second.

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Theories of comparative political economy have focused on institutions to explain these diverging tax policy patterns. They highlight the impact of electoral systems and interest group representation in the policy process, relying on the “Varieties of Capitalism” school.3 Both proportional representation (P R ) electoral systems and a specific system of interest group representation called a “coordinated market economy” (CME) help to foster a bargain between employers, unions, and political parties of different ideologies. Countries with a PR system and a C ME are able to strike a high tax and spending bargain where capital income is proportionately less taxed than labour income. This bargain is impossible in Anglo-American democracies like Canada which rely on a majoritarian electoral system and a system of interestgroup mediation called a “liberal market economy” (LME). In Canada, employers, unions, and political parties are unable to commit to a compromise on tax and spending policies to satisfy their diverging preferences. As a result, taxes and spending levels are lower. The tax system is more progressive because it relies heavily on income taxes while maintaining relatively low levels of social security contributions and taxes on goods and services. Finally, the conclusion reviews the main findings of the chapter and briefly discusses the consequences of Canada’s tax policy choices on income redistribution. It argues that because income redistribution depends on social spending levels, strategies to reduce income inequality should focus on tax revenue levels rather than tax progressivity. 1 c a n a d a ’ s ta x s y s t e m i n a c o m pa r at i v e perspective

Basic Concepts First, it is necessary to explain the fiscal policy concepts used in this chapter. In a progressive tax system, the proportion of taxes paid increases with income (high-income citizens pay a larger proportion of their income in taxes than low-income citizens), whereas in a proportional tax system, the percentage of tax paid is equal along the income distribution. Still, even in a proportional system, high-income citizens pay a larger amount of taxes (40% of $100,000 is more than 40% of $20,000). The most common measure of the tax burden is total tax revenues as a percentage of gross domestic product (GDP). This measure gives an overview of the size of tax revenues in relation to the size of the

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economy and allows for meaningful comparisons between countries and within countries over time. According to the categorization of the Organisation for Economic Cooperation and Development (O E CD ), there are four main types of taxes: taxes on income, profits, and capital gains of individuals and corporations; social security contributions; taxes on property; and taxes on goods and services. Social security contributions are indirectly tied to social benefits. For example, Employment Insurance (EI) premiums and Canada Pension Plan (CPP) contributions are social security contributions. They can be paid by employers, by employees, or by both together, and are used to fund a specific social insurance program. Property taxes include taxes on immovable property (like real estate), as well as wealth and inheritance taxation. Taxes on goods and services are sales taxes on the final consumption of a good or a service, like the Goods and Services Tax (G S T ). Income taxes include taxes on individual labour income, to which dividend and capital gains taxes can be added, as well as taxes on corporate profits. It is important to note that this definition of taxes excludes user fees on public services (which can represent up to 7.5% of GDP in some countries like Finland), natural resource revenues like royalties on oil or minerals, as well as custom duties. These different types of taxes have diverging degrees of progressivity. Income taxes tend to be the most progressive, although a tax progressivity depends on its specific design (like the top rate on highincome people and the amount of low-income exemptions). In general, sales taxes are proportional or regressive, because consumption represents a larger share of poorer households’ income than of highincome households that have more fiscal capacity to save and invest their money. Social security contributions tend to be proportional or regressive because the maximum contributions are capped at a certain income level. The progressivity of property tax is difficult to assess because the category includes very progressive taxes4 on wealth and inheritance, but also taxes on immovable property like housing. The progressivity of taxes on immovable property depends on the relative income of homeowners and, in the case of rental property, their capacity to shift the tax burden on tenants. Revenue Levels and Progressivity of the Canadian Tax System Canada is at the lower end of OE C D countries in levels of taxes in proportion to GDP, with total tax revenues representing around 32% of GDP in recent decades. Canada’s revenue levels are very similar to

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those of the United Kingdom (32.5%), higher than the United States (26.2%), but much lower than most western European countries. France, for example, maintains a tax burden of 45.2% of GDP, while the OEC D tax revenue average is 36% of G D P . Figure 1.2 shows that Canada’s tax system is among the most progressive of OECD countries; few countries have more progressive tax systems. I create an index using two measures of progressivity: a concentration coefficient of taxes, which measures how much the tax burden is concentrated on high-income individuals (higher values indicate that the tax system is more progressive) and the share of taxes paid for by the richest decile of the population.5 Canada’s combination of low taxes and high progressivity is similar to other Anglo-American democracies like the United States, the United Kingdom, Australia, Ireland, and New Zealand. This is because their tax system relies heavily on relatively progressive income and property taxes while keeping low levels of regressive taxes like social security contributions and taxes on goods and services. According to these progressivity measures, the United States is tied with Ireland for the most progressive tax system. This can be explained in large part by the low levels of taxes on goods and services in the United States (the federal government does not impose a national sales tax). In the United States, taxes on the poor are comparatively low, but the American tax system does not generate high levels of revenues. Hence, poor people in the United States don’t receive much from the government in comparison to countries with higher tax levels. In contrast, countries with lower levels of tax progressivity tend to maintain higher levels of taxes and, in consequence, more government spending. Figure 1.3 shows an inverse relationship between levels of taxes and the overall progressivity of the tax system (measured by a concentration coefficient). In general, countries with higher levels of taxes have less progressive tax systems.6 As mentioned, this is in large part because countries with high levels of taxation need to rely on higher levels of regressive revenue sources like social security contributions or taxes on goods and services.7 Indeed, it is almost impossible for a government to rely only on progressive income taxes to fund high levels of taxes, especially in an era of tax competition. Heavy taxes on high-income individuals or corporations might provoke capital flight, while social security contributions on employees, property taxes on immovable property, and taxes on goods and services are almost immune to tax competition between countries.8 Still, some countries,

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Denmark France Belgium Finland Austria Italy Sweden Hungary Norway Netherlands Germany Luxembourg Iceland Slovenia Greece Average Portugal Spain Czech Republic New Zealand United Kingdom Poland Slovak Republic Canada Japan Australia Switzerland United States Ireland 0.0

5.0

10.0

15.0 20.0 25.0

41

30.0 35.0 40.0

45.0 50.0

Figure 1.1  Tax revenues as percentage of GDP , O E C D countries, 2015 Source: OE CD, OECD Tax Database (OECD Publishing, 2018).

like Switzerland, combine a regressive tax system with low levels of revenues, while Finland shows that it is possible to maintain a relatively progressive tax system with high levels of revenues. A Detailed Picture of Taxation in Canada This section focuses on some of the key features of Canada’s tax system: low levels of social security contributions and of taxes on goods and services, a high ratio of capital taxes relative to taxes on labour, and large interprovincial differences of tax burdens. Firstly, figure 1.4

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Ireland United States Australia Netherlands United Kingdom Canada Finland New Zealand Czech Republic Italy Luxembourg Slovenia Average Germany Austria France Japan Denmark Norway Sweden Belgium Iceland Switzerland Poland 0

0.2

0.4

0.6

0.8

1

1.2

1.4

Figure 1.2  Tax progressivity, OECD countries, 2005 Source: OECD, Growing Unequal? (OECD Publishing, 2008), 107.

shows the proportion of each of the four major taxes as a share of the total tax burden in Canada, on average in the O E CD , and in AngloAmerican democracies.9 Figure 1.4 reveals that the proportion of each tax is very similar in Canada and in other Anglo-American democracies. Section 2 shows that the common institutions of Anglo-American democracies can explain why their tax policies are similar. The main distinguishing feature of Canada’s tax system is its heavy reliance on income taxation of individuals and corporations. Income taxes represent almost half of the tax burden in Canada, while the proportion of income taxes represents only 34% of the total in the rest of OECD countries. In consequence, Canada has a lower proportion of social security contributions (17% in Canada against 27% in the rest of the OEC D) and of taxes on goods and services. Indeed, in other O E CD

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Ireland

1.3 Tax progressivity, concentraion coefficient

43

United States

1.2 Australia United Kingdom Canada Netherlands

1.1

Finland

New Zealand 1

Czech Republic Luxembourg Germany Slovenia Norway

0.9 Japan 0.8

Iceland

0.7 Switzerland

0.6 20

25

30

Italy Austria Denmark Belgium Sweden France

Poland 35

40

45

50

Levels of tax revenues, % of gdp

Figure 1.3 An inverse correlation between tax progressivity and total revenues Source: OE CD, Growing Unequal? (OECD Publishing, 2008), 107, and OECD Tax Database (OECD Publishing, 2018).

countries, taxes on goods and services represent a similar proportion of tax revenues than income taxes (33%), while in Canada, they only represent 23% of the total tax burden, which is also much lower than in other Anglo-American democracies (28.7%). Finally, property taxes are more important in Canada (12%) than they are in other O E CD countries (6%) and in Anglo-American democracies (9.9%). Social security contributions fund social insurance programs, mostly old age and disability pensions as well as unemployment benefits. Canada’s level of social security contributions (4.8% of GDP) remains in the lower tier of OECD countries. Figure 1.5 shows a strong correlation between social security contributions and spending on unemployment benefits and pensions. Canada’s relatively cheap unemployment benefits and old age pensions mirror the low level of social security contributions. Indeed, unemployment benefits in Canada are not

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Olivier Jacques Distribution of taxes, oecd countries

Distribution of taxes, Canada 33.8

48.2

27.1

22.8 11.7

5.7

27.1

17.1

Anglo-American democracies 47.4 22.8

28.7 13.8

Income

Social security contributions

Property

Sales

Figure 1.4  Proportion of each type of taxes as a share of the total tax burden, 2015 Source: OECD, OECD Tax Database (OECD Publishing, 2018).

particularly generous and offer a relatively low replacement rate and coverage (0.6% of Canadian GDP, against an OECD average of 1.1%). Pensions represent the main social insurance expenditure in O E C D countries. The goal of many European public pension systems is to provide retirees with a similar income to their lifetime earnings.10 This is why they spend close to 10% of their G D P on pensions and have low levels of private spending for pension plans. Like most other Anglo-American pension system, the Canadian public pension system does not aim to provide lifetime income replacement for all retirees: upper-middle-class and high-income Canadians need to supplement their public pension with a private pension scheme to maintain their standard of living when they retire.11 The Canadian pension system relies extensively on Old Age Security, a basic universal cash benefit offered to all seniors, and the Guaranteed Income

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Pensions and unemployment benefits, % of gdp

18 16

Italy

14

Portugal Spain

12 Denmark

10 8

Ireland

6

Australia New Zealand

4

Finland Austria

France

Belgium Slovenia Japan Hungary Sweden Germany Czech Republic Luxembourg Netherlands Norway Switzerland Slovak Republic United Kingdom United States

Canada Iceland

2 0

0

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4

6

8

10

12

14

16

18

Social security contributions, % of gdp

Figure 1.5  Pensions and unemployment benefits depend on social security contributions Source: OE CD, Social Expenditure Database (OE C D Publishing, 2018), and OECD Tax Database (OECD Publishing, 2018).

Supplement (G I S ), whose objective is to lift low-income seniors out of poverty. Both programs are funded by general taxation, not by social security contributions. The Canada and Quebec pension plans are funded by social security contributions, but they remain a complement to Old Age Security and private pension schemes. In consequence, social security contributions in Canada are very low in comparative perspective and pension income replacement rates remain low. Thus, private spending on pensions is high (3.2% of G D P , against an O E C D average of 1.3%). Still, poverty rates among seniors in Canada are low in comparative perspective because the G I S achieves high poverty reduction for seniors (comparable to Scandinavia), at comparatively low costs.12 In brief, Canada’s low social security contributions reflect a lean pension system achieving efficient poverty reduction but forcing middle- and upper-income citizens to buy private pension schemes.13

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Canada’s tax system is also characterized by low levels of taxes on goods and services. Political science research has identified the late implementation of value-added taxes (VAT),14 which is the modern form of taxes on goods and services applied only on final consumption, as one of the causes of a smaller welfare state.15 Indeed, some estimates show that adopting value-added taxes raises tax revenues in the long run by 4.5% of GDP.16 VATs are particularly efficient: they create few economic distortions, are applied to imports rather than exports, and are not subject to tax competition, which explains why welfare states with high revenue needs tend to rely extensively on VAT.17 Canada had to wait until the second Mulroney government in the early 1990s to implement a value-added tax (the GST) and the debate about valueadded taxes in the country has always been contentious, as the Chrétien Liberals promised to repeal the tax, while the Harper government was elected on a promise to reduce the GST by two points. This reflects a lack of political consensus that will be addressed later in this chapter. This late implementation of VAT certainly helps to explain both the low levels of revenues generated by taxes on goods and services (see figure 1.6) and the low level of overall revenue. One of Canada’s distinctive features is its heavy reliance on property taxes. As shown in figure 1.7, Canada maintains the highest level of property taxes in the OE C D , after France and the UK. But Canada’s taxes on immovable property, which homeowners pay to their municipality (and local school board) every year, are the highest of the OECD. In countries like Belgium or France, inheritance taxation represents a relatively large proportion of property taxes, while property taxes in the UK are in large part composed of taxes on financial transactions. Canadian governments make little use of wealth and inheritance taxes as well as taxes on financial transactions to fund themselves. In Canada, inheritances are considered capital gains taxable like other sources of income; they are not subject to property taxes per se. The high reliance on taxes on immovable property in Canada reflects a characteristic of fiscal federalism in Canada:18 Canadian municipalities’ main (and almost only) taxation tool is property taxes. Still, municipalities have high expenditure needs and a lot of responsibilities. Because provinces are constantly struggling with the federal government about the division of revenues and expenditures, municipalities are not able to demand higher intergovernmental transfers from provinces.19 Already in the 1960s, Finance Minister Mitchell

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18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0

0.0

United States Switzerland Japan Canada Ireland Australia Luxembourg Spain Germany Belgium United Kingdom Slovak Republic Average France Netherlands Czech Republic Norway Poland Italy Iceland Austria Sweden New Zealand Portugal Finland Greece Denmark Slovenia Hungary

2.0

Figure 1.6  Taxes on goods and services, percentage of G D P , O E C D countries, 2015 Source: OECD, OECD Tax Database (OECD Publishing, 2018).

Sharp revealed that the Canadian property tax was the highest of all the advanced economies.20 Finally, it is worth looking at capital and corporate taxes. AngloAmerican states have typically relied on high taxes on capital income21 relative to taxes on other factors of production, like labour. However, corporate and capital taxes are most vulnerable to tax competition, putting a strong downward pressure on the tax base of AngloAmerican democracies.22 Figure 1.8 shows the proportion of effective capital taxes as a share of taxes on labour income (household labour income and consumption taxes).23 Historically, Canada has had a more capital-friendly tax structure than its southern neighbour,24 as reflected in the capital to labour tax ratios. With a ratio of 1, Canada

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4.5

Property taxes Recurrent taxes on immovable property

4.0 3.5 3.0 2.5 2.0 1.5 1.0

0.0

Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Luxembourg Netherlands New Zealand Norway Poland Slovak Republic Slovenia Spain Sweden Switzerland United Kingdom United States Average

0.5

Figure 1.7  Property taxes, percentage of GDP, O E C D countries, 2015 Source: OECD, OECD Tax Database (OECD Publishing, 2018).

taxes capital as much as labour income. This ratio is lower than the US, Japan, and Australia, but higher than the average of 0.77. Because they tend to tax labour much more and capital less, European countries have a ratio below 0.8. Interprovincial Differences To facilitate comparison, this chapter presented Canada as a unitary state, which obscures significant interprovincial differences in terms of levels of taxes. As shown in figure 1.9, Quebec and, to a lesser extent, Nova Scotia tax much more than the provincial average (with

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1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 C m an a Fi da nl an Fr d an G c er e m an y Ita ly N Jap et he an rla nd Sp s a Sw in Sw ed U ni itz en te er d l K an U ing d ni te dom d St a A tes ve ra ge

ia

iu

lg

tr

us

A

Be

A

us

tr

al

ia

0

Figure 1.8  Ratio of capital taxes to labour taxes, 2012 Source: Cara McDaniel, “Average Taxes on Consumption, Investment, Labour and Capital in OECD Countries, 1950–2013” (2016). http://www.caramcdaniel. com/researchpapers.

tax ratios on GDP of respectively 38.5% and 36.42%).25 Quebec’s tax level is similar to Norway’s. The difference between Quebec and the province with the lowest level of taxes, Saskatchewan (27.87% of GDP), is similar to the difference between Canada and Sweden (32% and 43.3% of GDP ), and is almost twice as large as the difference between Canada’s and the United States’ (26.2%) tax levels. These differences are impressive because they are comparable to nation-states with full control over their taxation, even though provincial governments only control around 60% of total tax revenues, the rest being allocated by the federal government. These large differences in tax revenues in relation to GDP are influenced by three factors: levels of spending, proportion of natural resources revenues, and gross domestic product. Levels of spending differ a lot between provinces: among O E C D countries, Canada has the highest share of expenditures allocated by subnational governments.26 Because of its larger tax burden, the level of poverty and inequality reduction of the Quebec welfare state resembles those achieved in North-Western European countries, while redistribution in other provinces is lower, and comparable to other Anglo-American democracies.27 Poorer provinces tend to tax more in proportion to their G D P , but the difference in tax levels between Manitoba and

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Tax rveneues, % of gdp

40 38 36 34 32 30 28

l A lb er Sa ta sk at ch ew an

n

bc

b O nt ar io M an ito ba

n

p d g

Q ue be N c ov a Sc ot ia

26

Figure 1.9  Interprovincial differences in tax revenues, 2016 Source: Statistics Canada, Revenue, Expenditures and Budgetary Balance, C A N S I M 384-0047 (2018), and Gross Domestic Product, Income-Based, Provincial and Territorial, CANSIM 384-0037 (2018).

Quebec, two provinces with a similar G D P per capita, suggests that political choices about levels of taxes and spending matter. Finally, it is worth noting that tax levels are lower in oil-producing provinces, simply because they can afford to fund expenditures with oil royalties instead of taxes. Indeed, since 1980, natural resource revenues represent on average 25% of total revenues of the government of Alberta and 19% of Saskatchewan’s government revenues. Since oil production boomed in Newfoundland in 2007, 29% of the provincial government’s total revenues come from natural resources.28 This is much higher than natural resource revenues in non-oil-producing provinces, which have to compensate with higher taxes.29 It is worth noting that the structure of tax systems does not vary much between provinces: provinces with higher levels of taxes maintain higher taxes on everything. The main difference comes from taxes on goods and services: Alberta has no provincial sales tax while Saskatchewan has a 6% provincial sales tax, as opposed to a 10% provincial sales tax in Quebec and in the Atlantic Provinces. Still, Quebec’s income tax is particularly high from a comparative perspective. After Denmark and Iceland, Quebec is the jurisdiction with the highest level of income tax on individuals (13.4% of G D P ).30

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This comparison with other OECD countries reveals the distinctive characteristics of the Canadian tax system. Overall tax revenues are low, which is largely explained by the low level of taxes on goods and services and of social security contributions. Because of this, Canada’s tax system is very progressive and relies heavily on income taxation, which provides almost 50% of Canada’s tax revenues. The tax burden in Canada falls disproportionately on homeowners, who are the most heavily taxed in the O E C D . Taxes on capital in general are also relatively high. Also, interprovincial differences in revenue levels are significant, with the tax burden being higher than the O E CD average in Quebec and Nova Scotia, while Alberta and Saskatchewan are among the lowest. 2 political and institutional causes o f c a n a d a ’ s d i s t i n c t i v e ta x s y s t e m

Explaining tax policy has not traditionally been the centre of attention in social science research. In comparative politics, it was assumed that spending and taxing were two sides of the same coin: the social, political, and economic causes of spending decisions were assumed to be the same as the causes of tax policies. According to power resource theory, the power of left-wing political actors determined the level and design of spending and taxes.31 However, power resource theory could not explain why countries where the left was dominant (like Scandinavian countries) had less progressive tax systems than countries, like Canada, where the left never forms a government at the national level. Why did the left fund generous welfare states with regressive taxes in some countries but not in others? Building on Sven Steinmo’s seminal contribution Taxation and Democracy (1993),32 the comparative political economy of taxation puts institutions at the forefront to explain a government’s tax policy. Two institutions are especially relevant, because they shape the incentives of unions, employers, and political parties: the electoral system and the system of interest group representation. Understanding the role of these institutions is crucial to explaining Canadian tax policy structure and comparing it with those of other countries. From this political economy perspective, taxation can be conceived as a bargain between political actors concerning their expenditure and revenue extraction objectives. Left-wing parties and unions prefer more social spending for their constituencies, while right-wing parties

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and employers prefer lower taxes, but not necessarily lower spending. Both proportional (P R ) electoral systems and a specific system of interest-group representation called a “coordinated market economy” (CME) help to foster a bargain between employers, unions, and political parties of different ideologies. In countries with a P R system and a CME, notably in northern and western Europe, this bargain involves higher social spending financed by broad-based taxes whose burden falls on workers, while the tax burden on employers is kept relatively low.33 This bargain was impossible to achieve in countries like Canada with a majoritarian electoral system and the system of interest-group mediation of a “liberal market economy” (L M E ) because employers, unions, and political parties are unable to commit to a compromise on tax and spending policies to satisfy their divergent preferences. As a result, tax and spending levels are lower and tax policies are more conflictual. Left-wing parties aim to increase taxes on the rich while right-wing parties aim to decrease taxes, making the overall system more progressive and more reliant on income taxes than on social security contributions and taxes on goods and services. It is important to highlight that there are institutional complementarities between electoral systems and varieties of capitalism: CMEs have proportional electoral systems and L ME s have majoritarian electoral systems.34 This chapter focuses on one perspective building on rational choice institutionalism. Epistemologically, this perspective proposes that theories should be conceived as instruments simplifying the social world: the objective is not to explain all cases but rather to have a sufficiently accurate theory to clarify most situations. The theory I present in this chapter is fairly consensual in the comparative political economy of taxation literature and is supported by case studies, quantitative research, and formal models. However, it cannot explain the idiosyncrasies of each case, which is better explained by detailed historical analysis. For example, the theory cannot explain why Canada maintains such high levels of taxes on immovable property. Before focusing on our political economy model, there are important alternative and complementary explanations to address. The war mobilization perspective proposes that mass warfare led to calls for the “conscription of wealth” in exchange for soldiers’ conscription: countries waging World War II, like Canada, considerably increased top marginal income taxes up to confiscatory rates (close to 95% in some cases) not only to fund the war effort, but also to ensure fairness between citizens sent to war and those staying at home.35 While

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pertinent to explain why some countries adopted extremely high top marginal tax rates, this perspective cannot explain the perpetuation of differences between countries long after the war, nor why some countries reduced their top income taxes more than others. Scholars studying political behaviour could argue that tax policies reflect public opinion. However, after recognizing that public preferences do not cause differences between countries in tax policies,36 political science research has reversed the causal arrow and analyzed how taxation feeds back into public opinion and influences citizens’ preferences. Some scholars have shown that very progressive tax structures, like Canada’s, tend to polarize public opinion37 and reduce overall support for government redistribution and for sustaining current tax burdens,38 while social security contributions produce a pro-tax political dynamic.39 This literature is burgeoning, but I prefer to disregard it here because it is very difficult to distinguish the cause (tax structures) from the effect (public opinion), and because crosscountry research tends to use the same international survey, the ISSP, which relies on a survey conducted only once in Canada. One could also argue that Canada’s tax structure mirrors policy choices made in the United States; the similarity between the two countries’ tax policy could be explained by policy diffusion and tax competition. Indeed, Shirley Tillotson suggests that Canadian tax policy has never been completely independent from that of its southern neighbour. It has been shown that Canadian taxes on high-income individuals and corporations are influenced by the United States’ tax policy decisions.40 However, this observation cannot explain why the tax structures of all Anglo-American democracies, not just those of Canada and the US, are so similar. Also, Canada and the US maintain similar levels of taxation on immovable factors, like taxes on goods and services, taxes on immovable property, and social security contributions, a fact that cannot be explained by tax competition alone. The comparative political economy theory I present suggests that the common institutional characteristics shared by the US and Canada provide a better explanation. Majoritarian and Proportional Systems Canada’s electoral system is single-member plurality: each riding is won by the candidate earning a plurality of votes. This system creates a disproportion between the number of votes and the number of seats,

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which discriminates against small parties (except those with very strong regional support). Such a system helps the formation of a twoparty system and a single-party government holding the majority of seats in parliament. Hence, Canada’s electoral system can be qualified as majoritarian, in contrast to proportional electoral systems where the discrepancy between the number of votes and seats won by a party is smaller. In proportional systems, there are usually more representatives from more parties in parliament. In consequence, parties rarely get a majority and need to govern in coalition or as minority governments.41 All Anglo-American democracies have a majoritarian electoral system, although New Zealand switched to proportional representation in the mid-1990s. Electoral systems have a clear effect on taxation. Canada’s relatively low levels of tax revenues, its progressivity, its heavy reliance on income tax and low levels of value-added taxes can all be explained with reference to its electoral system. Firstly, left-wing parties have more success in proportional systems, while right-wing parties are stronger in majoritarian systems.42 Left-wing governments are associated with higher levels of spending and of taxes, while right-wing governments prefer lower taxes and spending. Hence, revenues and expenditures tend to be higher in P R systems than in majoritarian systems. In Canada, at the federal level, the left (the New Democratic Party) has never won a plurality of seats and the centre (the Liberal Party) has traditionally been the “natural” governing party. In recent decades, Liberal governments have not increased tax levels significantly, while Conservative governments have decreased tax levels.43 The absence of a left government and the rotation between a taxcutting right-wing party and a “not-so-keen-on-increasing-taxes” centrist party at the federal level helps explain the relatively low levels of overall taxation. In majoritarian systems, political parties’ main objective is to attract the median voter. Hence, parties are very sensible to the will of the majority. Recent public opinion data reveal that the median voter wants to soak the rich and pay less tax: people prefer higher taxes on the rich and on corporations and a lower overall tax burden.44 Hence, governments in countries with majoritarian electoral systems end up with higher taxes on capital, proportionally more taxes on highincome people, and lower taxes on the median voter. In contrast, in PR systems, small parties representing capital-holders are more likely to have an influence in parliament and to prevent a disproportionate

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taxation of capital.45 This is part of the explanation of the pattern of high progressivity and low taxes in Anglo-American democracies.46 The tax reform proposed during the 2015 election by Justin Trudeau’s Liberals fits this pattern: it raises the progressivity of the system by increasing taxes on high-income earners and decreasing taxes on the middle class, without raising overall revenues. This low tax/high progressivity pattern can also be explained by the high electoral volatility inherent to majoritarian electoral systems. In a majoritarian system, a small change in votes can lead to a large difference in the number of seats won. Hence, it is very difficult for parties to credibly commit to a long-term strategy involving higher taxes on the middle class to fund higher spending.47 Parties are more likely to adopt a short-term tax strategy pleasing as many voters as possible, preferably in key ridings.48 In PR systems, opposition parties maintain some degree of influence on the government because they keep a sufficient number of seats in parliament and in parliamentary committees. For example, P R systems are associated with an earlier adoption of value-added taxes, which leads to higher levels of revenues collected by taxes on goods and services.49 This is made possible because political parties can credibly commit to tax the middle class and the poor with value-added taxes and use this revenue source to fund more generous social spending.50 In majoritarian systems, parties cannot credibly commit to raising regressive taxes to fund social spending. If they lose elections, they will not be able to influence the next government, which could simply decide not to raise social spending. Because of the absence of credible commitment between parties in majoritarian systems, right-wing parties cut taxes while left-wing parties increase taxes on the rich and refuse to increase taxes on their own supporters.51 In Canada, the left has historically campaigned for a higher personal exemption of income tax to alleviate the burden of poorer Canadians52 and has never campaigned to increase sales taxes, even if this would involve higher overall tax revenues. In contrast, it is not rare to hear centre-left European parties proposing to increase sales taxes to fund more generous social spending.53 Coordinated and Liberal Market Economies The distinction between coordinated and liberal market economies (C M E and L M E ), developed by the Varieties of Capitalism (VoC) school,54 is necessary to understand variations in tax policy choices.

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In a nutshell, the Varieties of Capitalism literature focuses on the preferences and organization of firms and employers and aims to understand why employers consent to large welfare states in some countries but not in others. Firstly, this literature argues that employers’ incentives regarding the provision of social insurance vary between countries. In CM E s, employers need employees with industry-specific skills. Hence, employers want to incentivize their employees to commit to long hours of training to ensure that these skilled employees will not be poached by other firms. To do so, employers have incentives to consent to high levels of employment-based social insurance, which acts as a guarantee against job losses for employees.55 Also, CME firms have traditionally been funded by bank-based patient capital, allowing them to pursue long-term strategies, notably by investing in workers’ industry-specific skills. In contrast, in LMEs, industries rely on more general skills and employers have fewer motivations to provide social insurance. Firms’ funding in LME relies on financial markets whose priority is short-term productivity and shareholder value maximization.56 Thus, in CM E , there is joint support between firms and workers for higher social spending, whereas LME produce an antagonism between capital and labour, leading to lower spending.57 Secondly, the VoC school stresses the role of macro-corporatist institutions, where peak associations representing unions and employers meet with government representatives to implement public policies related to wages, taxes, and spending. The literature on VoC shows that macro-corporatist institutions have been used to exchange wage moderation for higher social insurance.58 These macro-corporatist institutions are central to tax policy-making. Repeated contacts between unions and employers can educate employers and unions on the cost of high capital taxes on firms’ competitiveness and on the benefit of social insurance spending. Employers and unions represented by peak associations are better able to aim for a collectively beneficial position and overcome the particular interests of their individual members. The engagement of unions, employers, and the state in macro-corporatist institutions makes it possible to credibly commit to tax policies conceded by each actor. In CMEs, employers and unions can consent to a tax and spending policy bargain that involves high social spending paid for by taxes on workers. Employers consent to high social insurance since they are able to tailor tax policies to their own needs, notably by making sure the tax burden is not

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disproportionately theirs to shoulder. Hence, unions consent to higher taxes on their own members, knowing that they can count on higher social spending.59 In marked contrast, employers and unions are not represented by a peak association in L ME s: they represent the particular interests of their own industry and hence cannot impose bargains on their members. Unions and employers aim for short-term objectives and prefer to shift the tax burden to the other group.60 The conflictual relationship between employers and unions make this type of high tax/high social insurance bargain impossible to sustain in liberal market economies.61 For example, whereas leftist governments in coordinated market economies fund higher spending by regressive taxes on consumption,62 leftist governments in liberal market economies fear that an increase in regressive taxes will not be used to fund higher social spending in the future, and therefore favour higher income taxes on the rich. In brief, the political dynamic inherent to each variety of capitalism shapes the incentives of employers, unions, and their representatives within political parties regarding tax policy design. Table 1.1 synthesizes the theoretical arguments about the institutional causes of Canada’s tax policy distinctiveness. 3 c o n c l u s i o n : w h at a b o u t r e d i s t r i b u t i o n ?

The main findings of this chapter can be summarized by some key findings: •

•

•

•

•

The overall tax burden in Canada is low from a comparative perspective. However, the tax burden on immovable property is the highest of the O E C D. Tax progressivity is high, because Canada relies heavily on progressive income taxes and maintains low taxes on goods and services and social security contributions, which are more regressive tax components. Tax systems’ size and shape depends on the electoral system and on the system of interest groups representation. Our majoritarian electoral system and “liberal market economy” explain many features of Canada’s tax system and its similarity with the pattern of low revenues/high progressivity seen in AngloAmerican democracies.

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Table 1.1 Arguments about the institutional causes of tax policy distinctiveness Canadian institution Majoritarian ­electoral system

Political impact Left parties win less often Parties aim to attract the median voter Electoral volatility

Liberal market economy

Conflictual relationship between employers and unions

Tax policy impact Lower levels of taxes Higher taxes on capital and highincome ­individuals, lower taxes on consumption No bargain possible for high taxes on labour paying for high social spending. No bargain possible for high taxes on labour paying for high social spending. Lower taxes on goods and services and social security contributions.

To conclude, it is pertinent to discuss the impact of Canada’s tax system on income redistribution, since one of the explicit objectives of taxes is to affect the distribution of income. On the one hand, the progressivity of Canada’s tax system reduces income differences between the rich and the poor, but on the other hand, the relatively low level of revenue generated limits the government’s capacity to reduce poverty and inequality with social spending. Indeed, the size of the Canadian welfare state is small in comparative perspective: public social spending in Canada is among the lowest of the OECD.63 As a result, income redistribution after taxes and transfers is also very small, and income inequality and poverty remain relatively high in Canada.64 The case of Quebec in comparison to other provinces is revealing: Quebec taxes much more, spends even more and, in consequence, redistributes income more than any other province.65 If taxes in Canada were higher, income inequality and poverty would quite possibly be lower. As pointed out in figure 1.3, there is an inverse relationship between tax progressivity and tax revenues: countries with very high levels of tax revenues use more regressive revenue sources. This trade-off suggests that focusing on tax progressivity might not be the best strategy to achieve income redistribution. It is widely known in international research that the bulk of income redistribution is achieved by the spending side, especially with social cash benefits to households, rather

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than by the revenue side, through taxation.66 An additional dollar spent by the government is likely to end up in health care, education, cash transfers to individuals, or public infrastructure, which are redistributive expenditures. To achieve higher levels of redistributive expenditures, governments must maintain high levels of revenues. To do so, they cannot rely only on progressive sources and must also use more regressive revenue sources, both because of tax competition and because of necessity; at a certain level of expenditures, a government cannot be funded only by progressive income taxes. Considering that Canada already has a very progressive tax system, equality-seekers should not focus their efforts on taxing the rich by increasing top income tax rates or property taxes. Instead, they should seek to increase overall levels of revenues. The use of efficient taxes with high revenue-generating capacity, like taxes on goods and services, should be considered by progressive reformers. If this additional revenue is spent on redistributive social spending that lifts people out of poverty, the overall result will be highly egalitarian, even if increasing a particular tax might reduce the overall progressivity of the tax system. The outcomes of a broad-based tax increase would actually be more egalitarian than limiting tax increases to few high-income citizens, which will not raise much revenue.

notes



The author wishes to thank Elsbeth Heaman, Antoine Genest-Grégoire, Maxime Pelletier, and David Tough for comments on earlier versions of this chapter.  1 The O E C D data for Canada is based on Statistics Canada data and uses an average of subnational government revenues (provincial and municipal governments).   2 The major primary sources for this research are: O E C D , Growing Unequal? (O E C D Publishing, 2008); O E C D , Regions at a Glance (O E C D Publishing, 2017); O E C D , Social Expenditure Database (O E C D Publishing, 2018); O E C D , Income Distribution (O E C D Publishing, 2018); O E C D , O E C D Tax Database (O E C D Publishing, 2018); Statistics Canada, Revenue, Expenditures and Budgetary Balance, C A N S I M 3840047 (Statistics Canada, 2018); and Gross Domestic Product, IncomeBased, Provincial and Territorial, C A N S I M 384-0037 (Statistics Canada, 2018).

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  3 P.A. Hall and D. Soskice, “Introduction” to Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, ed. Hall and Soskice (Oxford: Oxford University Press, 2001).  4 The O E C D defines taxes as “the revenues collected from taxes on income and profits, social security contributions, taxes levied on goods and services, payroll taxes, taxes on the ownership and transfer of property, and other taxes. Total tax revenue as a percentage of GDP indicates the share of a country’s output that is collected by the government through taxes. It can be regarded as one measure of the degree to which the government controls the economy’s resources. This indicator relates to government as a whole (all government levels) and is measured in million USD and percentage of G DP” (OECD, OECD Tax Database).   5 Because these measures are influenced by the level of inequality of a country or the share of income held by the richest decile, I follow the common practice (O ECD, Growing Unequal?) of dividing the concentration coefficient by the level of inequality (measured by a Gini coefficient) and the second measure by the share of national income allocated to the richest decile. Both measures are combined to create an index of progressivity based on their average value.   6 A similar relationship appears using alternatives measures of progressivity. M. Prasad and Y. Deng, “Taxation and the Worlds of Welfare,” SocioEconomic Review 7, 3 (2009): 431–57.   7 S. Ganghof, “Tax Mixes and the Size of the Welfare State: Causal Mechanisms and Policy Implications,” Journal of European Social Policy 16 (2006): 360–73; J. Kato, Regressive Taxation and the Welfare State: Path Dependence and Policy Diffusion (New York: Cambridge University Press, 2003).   8 P. Genschel and P. Schwarz, “Tax Competition: A Literature Review,” Socio-Economic Review 9, 2 (2011): 339–70.   9 I include the average of Australia, Canada, Ireland, New Zealand, the UK, and the US. 10 I. Joumard, M. Pisu, and D. Bloch, “Less Income Inequality and More Growth – Are They Compatible? Part 3. Income Redistribution via Taxes and Transfers across OECD Countries,” OECD Economics Department Working Papers, no. 926 (2012). 11 A. D’Amours et al., Innover pour péréniser le système de retraite (Quebec: gouvernement du Québec, 2013). 12 K. Milligan, “The Evolution of Elderly Poverty in Canada,” Canadian Public Policy 34, 4 (2008): S79–S94; J. Myles, “Income Security for Seniors: System Maintenance and Policy Drift,” in Inequality and the

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Fading of Redistributive Politics in Canada, ed. K. Banting and J. Myles (Vancouver: U BC Press, 2013): 312–34. 13 J. Curtis and J. McMullin, “Dynamics of Retirement Income Inequality in Canada, 1991–2011,” Journal of Population Ageing 12, 1 (March 2019): 51–68. 14 France was the first country to implement a V A T in the 1950s, while most European countries implemented a VAT in the late ’60s and early ’70s. 15 Kato, Regressive Taxation; P.H. Lindert, Growing Public: Volume 1, Social Spending and Economic Growth since the Eighteenth Century (Cambridge: Cambridge University Press, 2004); F.R. Helgason, “Unleashing the ‘Money Machine’: the Domestic Political Foundations of V A T Adoption,” Socio-Economic Review 15, 4 (October 2017): 797–813. 16 M. Keen and B. Lockwood, “The Value-Added Tax: Its Causes and Consequences,” Journal of Development Economics 92 (2010): 138–51. 17 Ganghof, “Tax Mixes.” 18 Property taxes are not correlated to house prices presented by the OEC D (the price to income ratio and the real house price indices). Hence, ­property tax levels on G DP reflect tax rates, not average house prices. 19 S. Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy (Vancouver: U BC Press, 2017), 217. 20 Ibid. 21 “Capital income is equivalent to the sum of operating surplus earned by corporations, the capital share of operating surplus earned by private unincorporated enterprises, and operating surplus earned by the government. Capital tax revenues come from the following sources: taxes levied on corporate income, property taxes paid by entities other than households, and the household income tax on capital. Cara McDaniel, “Average Taxes on Consumption, Investment, Labour and Capital in OECD Countries, 1950– 2013” (2016): 13. Online: http://www.caramcdaniel.com/researchpapers. 22 Genschel and Schwartz, Tax Competition; J.C. Hays, Globalization and the New Politics of Embedded Liberalism (Oxford: Oxford University Press, 2009). 23 These are effective tax rates calculated by Cara McDaniel in “Average Taxes on Consumption.” 24 Tillotson, Give and Take. 25 The data used in the section and in figure 9 presents provinces as if they were independent countries to facilitate international comparison; data on each province includes taxes collected by the provincial government and by the federal government. 26 O E C D , Regions at a Glance.

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27 R. Haddow, “Power Resources and the Canadian Welfare State: Unions, Partisanship and Interprovincial Differences in Inequality and Poverty Reduction,” Canadian Journal of Political Science (2014); R. Haddow, “The Politics of the Tax State in Canadian Provinces after the Golden Age,” Canadian Journal of Political Science 49, 1 (2016): 63–88. 28 R. Kneebone and M. Wilkins, “Canadian Provincial Government Budget Data, 1980/81 to 2013/14,” Canadian Public Policy 42, 1 (2016): 1–19. 29 For example, mining royalties and Hydro Quebec net annual benefit represent around 3% of Quebec government total revenue but most of it is not used in the general budget. Instead, a large proportion of natural resource revenue is invested in the Fonds des Générations for debt repayment. 30 Chaire de recherche en fiscalité et finances publiques, Bilan de la fiscalité au Québec (2018). Online: https://cffp.recherche.usherbrooke.ca/outilsressources/bilan-de-la-fiscalite-au-quebec-edition-2018/ (accessed 30 May 2019). 31 Gosta Esping-Andersen, Politics against Markets: The Social Democratic Road to Power (Oxford: Oxford University Press, 1985). 32 S. Steinmo, Taxation and Democracy: Swedish, British, and American Approaches to Financing the Modern State (New Haven: Yale University Press, 1993). 33 C.G. Martin, “Labour Market Coordination and the Evolution of Tax Regimes,” Socio-Economic Review 13, 1 (2015): 33–54. 34 T.R. Cusack, T. Iversen, and D. Soskice, “Economic Interests and the Origins of Electoral Systems,” American Political Science Review 101, 3 (2007): 373–91; C.J. Martin and D. Swank, The Political Construction of Business Interests: Coordination, Growth, and Equality (Cambridge: Cambridge University Press, 2012). 35 K. Scheve and D. Stasavage, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe (Princeton: Princeton University Press, 2016). 36 For example, public opinion in Northern Europe, where value-added taxes are high, does not systematically favour VA T more than in countries like Canada with lower VAT. 37 P. Beramendi and P. Rehm, “Who Gives, Who Gains? Progressivity and Preferences,” Comparative Political Studies 49, 4 (2016): 529–63; M. Prasad, The Politics of Free Markets: The Rise of Neoliberal Economic Policies in Britain, France, Germany, and the United States (Chicago: University of Chicago Press, 2006). 38 L. Barnes, “The Size and Shape of Government: Preferences over Redistributive Tax Policy,” Socio-Economic Review 13, 1 (2014): 55–78;

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F. Roosma, A Multidimensional Perspective on the Social Legitimacy of Welfare States in Europe (Ridderkerk: Ridderprint, 2017). 39 Z. Truchlewski, “‘Oh, What a Tangled Web We Weave’: How Tax Linkages Shape Responsiveness in the United Kingdom and France,” Party Politics (2018): 1–11 40 S. Gordon, this book; E. Saez and M. Veall, “The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence,” American Economic Review 95, 3 (2005): 831–49; D. Swank, “Tax Policy in an Era of Internationalization: Explaining the Spread of Neoliberalism,” International Organization 60, 4 (2006): 847–82. 41 A. Lijphart, Patterns of Democracy (New Haven: Yale University Press, 2012). 42 T. Iversen and D. Soskice, “Electoral Institutions and the Politics of Coalitions: Why Some Democracies Redistribute More than Others,” American Political Science Review 100, 2 (2006): 165–81; J. Rodden, “The Geographic Distribution of Political Preferences,” Annual Review of Political Science 13 (2010): 321–40; H. Döring and P. Manow, “Is Proportional Representation More Favourable to the Left? Electoral Rules and Their Impact on Elections, Parliaments and the Formation of Cabinets,” British Journal of Political Science 47, 1 (2016): 149–64. Many explanations are put forward to explain this phenomenon. The middle class has more incentives to vote for the right in majoritarian system and more incentives to vote with the left in P R systems because it anticipates that a left-wing government in a majoritarian system could  soak the rich and the middle class to give to the poor (Iversen and Soskice, “Electoral Institutions”). Also, left-wing voters are traditionally concentrated in urban areas. The left tends to win these seats by large margins in majoritarian systems, while it loses more conservative rural districts by smaller margins. This involves that in a majoritarian system, the left has fewer seats than its number of votes would give them in a P R system (Rodden, “Geographic Distribution”). Thirdly, the choice of electoral system in the early twentieth century reflects the strength of the left and the right at the time: when the left was very strong and the right was divided, conservative elites decided to shift toward a P R system to prevent the left from g­ overning alone. This was perpetuated over time (Boix 2003). 43 O. Jacques, “L’écueil du budget libéral: le cadre fiscal conservateur,” Policy Options/Options Politiques, I PRR , https://policyoptions.irpp.org/fr/ magazines/march-2019/lecueil-du-budget-liberal-le-cadre-fiscal-​ ­conservateur/ (accessed 10 June 2019).

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44 Barnes, “The Size and Shape of Government”; F. Graves, “Canadian Public Opinion on Taxes,” in Tax Is Not a Four-Letter Word, ed. A. and J. Himmelfarb (Waterloo: Wilfrid Laurier University Press, 2013); M. Arsenau, J.-H. Guay, and L. Godbout, “Analyse de la perception des Québécois à l’égard de l’impôt: une relation paradoxale,” C IR A NO (Mars 2005). 45 Martin and Swank, The Political Construction of Business Interests. 46 J.C. Hays, “Globalization and Capital Taxation in Consensus and Majoritarian Democracies,” World Politics 56, 1 (2003): 79–113. 47 J.F. Timmons, “Taxation and Representation in Recent History,” The Journal of Politics 72, 1 (2010): 191–208. 48 In majoritarian systems, parties have incentives to use specific tax expenditures that are disproportionately beneficial to constituents concentrated in certain key ridings where the governing party must win to form a government. 49 Helgason, “Unleashing the Money Machine.” 50 Timmons, “Taxation and Representation in Recent History.” 51 A. Kemmerling, “Left without Choice? Economic Ideas, Frames and the Party Politics of Value-Added Taxation,” Socio-Economic Review 15, 4 (2016): 777–96; Steinmo, Taxation and Democracy. 52 Tillotson, Give and Take. 53 Kemmerling, “Left without Choice?” and A. Kemmerling, “How Labour Ended Up Taxing Itself and Why It Matters: The Long-Term Evolution of Politics in German Labour Taxation,” Journal of European Social Policy 24, 2 (2014): 150–63. 54 Hall and Soskice, Varieties of Capitalism. 55 M. Estevez-Abe, T. Iversen, and D. Soskice, “Social Protection and the Formation of Skills,” in Varieties of Capitalism; I. Mares, Taxation, Wage Bargaining, and Unemployment, (Cambridge: Cambridge University Press, 2006). 56 P. Culpepper, “Institutional Change in Contemporary Capitalism: Coordinated Financial Systems since 1990,” World Politics 57 (2005): 173–99. 57 Mares, Taxation, Wage Bargaining, and Unemployment. 58 J. Pontusson, Inequality and Prosperity: Liberal Europe vs. Social America (Ithaca: Cornell University Press, 2005). 59 Timmons, “Taxation and Representation in Recent History.” 60 Martin, “Labour Market Coordination and the Evolution of Tax Regimes.” 61 Martin and Swank, The Political Construction of Business Interests; Martin, “Labour Market Coordination and the Evolution of Tax Regimes.”

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62 P. Beramendi and D. Rueda, “Social Democracy Constrained: Indirect Taxation in Industrialized Democracies,” British Journal of Political Science 37, 4 (2007) 619–41. 63 O E C D , Social Expenditure Database. 64 O E C D , Income Distribution. 65 Haddow, “Power Resources and the Canadian Welfare State”; Haddow “The Politics of the Tax State in Canadian Provinces after the Golden Age.” 66 O. Causa and M. Hermansen, “Income Redistribution through Taxes and Transfers across OECD Countries,” OECD Economics Department Working Papers No 1453 (2017); V.A. Mahler and D.K. Jesuit, “Fiscal Redistribution in the Developed Countries: New Insights from the Luxembourg Income Study,” Socio-Economic Review 4, 3 (2006): 483–511.

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2 Taxation and Self-Government Clarence T. Jules and David Paul

clarence t. jules

Prime Minister Justin Trudeau recently promised to establish a framework to recognize First Nation jurisdiction in s.35 of the constitution. He further committed that this framework would be established in legislation before the next federal election in late 2019. I welcome this government’s commitment to reconciliation and a nation-to-nation relationship. Translating words into action has been difficult for us. According to Hansard, the first time a government minister promised to get rid of the Indian Act and replace it with self-­government was 1951. I believe this time is different. It is possible to move beyond the Indian Act and replace the colonial department of Indian Affairs if we systematically address the four main challenges to change: 1 We must overcome the mistrust and high switching costs created by the long and sad history of indigenous policies. 2 We were legislated out of this federation and fiscal relationship; we must effectively legislate our way back in to restore our lost jurisdictions. 3 We must build our governing institutions in a manner that reduces switching costs and grows our economies. 4 We must secure sufficient fiscal power to sustain our jurisdictions, services, infrastructure, and communities. I will address each of these challenges separately.

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1 The Challenges of History Our governments were systematically legislated out of Canada 150  years ago. We were excluded from the 1867 Constitution. Expenditure responsibilities and the fiscal power to pay for services were divided between the provincial and federal governments. Our lands were taken, and we were placed on reserves. Canada and the provinces asserted title to our territories, extracted the resources, created institutions, and generated wealth for everyone but us. Title to our lands was provided to the federal government. To this day, a reserve remains a tract of land whose “title is held by her Majesty” for our use and benefit. Crown title meant jurisdiction over us was transferred to the Department of Indian Affairs through the Indian Act in 1876. I N A C has created the worst governance system in Canada. We have the worst education, health, economies, housing, and infrastructure in the country by far. Their control over our lives has meant we have forgone 140 years of legal, administrative, and institutional development that the rest of Canada takes for granted. To appreciate the impact, consider that it takes at least four to six times longer to do business on our lands than in adjacent provincial lands. As my dad said in 1968, “We have to move at the speed of business. Our people elected us to govern, not the bureaucrats at Indian Affairs.” As this audience knows, destroying institutions that enable individual prosperity and extracting land and resources are the recipe for Why Nations Fail – as Acemoglu and Robinson’s popular book demonstrates.1 Of course, we protested the loss of our lands, title, and jurisdiction, and raised money to fight for our rights. In my territory we had a word for the revenues we collected – t.a.k.s.i.s. It is what it sounds like: taksis. We raised our revenues to build infrastructure, send our chiefs to meet the king, and pay for lawyers. Our ability to finance our governments was legislated away in 1927 with the express purpose of preventing us from fighting for our lands and rights and making us wards of state. The price of history has been high. Many of us have experienced five generations of dependency. We are the poorest of the poor in our home and native land. Our nations have been replaced with Indian Act bands. There are now almost 5,000 bureaucrats at Indian Affairs. This has created two great obstacles to policy and legislative change.

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First, there is high mistrust for any government proposal to help us. Second, there are high costs to implementing changes. 2 The Challenge to Legislate First Nation Governments Back into Canada We need legislation to implement our jurisdiction. Federal and, where necessary, provincial legislation provides an orderly transition from one jurisdiction to another. The federal or provincial jurisdiction creates the legislative room. Our laws and legislation fill that room and we occupy the jurisdiction. In the last thirty years we have learned a great deal about what type of legislation works. The first characteristic for success is First Nation–led. I will mention the ones I worked on, but there were many others that demonstrate the importance of this characteristic. The first piece of legislation that I worked on was the 1988 amendment to the Indian Act that facilitated our property tax jurisdiction. It was the original First Nation–led change to this colonial act. We followed this in 1990 and 1995 with provincial legislation in B C and Quebec, with Justice and Commissioner Harry Laforme, on the specific claims tribunal legislation (it was eventually passed in 2005). Then there was the F N G S T (the First Nations Goods and Services Tax) legislation in 1998 and the comprehensive FNGST legislation in 2003. In 2005, I led the work on the First Nations Fiscal Management Act legislation, which we subsequently amended with enhancements and improvements in 2014. During this period, federal government–led legislative initiatives on governance and education failed. The history of mistrust is too strong to support federally led legislation. The second characteristic for success is optionality. It is perhaps the most important ingredient for successful Indigenous-led legislation. It is important because it reflects the diversity of First Nations across Canada. First Nations have different histories and priorities. They have different geography, demographics, governance capacities, worldviews, and experiences with proposed changes. Optionality respects diversity and the right of self-determination. It eliminates the requirement for universal First Nation support at the outset for any proposed change. As I have experienced, complete First Nation consensus for a proposed legislative change is virtually impossible. Optional legislation solves this problem. It is precisely what supporting UNDRIP – the United Nations Declaration on the Rights of Indigenous Peoples – means.

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As the prime minister said to the United Nations General Assembly in September 2017, “Indigenous peoples will decide how they wish to represent and organize themselves. Some may choose to engage with our government based on historic nations and treaties. Others will use different shared experiences as the basis for coming together. The choice is theirs. That is precisely what self-determination demands” (emphasis added). As I mentioned, we have advanced and supported several optional pieces of First Nation–led legislation. To cite just one example of its success, consider that in 1988 it was predicted there would be about 20 First Nations who would use these new tax powers. In 2007, 33 First Nations immediately joined the First Nations Fiscal Management Act, or as we call it, the F M A . There are now over 160 tax-collecting First Nations in Canada and over 230 have joined the FMA. Optional, First Nation–led legislation works. 3 The Challenge to Build Effective Institutions Implementing First Nation jurisdictions is hard for three reasons. First, it is technically complicated. You must develop, pass, and implement the law governing the jurisdiction. You must develop the administrative systems and software to manage the jurisdiction. You must develop the administrative capacity to implement the jurisdiction effectively and adjust it because of policy or technological change. Second, First Nation jurisdiction must displace the current system. This means switching from one system to another, and this entails several costs. The costs of developing the new legal and administrative framework. The cost of developing capacity to implement the new jurisdiction. The cost of shutting down the old system. These are called “switching” costs. Third, First Nation jurisdiction must deliver better outcomes. Simply replacing Indian Affairs control with First Nation jurisdiction is not sufficient. First Nation jurisdiction must reduce economic barriers and improve access to capital. It must build better infrastructure. It must raise the quality of education, health care, housing, and all other services to national standards. During the last thirty years we have learned the importance of First Nation institutions. They address these barriers to implementing First Nation jurisdictions. They create sample laws and provide law development support to reduce the time and cost of establishing the legal

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framework for jurisdiction. They build software and templates to administer tax and financial systems. They provide accredited training to First Nation administrators to implement jurisdictions effectively. We are very proud of what our First Nations institutions have accomplished. I urge you to check out the work of the Financial Management Board at fnfmb.ca, the work of the Land Advisory Board and the Land Management Resource Centre at larbc.com, the Finance Authority at fnfa.ca, the Tax Commission at fntc.ca, the First Nations Gazette at fng.ca, and the Tulo Centre at tulo.ca. Our institutions have successfully reduced switching costs. In ten short years, over 1,000 First Nation tax laws have been passed and approved. Almost 100 First Nations have been certified by the Financial Management Board for their good management practices. Almost 100 First Nations have implemented land codes and management regimes. Compare these jurisdictional transfer results to how many modern treaties or comprehensive agreements have been completed in that time. The costs of the First Nation institutionally supported approach are much lower as well. Optional, First Nation–led legislation that clears the room for First Nation jurisdiction, supported by First Nation national institutions, is the most efficient and costeffective way to implement First Nation jurisdiction. Perhaps most importantly, the First Nation institutional approach delivers results. Two empirical academic studies show land management communities grow their economies faster than non-land management communities. The FMA and the First Nations Finance Authority have dramatically reduced the costs of long-term capital to First Nations. In the last five years, they have issued $376 million of debentures to build better infrastructure and economies. It is worth adding that these are the first pooled First Nation debentures in the world. Their last offering was over-subscribed. That means the market likes the institutional framework we have built. The last point I want to make about results is that our institutional framework has resolved the tax and representation issue. The Tax Commission was the first national reconciliation institution in Canada – it has indigenous and non-indigenous taxpayer representation. It reconciles the interests of taxpayers on rates, expenditures, and transparency. Several communities have developed taxpayer representation to council laws. We have provided an effective dispute resolution system and it has worked. This is because we viewed taxpayers on

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First Nation lands as investors. We treated them with respect and included them in the system. In summary, national First Nation institutions are the best bridge from the old Indian Act system to the new one of First Nation jurisdiction. The best way forward is to expand this system. 4 The Challenge of Fiscal Power Increasing our fiscal power is the key to implementing jurisdiction and a nation-to-nation relationship. “Nation-to-nation” isn’t just a phrase; it is what happens when two governments both have powers that cannot be overturned either fiscally or legally by the other. This is what we have between provincial governments and the federal government. Their division of powers and unassailable tax powers are in the constitution. I assume this is the framework for our jurisdiction under s.35 of the constitution that the prime minister talked about last week. Therefore, if we are to provide First Nations with a nation-to-nation relationship, we need to provide real jurisdictions and authorities. But that alone is not enough. We need to provide First Nations with real tax powers to implement those authorities. The assignment of a jurisdiction alone will leave us responsible for the service but will leave our authority compromised by the potential for the unilateral imposition of funding conditions attached to that responsibility. It would also make us accountable for the service but without any real certainty that we will continue to receive the funds necessary to deliver it. A ten-year funding agreement is an improvement to our fiscal relationship but does not give us real revenue certainty. If this is the only change to our fiscal arrangements, then future federal governments can still choose to reduce our funding or unilaterally assign new conditions to it. In short, it still leaves us under the thumb of other governments with respect to virtually everything we do. A nation-to-nation fiscal relationship must start with an expansion of our tax powers. And these tax powers must be provided in way that does not allow them to be unilaterally clawed back or made subject to conditions imposed by other governments, after they have been provided. We must look at all options to expand our fiscal power. Recently, the federal and provincial governments split the proposed cannabis excise tax between them 75–25 in favor of the provinces. There was no mention or consideration of our tax jurisdiction, even

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though we will face the same regulation, enforcement, health, and education pressures as other governments. Our fiscal power needs to include an option for cannabis and tobacco tax jurisdiction. If we don’t have this option, then we can all predict the results based on what we have seen with tobacco sales in Ontario and Quebec. Our fiscal power should extend to resources in our territories. The costs and time for negotiating arrangements for resource projects and protecting our rights for related to hunting, fishing, the environment, and heritage in our territories are high. Implementing a First Nation resource tax would reduce time and costs and provide us with the resources to implement jurisdictions necessary to protect our rights. Our fiscal power should be expanded to include the emerging carbon tax proposals, so we can implement our jurisdiction to protect the environment. We should cut out the Department of Indian Affairs on the gas tax so that we have a secure revenue stream to long-term fund infrastructure in our communities like other governments. Fixing the infrastructure system is particularly urgent. We have the worst infrastructure system in Canada. Our infrastructure costs more to build, takes longer to develop, and is less durable than any other infrastructure in Canada. As a result, we have boil water advisories, poor housing, and associated health problems. This must be fixed, and we know how. We need to build a better First Nation infrastructure system for interested First Nations through optional legislation and institutional support. A better First Nation infrastructure system would have more jurisdiction, revenues, and capacity at the local level to speed decisions, better manage projects and costs, and improve operation. A better system would have tribal, regional, and provincial First Nation institutions to provide necessary professional support for all parts of the infrastructure cycle and to encourage cost efficiencies through aggregations. A better system would have a national institution to improve access to infrastructure financing capital, encourage and promote innovation, and develop standards. This better First Nation infrastructure system would reduce time and costs of infrastructure development. It would increase infrastructure durability and improve health and social outcomes. It would support the growth of First Nation economies and revenues to build sustainable communities and nations. As a starting point, there are several First Nations who want to implement these expanded fiscal powers and assert their infrastructure jurisdiction. This would not be hard. We have an optional, First

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Nation-led legislative framework in place in the F M A. We have supportive national First Nations institutions in the Financial Management Board, Finance Authority, and Tax Commission. All it would take is an amendment the existing F M A to add these fiscal powers and a national First Nation Infrastructure Institution. The benefits would be almost immediate. Our communities would have the independent resources to implement jurisdictions over infrastructure, services, languages, culture, child welfare, and resource, land, and environmental management. We would have the basis for a revenue-based fiscal relationship like the rest of the country, where there is a clear link between revenues and expenditures. It could support an improved investment climate and grow our economies. It would provide the resources necessary to rebuild our nations and deliver services and infrastructure more efficiently. Perhaps most significantly, it would provide a path for a nationto-nation framework with Canada for interested First Nations. It would give interested First Nations a means to implement their s.35 jurisdictions. d av i d pa u l

I am David Paul, from Tobique First Nation in New Brunswick. I am the deputy chief commissioner of the First Nations Tax Commission. I want to start by putting the “tax and representation” issue that is the subject of my brief presentation in the proper perspective. Tax and representation over First Nation taxes paid by non-First Nations people is not a stand-alone issue. It is part of the larger issue of building First Nation economies and developing a fiscal relationship for First Nations that creates true nation-to-nation relations and allows for the proper degree of self-determination. Prime Minister Justin Trudeau has repeatedly reiterated his government’s commitment to implementing our s.35 rights, titles, and jurisdictions to establish a nation-to-nation relationship with our governments. The federal government, our communities, and all Canadians are challenged to turn the nice words and reconciliation sentiments into policy, legislation, and most importantly, better outcomes. Let me begin by defining a nation-to-nation relationship. This isn’t just a phrase. A nation-to-nation relationship is what happens when two different governments both have powers that cannot be overturned either fiscally or legally by the other. This is what we have between

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nations. It is also what we have between provincial governments and the federal government, because of the division of powers and the fact that both have unassailable tax powers under the constitution. If we are to provide First Nations with a nation-to-nation relationship, we therefore need to provide real jurisdictions and authorities. But that alone is not enough. We need to provide First Nations with real tax powers to implement those authorities. The assignment of a jurisdiction or responsibility alone will leave us responsible for the service but will leave our authority compromised by the potential for the unilateral imposition of funding conditions attached to that responsibility. It would also make us accountable for the service but without any real certainty that we will continue to receive the funds necessary to deliver it. Stated differently, the recently announced ten-year funding agreement is an improvement to our fiscal relationship. However, it does not give us real revenue certainty or jurisdictional freedom. It falls short of nation-to-nation and reconciliation. If this is the only change to our fiscal arrangements, then future federal governments can still choose to reduce our funding or unilaterally assign new conditions to it. In short, it still leaves us under the thumb of other governments with respect to virtually everything we do. A nation-to-nation fiscal relationship must therefore start with an expansion of our tax powers. And these tax powers must be provided in way that does not allow them to be unilaterally clawed back or made subject to conditions imposed by other governments, after they have been provided. Expanded tax powers must also be provided under arrangements whereby the scope of potential federal oversight and priority setting over our governments goes down, as we finance more of our government. If we don’t do that, then how can we say we are serious about reducing the intrusiveness of the federal government in our communities and lives? If we, as First Nations, have expanded tax powers under these conditions, then we can reduce federal oversight improving our economies. We can create the security we need over future revenues by looking after our economy rather than looking to the federal government. I think these conditions are essential for good government. Many factors go into creating a strong economy. However, it always requires strong private investment. We all know that First Nations get a relatively small share of Canada’s investment – well below what we should receive. This fact explains our poverty and underdevelopment.

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I’ll go further and say that we will have no lasting, and affordable, solution to disparities unless First Nations receive our share of investment. Why don’t we get our share of private investment? There are a lot of reasons. We don’t have a proper land title registry. We don’t have enough local jurisdiction. We don’t have enough information and administrative capacity to facilitate investment. We don’t build investment-­grade infrastructure in our communities. The result is that it costs four to six times more to do economic development in our communities than in any other Canadian jurisdiction. This statistic more than any other explains our economic disparity, which in turn is the principle cause of our social disparities. We are sick and tired of the inherent right to poverty. That is why many communities are working with us to address the root causes of these high costs of doing business. We are working together to develop a new land title registry system like the ones you take for granted, instead of the shoe box of records called the Indian Lands Registry that we currently have. We are supporting First Nations who want to take more control of their local jurisdictions through the Lands Management Act and other initiatives. We are working together to advance a new First Nations Infrastructure Institute so that we can build economically sustainable infrastructure like the rest of Canada. We are working to expand our highly successful administrative capacity development program at the Tulo Centre of Indigenous Economics. We need to move decision-making to the local level, because that is where business gets done. As Manny Jules’s father used to say, “We need to move at the speed of business. Our people elected Chief and Council to improve their communities, not the bureaucrats at Indian Affairs.” We are sick of them trying to micromanage over 600 First Nations. The only way we can truly break free is if we have sufficient fiscal power to implement our jurisdiction. I’m talking about First Nations collecting taxes from activities on their lands and territories and spending it according to the priorities they see, without the involvement of the federal government. This “radical” idea is of course precisely how taxes and expenditures are done by every other government in Canada. You have a revenue-based fiscal relationship. We have a transfer one. The results of which one is superior are evident in the economic and social outcomes. We want what you have. We are not advocating for special rights. We are just asking for what is right.

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Moreover, we have already implemented the beginning of revenuebased fiscal relationship through the First Nations Fiscal Management Act or FMA . The F MA provided us with our revenue authorities and sole responsibility for local services. We set the priorities, we design the programs, we work to attract investment. The verdict is in. The FMA worked. FMA First Nations have raised the value of that tax room that was provided to them. F M A First Nations have improved their economies, land values, infrastructure, and services, and created job and business opportunities for their members and for other people in their regions. First Nations with tax jurisdiction have raised over $1 billion in tax revenue to date. Over 100 of them have had their financial management systems certified. The First Nations Finance Authority has issued $376 million in debentures to finance better economic infrastructure. Over 200 students have attended accredited administration training at the Tulo Centre of Indigenous Economics. Most importantly, FMA First Nations have attracted almost $3 billion in investment. The FMA worked because it put decision-making and revenues in the right hands. It also worked because we understood from day one that we needed to respect the interests of all the people who brought their money to our lands. This is where the issue of taxation and representation comes up. We created the F N T C to establish national standards for First Nations property taxation and, in part, so that investors on our lands would get a degree of confidence that individual First Nations alone could not provide. The FNTC and its predecessor, the Indian Taxation Advisory Board, are the original reconciliation institutions in Canada. We have already had taxpayer and non-native representatives on our boards. We have always had mechanisms, like the First Nations Gazette, to ensure tax rates and expenditures are transparent. Commission standards and polices work with best practices in taxation to reconcile the interests of taxpayers and provide for a comparable and fair level of taxation. All law and by-laws related to First Nations taxation are published online in the First Nations Gazette. Some communities have established taxpayer representation systems to work with their councils to ensure that the interests of taxpayers are heard. Among our greatest success is the silence that is heard when the record of public disputes between First Nations and their taxpayers is examined. We are available to respond to inquiries and facilitate understanding when new taxation systems are being implemented. I am confident

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that we have addressed the taxpayer representation issue well. We did this by respecting the rights of the people who brought their money to our lands. We understood that if we did not provide comfort, protection, and certainty we would lose investment. First Nations created the F N T C , in part, so that they could establish a national tax system that could serve all First Nations and offer a degree of protection beyond which any individual First Nation could provide. The F N T C is one of the original institutions for reconciling interests. I want to give you just one example of how First Nations taxpayers work with the F N T C to advance their interests with other governments. The BC government first introduced its “revenue neutral” carbon tax in 2008. One element of their revenue neutrality was property tax rebates to homeowners. They did not provide these rebates, however, to non-native homeowners on First Nation lands. These homeowners worked with their First Nations and the Tax Commission to advance this grievance. They didn’t turn to provincial institutions to represent them. They turned to a First Nation one. That is reconciliation in action. That is how we work together to address tax and representation. First Nations want to expand the FM A model. I think it has been one of the most successful initiatives for First Nations development and reconciliation. They want to expand the set of revenues available to First Nations to include things such as tobacco taxes, cannabis taxes, business activity taxes, and an Aboriginal Resource Tax which would formalize our ability, as nations, to share in the revenues created by resource development on our traditional territories. FNTC supports advancing these initiatives. We should link these taxes to the assumption of new responsibilities over areas such as infrastructure, land and resource management, and child welfare. We should create new institutions to support better infrastructure, land title registrations, and statistics. This can be accomplished by working beyond the Indian Act and amending existing legislation like the FMA and the First Nations Lands Management Act or F N L M A. When these two initiatives started there were 35 First Nations in the FMA and 14 in the F NL MA . Now there are 276 First Nations in one or both initiatives. First Nation–led optional legislation works. National institutions work to implement jurisdictions. These 276 First Nations obviously want to make sure words become action. They have demonstrated a path that works. If not them, then who? If not now, then when?

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note

  1 Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (New York: Crown Business/Random House, 2012).

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t h e h i s t o r y o f ta x fa i r n e s s

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3 Jealousy of Taxes E.A. Heaman

The modern project of rule is grounded on consensual taxation. Every nation reflects that truth in its own history, Canada no less than any other. Because Britain led modern tax innovation and conquered New France in 1760, the Canadian colonies became an early testing ground for modern rule. This essay explores how some early ideas of fiscal modernization shaped Canadian history. It aims to deliver some basic fiscal theory as well as the broad outlines of Canadian fiscal history in digestible form to the non-specialist. That’s a tall order and it calls for a shortcut: David Hume, whose ideas about taxation can be traced through Canadian fiscal history over two and a half centuries. The title of this chapter plays upon Hume’s famous essay of 1758, “Of the Jealousy of Trade,” recognized as a crucial pivot towards economic modernity. Hume repudiated mercantilist thinking when he argued that countries should not be jealous of prosperity amongst their neighbours, because they stood to benefit from it. Political reason, grounded in competitive jealousy, may lead you to a Hobbesian “war of every man against every man” but, Hume argued, economic reason and “commercial sociability” permit mutual growth and benefits.1 Jealousy of trade reflects unenlightened selfishness rather than enlightened self-interest. This argument has become economic orthodoxy. Arguments about trade are also arguments about taxes. Tax debates pit different economic interests against one another and require the state to take sides. Neutrality is never possible: someone’s ox must be gored because taxes must be exacted wherever a state exists. Following Hume’s logic, states should avoid protective taxes and wars because they obstruct economic growth. Alas,

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eighteenth-century Britain seemed to be going the other way by fighting an escalating series of trade wars. If jealousy of trade was the problem, I’ll suggest, a certain resentment or jealousy of taxes was a solution. People don’t like to pay taxes. When they think that a tax is unfair or burdensome, they resist, sometimes with quiet evasion, sometimes with violent agitation, sometimes with great social revolutions. Hume’s History of England argued that parliament had used the power of the purse to discipline the Crown and subject it to rule of law and that England had become a modern “civilized” nation in the process, its disputes reflecting enlightened self-interest within a stable constitutional framework, rather than ideological passions that scorched not just rivals but the state itself. Liberal political thinkers following Hume celebrated tax resistance as a check on the state and guarantee of liberties. But tax resistance isn’t really the same as jealousy, a term of opprobrium for Hume. In an earlier essay, “On Taxes,” Hume argued that “Where taxes are moderate, are laid on gradually, and affect not the necessaries of life,” they made peoples more opulent and industrious. He approved consumption taxes, abominated poll taxes, and warned against arbitrary taxes that were more rather than less likely to result from strict limits, by driving levies into irregular, unequal, and arbitrary channels (such, perhaps, as recent “taxation by citation” noted in the Introduction here). Regular taxes collected through regular channels moderated and “united” the interests of rulers and ruled. Hume’s arguments became influential in the same decade that Britain drove France out of North America. His critique of jealousy inflected political-economic debates about Canada and in Canada, both before and after the transition to colonial self-government in the mid-nineteenth century. Where Americans repudiated their British heritage, Canadians embraced it, insisting on the historical continuities. Conservatives and liberals largely sparred over the precise translation of Hume’s liberal-conservative vision, and how to respond to an increasing American jealousy of trade. Over time, administrative capacity to tax increased and so did political accountability to a broadening swathe of the taxpaying public. Because taxes always had to be defended as both effective and fair, accreting scholarly expertise and political democratization perpetually informed and checked one another. In recent decades, the tax structure has become so big and complicated as to threaten fairness and public accountability. But

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beneath the complexity, I’ll argue, Hume’s logic persists as a measure of legitimacy for the modern, taxing state. Taking Hume as a point of departure lets us scrutinize the interweaving of popular and expert judgment. Hume argued that the only possible mechanism for evaluating the legitimacy of a law or a king was the opinion of the public.2 The Tudors got away with being more despotic than the Stuarts only because public taste changed. Appeals to ancient liberties and to a purported social contract might contradict the legitimacy of public opinion but still had to appeal to public opinion to win their case, thereby debunking themselves. Simple historical and economic facts, broadly circulated, could command popular consensus and best protect a public interest identifiable in retrospect, if not always at the time. For example, Hume observed: “Those who took up arms against Dionysius, or Nero, or Philip the second, have the favour of every reader in the perusal of their history; and nothing but the most violent perversion of common sense can ever lead us to condemn them.”3 Hume’s arguments were foundational for the emerging academic disciplines of economics, political science, philosophy, and history. But academic or expert knowledge is, by definition, not common and some forms claim epistemological privilege as a kind of trump card. They denounce public opinion and demand an override. But that’s also a kind of jealousy. Where unaccountable to public opinion, privilege in any form can tend towards selfishness and corruption. That’s the point made in 1897 by W.S. Fielding, a long-time Canadian finance minister, in response to protected manufacturers who feared liberalization of tariff policy and wanted guaranteed protections over the long term: “You have to trust to public opinion to do that; there is no other way.”4 *** Hume’s point of departure, according to István Hont, was that modern virtue was not anti-commercial but commercial, and England had lots of virtue and lots of commerce. The country enjoyed a peculiar standing “above any nation at present in the world, or that appears in the records of any story,” because it had more national wealth distributed more evenly through society. England was rich because it had an industrious, prospering artisan population. These people rightly enjoyed the fruits of their labour, thereby having the “full possession of all the necessaries, and many of the conveniences of life. No one

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can doubt but such an equality is most suitable to human nature, and diminishes much less from the happiness of the rich than it adds to that of the poor.”5 Equality within the nation served the general welfare and so did equality among neighbouring nations. If England’s neighbours prospered, all the better for England’s industrious artisans: they had a market ready at hand. Hume’s essay “Of the Jealousy of Trade” ended in a ringing, cosmopolitan peroration: “I shall therefore venture to acknowledge, that, not only as a man, but as a bri t i s h subject, I pray for the flourishing commerce of germany, spain, italy, and even france itself. I am at least certain, that great britain, and all those nations, would flourish more, did their sovereigns and ministers adopt such enlarged and benevolent sentiments towards each other.”6 England would be better off if Scotland and Ireland were richer than they were. Happily, Hume believed, that process was occurring naturally by the differential of wages. Cheap wages in poor countries attracted capital investment from rich ones, a change that Hume, as a Scotsman, welcomed. Hume argued that England had broken out of the classic (Polybian) cycle of rise, corruption, and decline.7 But for the logic to hold, Hume had to check political controls over commerce. Hume argued that commerce regulated itself. Left alone, it made nations industrial and civilized, and internal checks prevented decline into corruption and tyranny. The most important check upon tyranny and corruption was the equalization of wealth through trade that let prosperity regulate itself, even amidst short-term fluctuations – inflation or downturn – that should not, Hume argued, become licences to print money or monopolize trade. Hume did not use the invisible hand metaphor of his friend Adam Smith, but the concept of a self-regulating economy clearly underpinned his optimism. But Hume sought to check, not obliterate, political authority and there was no one standard of justice or fairness in operation. Any rule of law that served modern liberty and prosperity was just, and Hume admitted most European nations as modern and civilized, even the absolutist ones. He even, on mature reflection, admitted that Queen Elizabeth could be so described. But it was a tough call that demanded careful historical reflection. Trade was the vanguard of enlightened self-interest, but traders continually sought special privileges that hindered the free flow of commerce. In the language of David Ricardo, a self-styled heir of the Scottish Enlightenment, merchants engaged in “rent-seeking”

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behaviour to get from the state a better deal than fair market conditions would give them.8 Economist Angus Deaton provides a definition: “In a well-functioning market economy, people get rich by making things, innovating, and generally expanding what the system can offer. By and large, their personal incentives are aligned with what is good for society. Rent-seekers have another way of getting rich. They do not create, but try to redistribute in their own favour by lobbying, by rewriting the rules, or by rewarding and being rewarded by their cronies in business and in government.”9 Protective tariffs were one form of rent, one that didn’t just obstruct trade but also provoked the kind of trade-driven wars that France and English repeatedly fought throughout the eighteenth century. That was a misguided application of political to economic reason, one that failed the test of enlightened self-interest. If jealousy of trade was the problem, taxpayer resentment was a solution. Tariffs were taxes and they provoked resentment and resistance. The people had a natural interest in cheap bread. If wars drove up taxes, they also forced political concessions that enabled parliament to grasp greater control of the policy process and redirect it in the interests of taxpayers. Hume’s History of England recorded a long series of war-mongering monarchs forced to negotiate for funds with the nobility and the commons and gradually subjecting itself to parliament, that is, to rule of law. The Magna Carta was a tax deal and a major turning point towards political accountability. Neither King John nor his barons actively pursued the public good; both were fighting for their own power to oppress the nation. But the unintended result of their quarrels was that ordinary citizens became increasingly able enjoy the fruits of their labour under conditions of liberty and security. It’s the hindsight afforded by history that lets us perceive larger patterns of progress as the state and public opinion balance and stabilize one another. Without hindsight, it’s hard to identify the public interest, and especially so in fiscal transfers. For example, when a poor man must give a sum of money to a rich man to pay a debt, that transaction may strike us as unjust. But, Hume argued, the stability of property relations demands such payments and the poor man benefits from that stability, so long as those payments and relations are not too oppressive.10 Hume argued that justice emerged from concern for the protection of property and that both property and justice must be stable for modern commercial sociability to flourish. As with progress, one had to take the historical point of view to see

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that. Justice reflects “emergent properties not planned properties,” in Jacob Levy’s formulation.11 Complaints of unfair taxes can rein in oppression and injustice. But appeals to tax fairness can also be specious, selfish, and unjust. Tax jealousy can be as toxic as trade jealousy. Religious and charitable organizations became very wealthy by securing tax exemptions justified by their special services. Unconvinced, Hume denounced the wealth, political ambition, and ideological fervour of the medieval church as inimical to secular authority and the public good. Resentment of taxes could check onerous taxes and war-mongering Machiavellian princes, but careful judgment was needed to distinguish commercial sociability from an exaggerated jealousy. Hume posited natural human sympathy as an underlying constituent of commercial sociability, but he also wrote a six-volume history of England replete with warnings against political misjudgments.12 Normally, resentment of taxes could check jealousy of trade. But Hume’s times did not seem normal. Modern states had found a way to break that check: public credit. Credit wasn’t new, but newly globalizing wars with monstrous tax bills were enabling finance and the state to grow in unprecedented and dangerous ways. Both the War of the Spanish Succession and the Seven Years’ War cost Britain nearly 20% of G D P . The more that debts rose, the more the financiers demanded influence over policy: to ensure they would be paid back, to keep credit buoyant, and, perhaps, to prolong war for the purpose of profit. Financiers were well motivated to oppose peace and default. But repayment, Hume warned, could force the English state to tax first luxuries, then the necessities of the poor, and finally, land. Historically, the landed interests had fought off such taxes but now seemed to be strangely “supine.” A new cycle of decline threatened as the state and finance capital mutually consolidated around war. The public was weakened by an increasingly unaccountable executive power that might supplant Hume’s civilized prince with Machiavelli’s uncivilized prince. Was finance capital really worse than merchant or industrial capital? If it was property, it should dovetail with justice, in accord with Hume’s formulation. But Hume thought that finance capital had some peculiar qualities making it dangerous to justice: instability and statelessness. No property is perfectly stable, just as no political arrangement is perfectly stable: public opinion can turn powerfully against either of them, Hume showed. A separatist movement can drive down

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property values, as Quebecers know well. But history, and especially the South Sea Bubble of 1720, proved that finance was particularly unstable and stood as a warning against protecting reckless investors. Sometimes repayment can be not just “impracticable, but oppressive, socially insensitive and misconceived.”13 Statelessness also perverted ordinary property incentives: stateless capital lacks a long-term investment in national stability, prosperity, and justice. Hume denounced financiers as “men, who have no connections with the state, who can enjoy their revenue in any part of the globe in which they chuse to reside, who will naturally bury themselves in the capital or in great cities, and who will sink into the lethargy of a stupid and pampered luxury, without spirit, ambition, or enjoyment.” Where merchants added to the circulating wealth, war financiers drained it and they looked a lot like the medieval church that held back modernity for a millennium by leeching on productive wealth while hypocritically vilifying it. Financiers were the new leeches and so, arguably, they remain. Economist Tyler Cowen remarks of recent state-banking alliances: “It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw … Over time this situation will corrode productivity, because what the banks do bears almost no resemblance to a process of getting capital into the hands of those who can make most efficient use of it.”14 The offshoring of finance for purposes of tax evasion has played a significant role in that story.15 Modern wars, thus, endangered property and justice by generating too much public credit and too much taxation, while circumventing public opinion. Hume preferred public opinion to monarchs as the better caretaker of national interest and prosperity. His accounts of historical epochs always conclude with reflections on how public mores had moderated and reshaped politics in the process. But finance capital swung the balance of power too much away from the people and back towards the prince. Queen Anne’s War worried him; the Seven Years’ War alarmed him. With the benefit of hindsight, we know that France fell prey to its war debts but Britain did not. British statesmen found ways of checking the new cycle of decline. In the wake of the ferociously expensive French Revolutionary War (22% of G D P ), they checked the trade-war-debt cycle. Liberal-conservative politicians – above all Robert Peel and William Gladstone – drastically cut military and non-military spending. There would be no more expensive wars for a century: the Crimean and the South African wars remained in single digits of GDP. Peel and Gladstone also shifted the burden of

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taxation from tariffs to income tax.16 Nonetheless, the fiscal hangover persisted: from 1815 to 1914, Britain spent more on servicing its debts than on education.17 *** Canada was never far from the centre of those events and controversies. Early modern North America was an epicentre for imperial violence as rival empires vied for economic and political control. Everywhere, informal and unregulated trade flourished, often in defiance of local and imperial regulation: Emma Hart draws parallels between Smith’s theoretical deconstruction of the regulated marketplace from the top down and the practical colonial deconstruction from the bottom up.18 But growth in France was much weaker than in New England, and this weakness enabled the British to take control of continental North America in 1760. They then had to strike peace deals with Indigenous nations that organized to resist their rule. The Royal Proclamation of 1763 and the Treaty of Niagara of 1764 responded to and reflected Indigenous demands, but they also reflected a Humean optimism that enlightened self-interest expressed by public opinion – in legislative assemblies amongst Eurowesterners and public meetings amongst Indigenous nations – could tend towards mutually beneficial trading relations across ethnic and tribal boundaries. But then Britain tried to pay for those ferocious war debts by taxing colonials directly in the Stamp Act of 1765, passed by an imperial parliament in which they had no representation. Quebecers joined in the widespread colonial resentment and invoked the rights of the British subject for fiscal accountability.19 By the end of the American Revolutionary War, parliamentarians realized they could not tax colonies where settlers claimed the historic rights of the British taxpayer. Canada became a net beneficiary of the fiscal-military state in the form of military canals, citadels, Martello towers, and soldiers who were encouraged to settle there. There were also imperial trade preferences (taxes on non-imperial produce and shipping). But pressures to stem the flow of resources from Britain to Canada mounted steadily. That tax resentment was reinforced by the free-trade logic of political economy. Debates for and against military spending and tax privileges were not just about Canada, but the debates about Canada reveal core perplexities about political economy as a project of imperial rule.

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New insights fuelled new perplexities. In 1798, Thomas Malthus warned that generalized well-being was threatened by overbreeding amongst the poor, prompting fiscal transfers from rich to poor that would drain productive wealth and create pauperism, a self-­ reproducing poverty. Philanthropy and welfare were, on that view, a kind of rent-seeking, grounded not in cronyism but in sympathy. Too much sympathy, Malthusians argued, negated poverty as a check upon idleness. Thus did the Poor Law Amendment Act of 1834 introduce cruel workhouse disciplines as countervailing incentives against pauperism. Across early Canada similar institutions began to appear, even in Maritime regions where the old poor laws remained in force, and in Upper and Lower Canada where charity was the preferred mechanism of relief.20 Malthus’s arguments intensified the logic for a supposedly noninterventionist state with profoundly coercive underpinnings. So did Ricardo, who carried his arguments directly into Parliament. He seconded the attack on protective tariffs by accusing them of rentseeking and diminishing returns. Amidst crippling debt and a widespread economic downturn, British politicians and scholars mutually attacked and educated one another. In the process, political economy came of age with new methods and data. Free trade was not wholly a victory of theory over experience, according to historians. Boyd Hilton argues that before 1830, Tory fiscal policies (hard money and protection) were primarily pragmatic responses to immediate economic problems: debts, slump, and such specific sectoral failures as the handloom weavers displaced by mechanization. But the WhigLiberal criticisms of Tory policies were theory-driven and so, therefore, were Tory replies. Debates about corn laws reflected not actual but potential food shortages. The question of policy became a question of knowledge: how had markets behaved in the past and how would they behave in the future? What facts and what theories best described the relation of past, present, and future? Pragmatic response to crisis did not require theoretical rigour, but prediction did.21 These were intense and polarizing debates that provoked new methods and new data. Political economy entered the university, with chairs in Oxford, Cambridge, and London in 1825 and 1828.22 In relation to Canada, the questions were twofold. First, should the British state assist the unemployed to emigrate to Canada? Where employers saw ruinously rising wages, landed interests and liberals

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saw lower taxes and a less coercive solution to poverty. Second, should parliament protect British and colonial produce, rather than letting other countries compete for the British market on equal terms? Corn laws aimed to ensure food security by luring marginal lands into production. Their justification was, thus, partly liberal economics and partly self-defence. But Ricardo argued that only free trade could sustain Britain’s economy and food supply over the long term. If extra measures of a variable factor (such as capital or labour) are applied to something fixed, like land, then each new infusion of capital or labour will increase the production (wheat) by progressively smaller amounts. Malthus and Ricardo both came to that conclusion in 1815, in response to a new corn law. The conclusion: corn taxes would rise to counteract the diminishing returns on marginal lands, enabling the tillers of better soils to profit exorbitantly. Only free trade could break the cycle.23 Colonial produce and all else must be left to find its way on the open international market. Canadian production, everyone knew, could not compete in Britain on such terms, by reason of the short growing season and the lack of transportation infrastructure. But comparative advantage predicted that Britain and Canada would be better off in the long run. Aiming at “abating national jealousies and prejudices,” Peel split the Tory party in the 1840s when he abolished imperial preferences.24 This was a significant de-escalation of imperial domination and it coincided with the granting of responsible government to legislative assemblies in the Canadian colonies, following violent rebellions. The colonies must make their way on the international market, but they would at least tax and govern themselves. The intertwined logic of free trade and colonial self-government was championed by two leading parliamentary critics of Tory rule in the 1820s and influential allies of the early 1830s, John Lambton, Lord Durham, and Charles Poulett Thompson, Baron Sydenham (respectively the de facto author of the Great Reform Bill and the president of the Board of Trade), who served as successive Canadian governors general between 1838 and 1841. The arguments reflected Hume’s principles of liberalization revamped by both a mathematical and a data revolution in political economy. Hume’s political economy had been a sceptical response to an earlier “efflorescence of political numbers” around population, trade, and debt. National debt had risen to such reckless heights because the gullible public had been beguiled by “chimerical calculations” of future prosperity.25 Nineteenth-century political economists

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firmed up the data by mathematizing and quantifying it, inaugurating an academic turn to economics that insulated it from a democratizing public. At Cambridge, William Whewell, a polymath scientist, denounced Ricardo’s theories of built-in economic decline as too pessimistic and too deductive. They started with moral principles, conflated them with reason, and distorted the scant data they invoked. Whewell wanted to see the reasoning begin with data, only then rising to generalizations that should be grounded in mathematics. He wrote a series of papers and equations that Malthus ruefully admitted he couldn’t understand.26 Mathematics was the centrepiece of a Cambridge education, largely in the image of mathematical physics, attached to metaphors of force, resistance, and energy.27 Mathematics might trump moral reasoning but it couldn’t trump historic experience: there, data was needed. Parliamentarians debating economic policy continually demanded statistics and complained of their unavailability. In 1832, they created a statistical branch at the Board of Trade and hired a statistician, G.R. Porter (Ricardo’s brother-in-law and a free trader), who industriously built up statistical capacity.28 There were also private associations to collect data from businesses and foreign experts, including a statistical section at the British Association for the Advancement of Sciences in 1833 and a new Statistical Society of London in 1834.29 The new statistical data came to Canada with surprising celerity in the person of Rawson W. Rawson, the energetic secretary of the London Society and editor of its journal, who also had a day job as clerk under Porter at the Board of Trade. Rawson came to Canada in 1841 as secretary to Sydenham’s successor, Sir Charles Bagot, and he brought his social-investigation chops when he wrote the Rawson or Bagot report on the state of the Canadian Indian Department. Rawson had to address an obvious trend – noted in the last major report done in 1828 – of growing Indigenous poverty.30 This was a problem and a test for political economy. Rawson saw a racialized version of the law of diminishing returns in operation. Immigration was creating such terrific pressure for land cession as to make it predictable, even where it was held in fully orthodox and legal forms by populous Indigenous nations, as at the Six Nations reserve at Brantford. Because the colonial public was “virtually a party” in favour of dispossession, Indigenous people could not recoup on their investments. Rawson saw no solution except political and economic agency on the only terms that Canadians recognized, namely, assimilation. He advocated

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education even as he warned against making a fetish of it. But by fetishizing education as a path to enfranchisement, the Canadian government – which began to legislate Indian affairs from 1850 – could perpetually withhold enfranchisement. The Indian Department would find its niche in intensifying rather than checking popular racism. Only intense racialization permitted disruption of Indigenous land ownership without disruption of property and justice more generally. Absent the racism, dispossession – a process riddled with corruption, coercion, and fraud – looked (and now looks) more like theft than justice. This was more John Locke than David Hume. Locke’s theory of property privileged private ownership over public political process and justified Indigenous dispossession. Hume debunked Locke on property and offered no alternative justification for privatizing land as property. But in Hume’s very warnings against English dispossession by finance capital, Canadians apparently saw lucrative opportunities for expulsion and development. The move to self-government in the British North American colonies in the 1840s coincided, thus, with economic liberalization and a deep strain of settler illiberalism. Reformers, insisting on their tax grievances, reconstructed colonial governance in the image of the imperial parliament. They wielded tax resentments to tame the prince, just as English parliamentarians had done. But they also wielded a harsh political tutelage over Indigenous peoples. They dismantled the tax check on illiberalism by exempting anyone with “Indian” status from direct taxation and disenfranchising them. In fact, Indigenous peoples paid many taxes, particularly consumer taxes, as Prime Minister John A. Macdonald observed in 1885.31 But the vote was extended to all people holding Indian status only in 1960. Heavy consumer taxes were a major difference between Britain and Canada, and a heavily contested one. Political liberalization in Canada came with a large slice of state capture by business. It did so according to a Macdonaldian political-economic logic that owed a great deal to Hume. Canadian politics reflected historic English suspiciousness and jealousies, especially of French and Irish; less so of Scots, who held much local power. The old rich nation/poor nation jealousies played out in Canada, exacerbated by regional and religious factors. Canadians fought over how to share customs revenue according to race, religion, and region. English Canadians in Upper Canada saw themselves as more highly taxed than everyone else because they were wealthier and preferred imported goods. French Canadians were

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described as “shivering peasants” too poor to pay their fair share of taxes: in riots against the corvée in the 1790s; agitation against land taxes to pay for a jail in the 1800s; paralysis of government in the 1820s; rebellion in the 1830s; and resistance to coercive school taxes in the 1840s. But French-Canadian tax resistance reflected an understanding that under the British constitution, political grievances were most legitimate when described as tax grievances. They registered commercial virtue and political modernity. Macdonald understood that fact very well. He modernized Canadian conservatism in the image of Peel and Gladstone with a program of economic development and political moderation, and he rejected the ethnic, religious, and fiscal attacks against French Canada fashionable amongst old-school Tories and western liberal or “Grit” reformers. But the reformers won more and more supporters when they complained that political cronyism and French-Canadian backwardness threatened Canadian economic modernity because they transferred English-Canadian wealth to impoverished French Canadians. Worse yet, overspending, especially on government-backed railways, was driving up the tariff and thereby increasing the transfers and stultifying economic growth. The tariff also annoyed the United States enough to prompt abrogation of an earlier free trade deal. From 1866 on, the United States imposed heavy taxes on Canadian goods, denying them access to that market. American jealousy of trade set the tone for the next century. How could Canada achieve economic modernity under such conditions? In 1867, British North American Confederation became the solution. It would create a customs union and swamp the French vote by a larger English one. Confederation also created two levels of government: a local one for negotiating non-economic interests such as religion, and a national one to be organized around economic interests, including western expansion. Above all, it would, Grits argued, install constitutional checks on taxes and interregional transfers. Local governments must tax directly; the federal government could tax indirectly but could not send more than eighty cents per capita to any province. Moreover, that subsidy was fixed at the census of 1861, so that a province that doubled its population would receive only forty cents per capita. The cap on fiscal transfers didn’t last long. Macdonald breached it in response to a “better terms” movement – a tax revolt – in Nova Scotia. He further negotiated a series of inter-regional transfers,

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including pledges for railways stretching to the east and west coasts. Ontario liberals fumed at the redistributive taxes and at the corrupt deals done between Conservative politicians and protected manufacturers. But the economy, blanketed in depression during the 1870s, picked up again in the 1880s. Macdonald won election after election with boasts of the industrious, prospering population of workingmen that his tariff had nurtured, a boast fully consonant with Hume’s measure of national well-being. Macdonald cleaved to a remarkably Humean formula for governance. Like Hume, he called himself liberal-conservative. He understood that the classic rich country/poor country logic, applied to Canadian-American relations, would raise Canadian wages. As late as the mid-1870s he was heard to insist that he was no protectionist. But if Canada was shut out of the American market, it must cultivate its own; Hume had admitted the principle.32 Above all, Macdonald repudiated a politics of passion in favour of a politics of interest, moderation, and Britishness. Like Hume, he saw those qualities as compatible with the strong executive government that he wrote into the B N A Act. Macdonald also resembled Hume in his Francophilia, his distaste for expensive wars, and his respect for the large-scale movement of enlightened opinion as a powerful civilizing force – so long as that public opinion was grounded on property rather than on radical notions of democracy. But Macdonald also betrayed his Humean heritage in some important ways, and increasingly so as he aged – like Hume himself, who came to believe that racialized slavery was natural.33 While early Macdonald argued that politicians must ever “stoop to conquer” and respect public opinion, he became, over time, increasingly likely to use state powers of repression and violence to shape that opinion. He nurtured alliances between commerce-minded English and French so as to obstruct English-Canadian fantasies of religious and racial domination. But he made increasing concessions to popular prejudice and state capture that let fantasies of domination write themselves back in. Macdonald put Rawson’s insight – that liberals and conservatives united as “virtually a party” around dispossession – to work by uniting Canadians around the settlement and development of the western territories which he annexed in 1869. Like Hume, Macdonald realized that internationally financed public debt tended to accomplish the dispossession of the landed. Together debt and public opinion could, he realized, dispossess Indigenous peoples more expeditiously than

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armies or tax collectors. Even as he advocated the liberal enfranchisement of propertied Indigenous peoples, Macdonald forced their hand with policies of starvation, quasi-military policing, and exemplary state violence to deliver up their lands for settlement and development.34 And where local consensus was openly nativist, he catered to that nativism. In BC, settlers accused non-white populations of racialized tax evasion, disenfranchised them on those grounds, and then brutally taxed them. Macdonald let it happen. He tolerated similar petty tyrannies against Black Canadians, and sometimes even exploited it, as Barrington Walker has shown.35 By the end of Macdonald’s life, anti-French nativism was also resurging. Macdonald had tried to empower progressive economics against ethnic and religious jealousies according to Hume’s formula, but the nativists discovered that if they insisted on the tax implications of ethnic and religious identity, they could claim that rational self-interest rather than jealousy animated them. For them, tax resistance was only progressive when voiced by the supposedly progressive races. They racialized political and fiscal accountability. Macdonald also ceded too much to jealousy of trade in his National Policy of Tariff Protection of 1879. He protected industries in return for bribes so massive as to render general elections “close to meaningless.”36 The tariff alienated farmers and other commodity producers who had to sell their goods on the open market. It also strengthened protectionism in Britain. The stage was being set for Hume’s slippery slope from the jealousy of trade to predatory war finance. State debt in Canada emerged around railway finance, which continually propelled that debt beyond what either industry or the state could comfortably bear. At the turn of the century, finance capital also took on unprecedented levels of industrial debt. It formed gigantic holding companies or trusts that annexed smaller corporations in pursuit of control over whole economic sectors, amidst concern about the threats that a new “fiscal feudalism” posed to general prosperity.37 Gilded Age inequality seemed not natural but artificial, propped up by illiberal legislation. New economic theories and methods parsed the new perplexities. Economics departments were professionalizing, replacing older generalists without PhDs – such as Adam Shortt at Queen’s University and James Mavor at the University of Toronto – with highly trained specialists who insisted on the distance between popular and scientific economic reasoning.38 They imbibed the new “marginal utility” theories of British and American economists that

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insisted on increasingly specialized research methods and logic. Among the findings that emerged from the new research into tax incidence was the discovery that existing tax regimes were regressive. Those findings lent strength to popular fiscal-reform movements demanding progressive taxes based on “ability to pay.” Britain and the United States both introduced modestly progressive income taxes in the decade before the First World War. War would dramatically increase their upper marginal tax rates. Wartime tax hikes reflected a widespread sense of sacrifice: where soldiers were dying at appalling rates, it seemed only fair to demand that capital, too, make a sacrifice. But the increases also reflected economic theory. If taxes increase but marginal rates do not, then progression becomes regression, according to Arthur Pigou, who held the Cambridge chair of economics from 1908. Pigou also invented the theory of externalities – the idea that the market doesn’t always fully reflect the costs of some given policies. Urban pollution, for example, could have consequences that don’t redound upon the polluter, such as dirty laundry or impaired crop yields. Pigou reasoned between the moral, the political, and the economic when he reasoned around taxation. His influential wartime pamphlets advocating steeply progressive taxation also referenced the Scottish arguments against war debt and in favour of pay-as-you-go taxes that could obstruct speculative profiteering. His student and later rival, John Maynard Keynes, also later advocated an interventionist state that increased spending during harsh downturns, and also profoundly influenced the postwar settlement.39 John Hall notes Keynes’ intellectual debts, observing that he “endorsed capitalist society for the reasons given by Hume and Smith,”40 even if Keynes was less worried by debt and more worried by unemployment than Hume.41 Canada was slow to modernize its tax structures. In no developed country did the rich man pay less tax, observed Oscar Skelton, Shortt’s successor at Kingston. Well into the First World War, Canada’s finance minister, Thomas White, a financier, relied on the tariff and borrowing, thereby intensifying inflation, burdening consumers, and enriching his fellow financiers. Liberals, who had renounced ambitions to reform the tariff in order to govern Canada from 1896 to 1911, rediscovered their dislike of protection and demanded progressive income tax. The Tories responded with extreme vitriol, as ordinary partisan rivalry degenerated into something much uglier. Farmers and French Canadians were declared a threat to Canada and to civilization: the

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Winnipeg Telegram, published by M.E. Nichols (White’s half-brother), declared that a vote for Laurier was “a vote to establish tyranny, lawlessness and terror.” Nichols wasn’t just a publisher; he also ran Prime Minister Robert Borden’s propaganda office. Only in 1917 did Canada introduce a modest income tax, although tax exemptions for war-bond purchases enabled finance capital virtually to exempt itself from taxation for many years to come.42 Still, income tax was accomplished, in Canada as elsewhere and, in the long run, income tax was a modernizing power. It increased state revenues and administrative capacity but it also prompted new debates about fairness. Competing claims of fairness and efficiency had always punctuated debates about the tariff, but the state’s growing capacity to measure and administer wealth and poverty created expert and public demand for fairer taxation. Macdonald did not need statistics to know that his taxes were upwardly redistributive. Twentieth-century politicians had to prove that theirs were not – that they used state capacity to measure and manage tax incidence according to ability to pay. Statistical and economic debates raged, as a democratizing public listened intently. A mandate for a big-spending state existed at the end of the war but the economic downturn that followed, as well as the heavy debts and taxes, soon checked it. Businessmen had the upper hand and they retained it into the 1930s amidst a renewed protectionism that, if it didn’t hasten the Second World War, surely did not postpone it. But they discredited themselves by demanding economic domination and delivering poverty.43 The state’s intervention became increasingly necessary not just for the rich and the poor but also for the middle classes. The Great Depression of the 1930s created new political will to use the state to measure fiscal need and redistribute resources from “have” to “have-not” regions and classes. When the premiers of the wealthier provinces – Ontario and Quebec – likened the transfers to occupation and enslavement, the economists itemized the benefits from having economically and fiscally stronger neighbours. Shirley Tillotson tells the story of the growing alliance between academics, bureaucrats, and national politicians here, with particular focus on the Rowell-Sirois report, equalization formula, and Carter Commission.44 Data and democratization turned the balance. Expertise constructed a transnational equalization project by insisting on objective measurement and management of both prosperity and need. The general prosperity vaunted by Hume seemed best served with greater state mediation.

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Historical economist Robin Neill saw therein the corruption of classic economic doctrines: “Regional economics, urban economics, and the economics of science policy were all attempts to build up a body of theory in areas in which the governments seemed bent on spending money to please sectoral interests, regionalized interests, or the voters in general. They were really attempts to rationalize the system of corruption by which the federation was still being held together almost a century after the influence of the Scottish Enlightenment and the Court Whigs might have been presumed to have ended.”45 Tillotson, by contrast, sees the trend as a turn away from irrationalism, patronage, and populism, and towards a fact-based remedy to economic problems. Jealousy of taxes diminished during the middle years of the century. But reaction soon set in, beginning in the United States. As taxes rose to unprecedented heights, Americans inaugurated a global tax revolt, beginning around 1980. But the differences between Canada and the United States really began in 1917, when Canadians introduced their toothless income tax while Americans, immediately on joining the war, raised their marginal rates to get a highly lucrative and progressive national income tax. Woodrow Wilson feared that the internecine fighting amongst Europeans threatened the hegemony of white civilization.46 American federal taxes had a serious punch and they provoked a serious reaction that only intensified in the aftermath of F.D. Roosevelt’s interventionist New Deal.47 Canadian taxes were lower, kept so in part by constitutional obstacles to federal transfers. But the Canadian public, politicians, and economists slowly came around to an understanding that the eastern and western regions were so badly damaged by economic downturn – reflecting acute, short-term problems to the west and long-term decline in the Maritimes – that the very persistence of the transcontinental nation was at threat unless wealthier central Canadians injected funds into those regions. The Second World War offered the economists an opportunity to make good on their arguments for an equitable and efficient mass-taxing state and they carried that advantage into postwar equalization projects. Amidst perpetual grumbling and many successful low-tax campaigns across the different jurisdictions, the major parties have generally upheld redistribution as the price of Canada’s continued existence. Meanwhile, the United States moved in a different direction. The Second World War, like the First, was paid for in the United States by taxes rather than by borrowing. But the Cold War saw Americans maintain a high level of military engagement that was increasingly

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paid for with loans rather than taxes. According to Sarah Kreps, the consequence was longer and costlier wars that eluded democratic accountability.48 Meanwhile the very principle of democratic fiscal accountability was also under attack. American economists were arguing not only that particular kinds of taxes were unfair but attacking the principle of taxation itself. The revolt began at the University of Chicago, where a classic liberal critique of state capture by monopolyminded businessmen, voiced by Montrealer Jacob Viner amongst others, yielded to Milton Friedman’s neo-liberal critique of the state and his defence of large corporations as, in their breadth, approximating the “impersonal ideal of the market.”49 Friedman repudiated as “utterly false” any distinction between private interest and public good. “A government bureaucrat is seeking to serve his private interest just as much as you or I or the ordinary businessman.” Specious appeals to the public good were especially obnoxious when done to defy public opinion, as seen in state-imposed busing to desegregate schools. Where the state denied your wishes and coerced you, the market gave you what you paid for, wholly voluntarily. Political checks on market choices were intrinsically undemocratic, fiscally unsound, and a threat to “liberty and freedom.”50 At its most extreme, the argument was that taxes were no better than theft. That was the claim made by Virginia-based economist and Nobel laureate James Buchanan, namely, that taxing someone was coercion “in the same way as that exerted by the thug who takes his wallet in Central Park ... The wallet was the victim’s by right of assigned and acknowledged ownership. Is this comparable to the situation of the citizen who finds that he must, on fear of punishment, pay taxes for public goods in excess of the amounts that he might voluntarily contribute?”51 Like Friedman, Buchanan rejected appeals to the public or collective good: that was no more than the sum of individual goods that were better achieved by individuals directly. Friedrich Hayek, at Chicago, took much the same view in disputes with Pigou. Hayek admitted the need for a state and “moderate” taxes in The Constitution of Liberty, which he carefully situated within the “tradition of English freedom” (as opposed to the French tradition of “flattering assumptions about the unlimited powers of human reason”): there were twenty-one references to Hume in the index, and seventeen to Smith. But progressive income tax lacked an internal check to keep it moderate rather than punitive: “there is no reason why ‘a little more than before’ should not always be represented as

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just and unreasonable.” If the cap could only be arbitrary, the tax must also be arbitrary and illegitimate.52 The new fiscal libertarianism was initially a fringe movement amidst a hegemonic Keynesian interventionism. But it had two sources of strength: a critique of authoritarianism that resonated during the Cold War and a growing number of wealthy supporters who invested huge sums of money in propaganda campaigns and academic capacity.53 The libertarians turned “many of the traditional nostrums of tax orthodoxy on their heads,”54 in the name of the Scottish Enlightenment. The founders of public choice theory, Buchanan and Gordon Tullock, promised to do for politics what Adam Smith had done for economics, namely, replace political reason with individual self-interest and the invisible hand of the market. By that logic, politics was an externality resting on spurious extra-economic knowledge – as when, for example, politicians taxed a polluting factory: Pigovian taxes wrongly presumed to know the social costs of pollution and the best outcome. As Ronald Coase argued: “Without the tax, there may be too much smoke and too few people in the vicinity of the factory; but with the tax there may be too little smoke and too many people in the vicinity of the factory. There is no reason to suppose that one of these results is necessarily preferable.” Knowledge was economic knowledge, agency was economic agency, and anything else was probably a baseless infringement on liberty.55 Liberty was no new appeal, of course, but hearkened back to Locke and underpinned American independence and constitutionalism. Slaveholders invoked liberty to protect their holdings from federal taxation before the Civil War, fearing confiscatory federal taxes; after the war, other wealthy interests maintained the appeal.56 The liberty argument faltered amidst the muckraking antitrust movements prior to the First World War, but now the economists stoked it anew in order to check the taxing and spending authority of the American federal state. Cold War–era Canadians also appealed to liberty to check economic regulations.57 But the appeal had far less purchase in Canada, where abstract liberties deferred to the historic liberties of the British subject. You could only reinterpret the Magna Carta so far. Canada was founded as a counter-revolutionary project in reaction to American demands for liberty,58 and the state was thereby seen as a necessary protector in the face of American economic muscle.59 Macdonald sold his tariff as a mechanism to ward off American economic and political domination. Lower taxes threatened de facto Americanization. That simple fact has

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tended to give Canadians a relatively “benign” view of both government and taxes, and slowed acceptance of the liberty argument. Most Canadians know their choices are always constrained and that the Canadian state is more an adjunct than an obstacle to liberty. But thinking internationally could nurture anti-statism as well as statism. Where Americans theorized about how to insulate their wealth from the state, Canadians merely hid theirs offshore. In both countries, the wealthy resented fiscal transfers to the poor and racialized their understanding of the poor. White Anglo-Saxon Protestants understood themselves to be the most progressive, wealthy, and civilized members of any community and the state to be transferring that wealth not just to a heterogenous population of relatively poor people but also to a significant “national minority” with enough votes to sway the outcomes of elections: Black Americans in the United States and French-Canadians in Canada. But in the 1940s, according to David Roediger, it became common to abandon distinctions between types of Eurowesterners and to see populations in black and white.60 That new reading of race tended to exacerbate American tensions more than Canadian ones. In the United States, the legal case of Brown v Board of Education in 1954 inaugurated a series of Supreme Court decisions repudiating “Jim Crow” separation between Blacks and whites.61 It required desegregation of schools on the grounds that separate schools were manifestly unequal and prompted the busing that Friedman so disliked. In Virginia, some counties preferred to shutter their schools rather than admit Black students. Public schools remained closed for as long as five years, while white students attended private “academies” that barred undesirable students and still received grants from local authorities. The Virginia-based public choice economists saw in those school closures an opportunity to roll back the taxing state, and they lent their academic authority to the closures. Whether they did it for merely economic reasons or because they were racist remains a profoundly controversial question, one that tends to see neoliberal economists and left-leaning historians lined up against one another. But we need not take sides to see that racism and tax resistance dovetailed, much as they had done in the protections for slavery during the 1780s.62 And much as they continue to do, according to the Nobelwinning economist Paul Krugman, who accuses the twenty-firstcentury Republican Party of “exploitation of racial hostility to achieve its economic goals,” even to the point of tolerating white supremacist massacres as “an acceptable price to pay in return for tax cuts.”63

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Racism could not be so openly deployed to get tax cuts in postwar Canada. Social scientists described French Canadians as economically inferior and backwards so that they must benefit from downwardly redistributive taxes. But they could not be seen to pose a threat to “white” civilization; nor could the significantly smaller populations of visible minorities. Moreover, the Canadian Liberal Party was, from Laurier’s death in 1919 until 1948, led by William Lyon Mackenzie King, who had a PhD and Macdonaldian leanings. He governed Canada for twenty-one years, while his heir, a Francophone Catholic, Louis St Laurent, governed until 1957, whereupon he was replaced by a Conservative prime minister, John Diefenbaker, with a record of championing civil rights. Thus, as tax rates spiralled upwards, wealthy Canadian interests could not look to internal racialization to underwrite tax resistance. It took ingenuity to find a different solution in external racialization. As Alain Deneault shows in his chapter here, around the time that Virginia was shuttering schools, Canadian financiers and even statesmen turned, instead, to developing Caribbean tax havens. This too was a way of monetizing racialized Black people, one that made wealth significantly less answerable to the democratic public in Canada or beyond. In the Caribbean, government officials bought off by foreign investors were less reliant on taxes for public purposes and less accountable to public opinion. This ignominious trend reaffirms Hume’s warnings against denationalized financiers. Thus did Canada help to create a world where, for example, Google could route €8.8 billion in payments to Bermuda in 2012, thereby reducing its overseas tax rate to about five percent.64 But it was done without the toxic anti-state rhetoric or hateful white-capped racist allies that underwrote the American tax revolt. Relationships within Canada remained profoundly racist in many ways, but they were significantly less militarized and carceral than American ones. I do see in the divergence a final resonant note of Hume’s philosophies of sympathy, liberality, and history. Where Americans violently repudiated their debt to British history, Canadians insisted upon the continuities. Those continuities tended to inoculate Canada against American-style libertarianism. Adam Smith really had no need to debunk politics because Hume had already done that. Qua philosopher, Hume deconstructed both reason and the state, showing that they rested on nothing stronger than custom, which is to say public opinion and history. And Hume’s history belied a basic principle of

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public choice theory: the distinction between meta-constitutional choices and ordinary rule-governed behaviour. Buchanan and Tullock distinguished “individual choice at the constitutional level, where the choice is among rules, and individual choice of concrete and specific action, within defined rules.”65 Meta-politics requires imposed collaboration; only rule-governed choices should be individualized. But for Hume, political scientist Andrew Sabl observes, banal and metapolitics were dynamically intertwined. A small breach of rules could provoke violent and even revolutionary change.66 Game theory only works when the rules are agreed upon, but history shows that there’s usually someone somewhere waiting for an opportunity to burn down the rules and seize control. Hume’s History is one long lesson in unintended consequences. Where public choice posits a rational agent, Hume argued that if humans had even once been ruled by reason, they would never have left that condition. He fought rationalist, speculative projects of reform upheld with more zealotry than evidence. Economists who advocate “extremism in the defence of liberty” (Milton Friedman’s campaign slogan for Barry Goldwater) resemble the Whigs that Hume wrote to debunk, who extolled “the perfection of civil society” at the expense of “those maxims, that are essential to its very existence.” To repudiate history was to ignore the lessons of unintended consequences and to have an evidence problem. That’s a point made by American “liberaltarian” Will Wilkinson: The fact that all our evidence about how social systems actually work comes from formerly or presently existing systems is a huge problem for anyone committed to a radically revisionary ideal of the morally best society. The further a possible system is from a historical system, and thus from our base of evidence about how social systems function, the more likely we are to be mistaken about how it would work if it were realized. And the more likely we are to be mistaken about how it would actually work, the more likely we are to be mistaken that it is more free, or more equal, or more socially just than other systems, ­possible or actual. Indeed, there’s basically no way to rationally justify the belief that, say, “anarcho-capitalism” ranks better in terms of libertarian freedom than “Canada 2017,” or the belief that “economic democracy” ranks better in terms of socialist equality than “Canada 2017.” You may think you can imagine

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how anarcho-capitalism or economic democracy would work, but you can’t. You’re really just guessing – extrapolating way beyond your evidence.67 Evidence and norms go hand in hand. Fair taxation requires norms of fairness and evidence for or against the workings of those norms. Libertarians insist that no such evidence is possible and that we must fall back on norms of self-interest and liberty. To make the case, they discredit other norms and evidence as biased and their champions as ideologues. That view has gained traction because it makes for lower taxes. But libertarian agnosticism denies our ability to learn from experience. History enables us to profit from knowledge which we individually do not possess.68 Hayek made that observation because he was reasoning from a non-interventionist past against an interventionist present. Nowadays the appeal to history is an appeal to the postwar Keynesian era, when taxes were high and economies flourished. Historical data disproves libertarianism.69 That simple fact impels libertarians to ever greater theoretical extremes. Twenty-firstcentury economic libertarianism insists that no data can disprove its stylized, mathematical truths. It repudiates as “anecdotal” the historical and statistical wielded by such prominent Canadian economists as J.K. Galbraith and Mark Carney: “For Mark Carney, ‘economics’ resembles something like physics and history.”70 It upholds as a “bulldozer for economic freedom”71 the modern finance capital that has captured the state and appropriated productive wealth, provoking severe economic hardship and falling wages and employment that it exacerbates by demanding austerity.72 It advocates a neo-Malthusian callousness in the face of such hardship by persuading us, Joseph Heath observes, to “ignore the clamouring of people here and now, in order to pursue the policies that will be maximally beneficial in the long term.”73 Robert Skidelsky blames such reasoning for the 2008 crash and traces it back to the “efficient market” hypothesis and David Hume.74 But Hume always defended experience and evidence against theory and natural sympathy against selfishness. He repudiated not all intervention but the kind that Jacob Viner described (in a companion piece to Coase, citing Hume) as “stupid or malicious or clumsy” intervention,75 and placed his best political hopes on fiscal accountability to the opinion of a generally flourishing public that, analyzed historically, showed more sense and virtue than its leadership. We cannot agree on fair taxation because we cannot know the right

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amount of social costs; but we can agree, overwhelmingly, that some social costs are too high and too unfair, including regressive taxes on the poor and deaths of despair. John Lanchester remarks: “The ethical defence of capitalism is an important thing to have inadvertently conceded. The moral basis of a society, its sense of its own ethical identity, cannot just be: ‘This is the way the world is, deal with it.’”76 That’s not the view from Hume, and it’s not how economic modernity arose. Any scholarly discourse that writes historical experience and ordinary norms of good and evil out of its framework blinds and trivializes itself. There’s an intellectual jealousy at work that is all the more disconcerting for claiming to be apolitical. Specialized knowledge may be rigorous but the more it becomes technical or mathematical, the less it fits itself to measure or define broader human flourishing. Commonsense distinctions between well-being and suffering, as between good and bad leaders, remain meaningful and they trump speculative arguments for liberty. Good taxes, for Hume, delivered measurably good government. Proportionally, more Canadian households are better off than American ones. That’s not an anecdote; it’s the kind of observation that served as Hume’s point of departure. Canadians have good empirical grounds for being less eager for fiscal freedom than Americans and for worrying more about an overgrown financial sector than the dangers that democracy poses to freedom.

notes



Thanks to Shirley Tillotson, Jeff McNairn, Colin Grittner, and David Tough for critical advice.   1 David Hume, Essays Moral, Political, and Literary, ed. Eugene F. Miller, rev. ed. (Indianapolis: Liberty Classics, 1987); István Hont, Jealousy of Trade: International Competition and the Nation-State in Historical Perspective (Cambridge: Belknap Press, 2005).   2 Duncan Forbes, Hume’s Philosophical Politics (Cambridge: Cambridge University Press, 1975).   3 David Hume, A Treatise of Human Nature, ed. L.A. Selby-Bigge, 2nd ed. (Oxford: Clarendon, 1978), 552.   4 Toronto Globe, 5 January 1897.   5 Hume, Essays; Hont, Jealousy of Trade. James Harris, Hume: An Intellectual Biography (Cambridge: Cambridge University Press, 2015); Paul Sagar, “István Hont and Political Theory,” European Journal of

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Political Theory (2018): 1–25; Béla Kapossy, Isaac Nakhimovsky, Sophus A. Reinert, and Richard Whatmore, eds. Markets, Morals, Politics: Jealousy of Trade and the History of Political Thought (Cambridge, MA : Harvard University Press, 2018).   6 Hume, Essays, xiii–iv, 327–31.   7 Mark G. Spencer, ed., David Hume: Historical Thinker, Historical Writer (Philadelphia: Penn State University Press, 2015); Mark Salber Phillips, Society and Sentiment: Genres of Historical Writing in Britain, 1740–1820 (Princeton: Princeton University Press, 2000); Andrew Sabl, Hume’s Politics: Coordination and Crisis in the History of England (Princeton: Princeton University Press, 2012)   8 Donald Winch, Riches and Poverty: An Intellectual History of Political Economy in Britain, 1750–1834 (Cambridge: Cambridge University Press, 1996).   9 Angus Deaton, “Perspective,” The Lancet 381 (2 February 2013), 363. 10 E.g. Forbes, Hume’s Philosophical Politics, 89. 11 “Conceptual Engagement with Justice and Pluralism,” Tenth Anniversary Dialogues in Human Rights and Legal Pluralism, of the Centre for Human Rights and Legal Pluralism, Faculty of Law, McGill University, https:// www.mcgill.ca/humanrights/chrlp-live (number six). 12 Annette Baier, A Progress of Sentiments: Reflections on Hume’s Treatise (Cambridge, M A: Harvard University Press, 1991) and Moral Prejudices (Cambridge, M A: Harvard University Press, 1995); Paul Sagar, The Opinion of Mankind: Sociability and the Theory of the State from Hobbes to Smith (Princeton: Princeton University Press, 2018). 13 Hont, Jealousy of Trade, 334; see also Sabl, Hume’s Politics. 14 E.g. Saskia Sassen, Expulsions: Brutality and Complexity in the Global Economy (Cambridge, M A: Harvard University Press, 2014) and Cities in a World Economy (Sage, 2018); Tyler Cowen, “The Inequality That Matters,” The American Interest, 1 January 2011; Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (New York: Viking, 2018). 15 Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens, trans. George Holoch (Chicago: University of Chicago Press, 2015); Alain Deneault, Offshore: Tax Havens and the Rule of Global Crime (New York: The New Press, 2011) and Legalizing Theft: A Short Guide to Tax Havens, trans. Catherine Browne (Toronto: Fernwood, 2018). 16 Donald Winch, Wealth and Life: Essays on the Intellectual History of Political Economy in Britain, 1848–1914 (Cambridge: Cambridge

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University Press, 2009); Martin Daunton, Trusting Leviathan: The Politics of Taxation in Britain, 1799–1914 (Cambridge: Cambridge University Press, 2001); Donald Winch and Patrick K. O’Brien, eds. The Political Economy of British Historical Experience, 1688–1914 (Oxford: Oxford University Press, 2002). 17 Thomas Piketty, Capital in the Twenty-First Century, trans. Arthur Goldhammer (Cambridge, M A: Harvard University Press, 2014), 545. 18 Emma Hart, Trading Spaces: The Colonial Marketplace and the Foundations of American Capitalism (Chicago: Chicago University Press, 2019), 158. 19 Donald Winch, Classical Political Economy and Colonies (Cambridge, MA : Harvard University Press, 1965); Paul W. Mapp, The Elusive West and the Contest for Empire, 1713–1763 (Chapel Hill: Omohundro Institute and University of North Carolina Press, 2012); E.A. Heaman, “Constructing Ignorance: Epistemic and Military Failures in Britain and Canada during the Seven Years’ War,” in Essays in Honour of Michael Bliss: Figuring the Social, ed. E.A. Heaman, Alison Li, and Shelley McKellar (Toronto: University of Toronto Press, 2008). 20 Winch, Riches and Poverty; David Englander, Poverty and Poor Law Reform in Nineteenth-Century Britain, 1834–1914 (London: Routledge, 1998). 21 Boyd Hilton, Corn, Cash, Commerce: The Economic Policies of the Tory Governments 1815–1830 (Oxford: Oxford University Press, 1977); Anna Gambles, Protection and Politics: Conservative Economic Discourse, 1815–1852 (Woodbridge, UK: Boydell, 1999) and Barry Gordon, Economic Doctrine and Tory Liberalism 1824–1830 (London: Macmillan, 1979). 22 Donald Winch and Roger E. Backhouse, “History of Economics, Economics and Economic History in Britain, 1824–2000,” European Journal of the History of European Thought 11, 1 (2004): 107–27. 23 Hilton, Corn, Cash, Commerce, 117–18. 24 Quoted in Anthony Howe, “Free Trade and Global Order: The Rise and Fall of a Victorian Vision,” in Victorian Visions of Global Order: Empire and International Relations in Nineteenth-Century Political Thought, ed. Duncan Bell (Cambridge: Cambridge University Press, 2007), 26. 25 William Deringer, Calculated Values: Finance, Politics, and the Quantitative Age (Cambridge, M A: Harvard University Press, 2018), 258, 282–8. 26 James P. Henderson, Early Mathematical Economics: William Whewell and the British Case (Lanham: Rowman and Littlefield, 1996).

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27 Philip Mirowski, More Heat than Light (Cambridge: Cambridge University Press, 1989); E. Roy Weintraub, How Economics Became a Mathematical Science (Durham, N C: Duke University Press, 2002); see also essays collected in Philosophy of the Social Sciences 22, 1 (March 1992). 28 Lucy Brown, The Board of Trade and the Free-Trade Movement 1830–42 (Oxford: Clarendon Press, 1958); Tom Crook and Glen O’Hara, eds. Statistics and the Public Sphere: Numbers and People in Modern Britain, c. 1800–2000 (Routledge: London, 2011); Theodore Porter, The Rise of Statistical Thinking, 1820–1900 (Princeton: Princeton University Press, 1986). 29 Lawrence Goldman, “The Origins of British ‘Social Science’: Political Economy, Natural Science and Statistics, 1830–1835,” The Historical Journal 26, 3 (September 1983): 587–616; Victor L. Hilts, “Aliis Exterendum, or, the Origins of the Statistical Society of London,” Isis 69, 1 (March 1978): 21–43; Mary Poovey, “Figures of Arithmetic, Figures of Speech: The Discourse of Statistics in the 1830s,” Critical Inquiry 19, 2 (Winter 1993): 256–76. 30 E.A. Heaman, “Space, Race, and Violence: The Beginnings of Civilization in Canada,” in Violence, Order, and Unrest: A History of British North America, 1749–1876, ed. Elizabeth Mancke, Jerry Bannister, Denis McKim, and Scott See (Toronto: University of Toronto Press, 2019). For the Bagot or Rawson Report see “Report on the Affairs of the Indians in Canada,” Appendix EEE in Journals of the Legislative Assembly of Canada 1844–45 and Appendix T in ibid., 1847; John Leslie, “The Bagot Commission: Developing a Corporate Memory for the Indian Department,” Historical Papers 17, 1 (1982): 31–52; Brian Gettler, “En espèce ou en nature? Les présents, l’imprévoyance et l’évolution idéologique de la politique indienne pendant la première moitié du XIXe siècle,” Revue d’histoire de l’Amérique française 65, no. 4 (2012), 409–37. 31 Heaman, Tax, Order, and Good Government; see also Chelsea Vowel, Indigenous Writes: A Guide to First Nations, Métis, and Inuit Issues in Canada (Winnipeg: HighWater, 2016); J.R. Miller, Skyscrapers Hide the Heavens: A History of Native-Newcomer Relations in Canada, 4th ed. (Toronto: University of Toronto Press, 2018). 32 Harris, Hume, 276. 33 See Aaron Garrett, “Hume’s Revised Racism Revisited,” Hume Studies 26, 1 (April 2000): 171–7. 34 James W. Daschuk, Clearing the Plains: Disease, Politics of Starvation, and the Loss of Aboriginal Life (Regina: University of Regina Press, 2014).

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35 Barrington Walker, Race on Trial: Black Defendants in Ontario’s Criminal Courts (Toronto: University of Toronto Press, 2010), 116, 184. 36 Michael Bliss, Right Honourable Men: The Descent of Canadian Politics from Macdonald to Mulroney (Toronto: HarperCollins, 1994); J.J.B. Forster, A Conjunction of Interests: Business, Politics, and Tariffs, 1825– 1879 (Toronto: University of Toronto Press, 1986); R.T. Naylor, The History of Canadian Business, 1867–1914 (Montreal and Kingston: McGill-Queen’s University Press, 2006). 37 Michael J. Piva, The Borrowing Process: Public Finance in the Province of Canada, 1840–1867 (Ottawa: University of Ottawa Press, 1992); Gregory P. Marchildon, Profits & Politics: Beaverbrook and the Gilded Age of Canadian Finance (Toronto: University of Toronto Press, 1996). 38 Robin Neill, A History of Canadian Economic Thought (London: Routledge, 1991); Craufurd D.W. Goodwin, Canadian Economic Thought: The Political Economy of a Developing Nation 1814–1914 (London: Cambridge University Press, 1961); Barry Ferguson, Remaking Liberalism: The Intellectual Legacy of Adam Shortt, O.D. Skelton, W.C. Clark, and W.A. Mackintosh, 1890–1925 (Montreal and Kingston: McGill-Queen’s University Press, 1993). 39 Ian Kumekawa, The First Serious Optimist: A.C. Pigou and the Birth of Welfare Economics (Princeton: Princeton University Press, 2017); Michel Beaud and Gilles Dostaler, Economic Thought since Keynes: A History and Dictionary of Major Economists, trans. Valérie Cauchemez (London: Routledge, 1995); John Snape, “The ‘Sinews of the State’: Historical Justifications for Taxes and Tax Law,” in Philosophical Foundations of Tax Law, ed. Monica Bhandari (Oxford: Oxford University Press, 2017): 9–33; see also David Edgerton, The Rise  and Fall of the British Nation: A Twentieth-Century History (London: Penguin, 2018). 40 John A. Hall, Powers and Liberties: The Causes and Consequences of the Rise of the West (London: Penguin, 1985), 173; Robert Skidelsky, John Maynard Keynes 1883–1946: Economist, Philosopher, Statesman (abridgment of his three-volume biography; London: Penguin, 2005). 41 Thomas Mayer, “David Hume and Monetarism,” Quarterly Journal of Economics 95, 1 (August 1980): 89–101. 42 Heaman, Tax, Order, and Good Government; David Tough, The Terrific Engine: Income Taxation and the Modernization of the Canadian Political Imaginary (Vancouver: U BC Press, 2018); Shirley Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy (Vancouver: U BC Press, 2017).

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43 Don Nerbas, Dominion of Capital: The Politics of Big Business and the Crisis of the Canadian Bourgeoisie, 1914–1947 (Toronto: University of Toronto Press, 2013). 44 See Shirley Tillotson’s chapter in this collection; also Daniel Béland, André Lecours, Gregory P. Marchildon, Haizhen Mou, and M.R. Olfert, Fiscal Federalism and Equalization Policy in Canada: Political and Economic Dimensions (Toronto: University of Toronto Press, 2017); Ian Peach, ed. Constructing Tomorrow’s Federalism: New Perspectives on Canadian Governance (Winnipeg: University of Manitoba Press, 2007). 45 Neill, History of Canadian Economic Thought, 187. 46 Adam Tooze, The Deluge: The Great War, America and the Remaking of the Global Order, 1916–1931 (New York: Penguin Books, 2014), 60. 47 Isaac William Martin, Rich People’s Movements: Grassroots Campaigns to Untax the One Percent (Oxford: Oxford University Press, 2013); Romain Huret, American Tax Resisters (Cambridge, MA : Harvard University Press, 2014). 48 Sarah E. Kreps, Taxing Wars: The American Way of War Finance and the Decline of Democracy (New York: Oxford University Press, 2018). 49 Robert Van Horn, “Jacob Viner’s Critique of Chicago Neoliberalism,” in Building Chicago Economics, ed. Robert van Horn, Philip Mirowski, and Thomas A. Stapleford (Cambridge: Cambridge University Press, 2011), 295 and passim. 50 Milton Friedman, “The Fragility of Freedom,” Encounter 1976; republished in Milton Friedman on Freedom: Selections from the Collected Works of Milton Friedman, ed. Robert Leeson and Charles G. Palm (Stanford, CA: Hoover Institute Press, 2017). 51 James Buchanan, The Limits of Liberty; Nancy Maclean, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America (Durham, NC: Duke University Press, 2017). See also Will Wilkinson, “The Tax Bill Shows the G.O.P.’s Contempt for Democracy,” New York Times, 20 December 2017, quoting Murray Rothbard: “What is taxation but theft on a gigantic, unchecked scale?” On Chicago vs public choice, see Filip Palda, A Better Kind of Violence: The Chicago School of Political Economy, Public Choice, and the Quest for an Ultimate Theory of Power (Ottawa: Cooper-Wolfling, 2016), 102–3. 52 Friedrich A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960): 55, 313–15 and passim; Angus Burgin, The Great Persuasion: Reinventing Free Markets since the Depression (Cambridge, MA : Harvard University Press, 2012), 112. Hayek also defended taxation

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as necessary and just in The Political Order of a Free People, vol. 3 of Law, Legislation and Liberty (London: Routledge and Kegan Paul, 1982), 41–3. 53 Burgin, Great Persuasion; David Ciepley, “Why the State Was Dropped in the First Place: A Prequel to Skocpol’s ‘Bringing the State Back In,’” Critical Review 14, 2–3 (2000): 157–213; Quinn Slobodian, Globalists: The End of Empire and the Birth of Neoliberalism (Cambridge, MA : Harvard University Press, 2018). 54 Geoffrey Brennan, “Foreword” to The Collected Works of James M. Buchanan, vol. 9, The Power to Tax: Analytical Foundations of a Fiscal Constitution (Indianapolis: Liberty Fund, 2000; 1st ed. 1980). 55 R.H. Coase, “The Problem of Social Cost,” Journal of Law and Economics 3 (October 1960): 1–69; Deirdre McCloskey, “The So-Called Coase Theorem,” Eastern Economic Journal 24, 3 (Seummer 1998): 367–71. 56 Robin Einhorn, American Taxation, American Slavery (Chicago: University of Chicago Press, 2006). 57 Michael Dawson, Selling Out or Buying In? Debating Consumerism in Vancouver and Victoria, 1945–1985 (Toronto: University of Toronto Press, 2018): 108–26. 58 Jean-François Constant and Michel Ducharme, eds., Liberalism and Hegemony: Debating the Canadian Liberal Revolution (Toronto: University of Toronto Press, 2009). 59 Marc-William Palen, The “Conspiracy” of Free Trade: The AngloAmerican Struggle over Empire and Economic Globalisation, 1846–1896 (Cambridge: Cambridge University Press, 2016). 60 David R. Roediger, The Wages of Whiteness: Race and the Making of the American Working Class (London: Verso, 1991). On “national minorities,” see Will Kymlicka, Multicultural Citizenship: A Liberal Theory of Minority Rights (Oxford: Clarendon Press, 1995). “Eurowesterners” is taken from Daniel Justice Heath, Why Indigenous Literatures Matter (Waterloo: Wilfrid Laurier University Press, 2018). 61 Michelle Alexander, The New Jim Crow: Mass Incarceration in the Age of Colorblindness (New York: The New Press, 2012), 34. 62 See Jacob T. Levy, “Black Liberty Matters,” Niskanen Center Blog, 20 September 2017: https://niskanencenter.org/blog/black-liberty-matters/. 63 Paul Krugman, “Trump, Tax Cuts and Terrorism: Why Do Republicans Enable Right-Wing Extremism?” New York Times, 5 August 2019. 64 Financial Times, 11 October 2013, cited in Peter Dietsch, Catching Capital: The Ethics of Tax Competition (Oxford: Oxford University Press, 2015).

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65 James Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Indianapolis: Liberty Fund, 2004), 105. 66 Sabl, Hume’s Politics. 67 Will Wilkinson, “Public Policy after Utopia,” Niskanen Center Blog, 24 October 2017. 68 Hayek, Constitution of Liberty, 23; John Lewis Gaddis, The Landscape of History: How Historians Map the Past (Oxford: Oxford University Press, 2004), 9. 69 Geoff Mann, In the Long Run We Are All Dead: Keynesianism, Political Economy, and Revolution (London: Verso, 2017). 70 Caleb McMillan, “Mark Carney’s False Ideology,” The Cobden Centre, 28 May 2013, arguing for logic against evidence. McMillan is a Mises Institute author, and comparable attacks upon Galbraith are also found on the Institute’s website, e.g. William L. Anderson, “The Century of Statism,” 31 December 1999. See also Gaddis, The Landscape of History, 87–8. 71 Tooze, Crashed. 72 E.G. Brink Lindsey and Steven Teles, The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality (Oxford: Oxford University Press, 2017); Tyler Cowen, Average Is Over: Powering America beyond the Age of the Great Stagnation (New York: Plume, 2013), 51–3. 73 Joseph Heath, “Review of Tyler Cowen’s Stubborn Attachments,” Erasmus Journal for Philosophy and Economics 12, 1 (Spring 2019), 120. 74 Robert Skidelsky, Money and Government: The Past and Future of Economics (New Haven: Yale University Press, 2018). 75 Jacob Viner, “The Intellectual History of Laissez-Faire,” Journal of Law and Economics 3 (October 1960), 64. 76 John Lanchester, “After the Fall,” London Review of Books, 5 July 2018, 8.

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4 “Set Apart for the Children of Colored Taxpayers of the Entire Town”: Race, Schools, and Citizenship in Nineteenth-Century Chatham, Ontario Barrington Walker

On 26 July 1856, The Provincial Freeman published a piece titled simply “Grammar School” that informed its readers of an event that had taken place approximately a month prior, on 27 June 1856. The Provincial Freeman excerpted a notice of the school examination as reported in the Chatham Planet. The notice extolled the virtues of the grammar school. “The pupils … acquitted themselves well, being examined in the several branches, viz: English, English Grammar, History, Geography, Geometry, Algebra, Arithmetic, Composition and Classics.” It went on to praise the teachers for creating such an excellent curriculum, while it lamented “we were much surprised at finding the apathy and indifference evinced by the Parents and Guardians of the children in so few attending.” It concluded, “We may be well proud of the institution and hesitate not to say that it is able to compete with any similar school in the Province, and that the Teachers are pains taking and assiduous in their attentions to the pupils under their charge.” The Provincial Freeman, and in particular its Black firebrand editor, Mary Ann Shadd, responded with scorn bordering on outrage. Her response is worth citing at length: The children of this Colored School, are not promoted to the Grammar School, neither are they led to hope that they may be. – Why is it? Crowded into a Kennel in comparison with the fine

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edifices their equals, the children of the mechanical and other classes of the whites occupy, they are upbraided for not attending the school, and their parents are censured as was the case at a sort of visit not long ago, for not sending them to the school, and they for not going. These too the people who pay taxes, and whose contribution to the public fund are never realized by them to any extent. The Colored people of Chatham must pay taxes, and then in order to have their children educated, must sustain select schools!! It is too bad. The condition of our public schools is an unmitigated insult, to the colored people and a disgrace to the [?]. The public school should be abandoned and the excellent teacher employed therein sustained as a private teacher, and that disgrace of the place the little colored school house should be left to rot down, or to stand as it is a monument of the injustice the colored people sustain.1 *** I am new to the history of tax policy in Canada, and I must confess that its recent and rapid rise to prominence in historiography has taken me by surprise. It has also, nonetheless, given me an opportunity to return to earlier work that I had done on the Black Canadian experience and suggested the importance of situating this work within a broader frame of reference, animated by a fresh set of questions. This paper brings the question of taxes into Black Canadian history and critical race histories of Canada to the forefront. My primary interest here is to look at the question of educational tax policy during this era and, more crucially, to consider how questions around taxation were an aspect of racial state formation in pre-Confederation Canada. This chapter will consider how taxation shaped the experiences of Black Canadians during this era alongside the more conventional frames of reference for thinking about this history such as the courts, the law, and social activism. This short piece I envision as a contribution to the long history of Black settler colonialism, the law, and citizenship in Canada. Taxation policies are also histories of race and citizenship, and of Black peoples’ struggle to attain status as full citizens in the context of a racially (and class) stratified white settler colonial state. I argue here that for Black Canadians in the nineteenth century, taxes became a key issue crystalizing the abstract and complex alchemies of race, citizenship, class, and freedom in slavery’s immediate afterlife. Paying taxes could be a

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marker of freedom and civic belonging, but school taxes also exemplified Black people’s fragile status as rights-bearing citizens in nineteenth-century Canada West. School taxes represented the triumph of an ideal of civic good over those who were wary of state intrusion and coercion. Thus taxes modeled a vision of citizenship that was virtually uncontested in Canada West by the 1850s. But for Black people in Canada West, school taxes – and in particular racialized interpretations of school tax policies – were marshalled in support of what scholars of Black Canadian history have elsewhere called Canadian Jim Crowism. Here the state both directly and indirectly circumvented Black peoples’ rights on paper to support a white supremacist civic ideal. Keeping Blacks out of the publicly funded common schools – when it did occur – was one of the ways in which a white civic culture was made and remade, particularly in places where the Black population reached critical mass. The coercive and civic elements of taxation policy were simultaneously exerted on Black people and Black communities to further erode their fragile citizenship status. Tax policy in nineteenth-century Canada West is a central – not a peripheral – aspect of understanding the nuances of the Black experience during this crucial time. It was a fundamental technology of racial state governance in pre-Confederation Canada. the schools question a n d t h e e d u c at i o n a l s tat e

In her seminal article, “Politics, Schools and Social Change in Upper Canada,” Susan E. Houston eschews the teleological colony-to-nation thesis of educational development, “church and state relations,” “biculturalism,” and what she called “facile analogies to Jacksonians and Whigs in the school debates,” arguing instead for a more nuanced and contextualized interpretation of the educational debates that emerged in Upper Canada in the 1830s and 1840s. Houston argues that to understand the “pace and direction of the educational advance in Upper Canada” one must consider “the changes being wrought in virtually every facet of colonial life.”2 Indeed, in the 1830s and the 1840s, Upper Canada was in the midst of profound social and economic change as it developed from a nascent white settler colony to a more muscular one marked by population intensification and urbanization. While they lagged behind their counterparts in the northern United States, cities such as Toronto and

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Kingston, according to Houston, began to ascend to a cultural and commercial importance approaching older eastern centres south of the border. As Upper Canada and its key urban centres expanded, says Houston, middle-class social reformers and educational promoters began to identify the social problems that attended this rapid growth and they were deeply concerned by what they saw: in particular, juvenile delinquency, idleness, vice, and crime. This concern with the problems of the city, argues Houston, was belied by the “overwhelmingly rural economy and setting” of Upper Canadian society. Houston attributes this to the “emotional and intellectual tie of a preponderance of adult settlers with Britain.”3 The question of school reform thus emerged at the forefront during this era of rapid change and “would provide the middle class with their main strategy for meeting the problems of their changing society.” For Houston then, the project of middle-class reform provided the main ideological impetus for the school promoters. Bruce Curtis’s Building the Educational State: Canada West, 1836–1871 takes a related but divergent tack from Houston. Houston’s work acknowledges but ultimately decentres the standard Reform-Tory political/ ideological divide at work in the schools question in Upper Canada. In contrast, Curtis looks at the emergence of what he calls the “Educational State” in mid-nineteenth-century Canada West. He devotes the first half of his book to fleshing out the ideological underpinnings of the schools debate and, in particular, political disagreement over the form that the school system should take. The second part of his book is concerned with the practicalities of the construction of the educational state. Curtis’s central argument is that “state schooling was intended as a process of self-making, of subjectification.”4 Similar to Houston, Curtis fleshes out the history of educational reform in Canada West and the role that the major political parties in Upper Canada had in shaping the contours of the debate. Curtis tells the story of a group comprised of a coterie of merchants, lawyers, and professionals who composed the colonial legislative and executive councils that “exercised veto powers over the efforts of parties in the elective branch of government to reform educational organization.”5 Debates about the nature of educational reforms, Curtis suggests, were inherently discussions about state formation, about, that is, “the nature of the state itself.” Tories, says Curtis, desired a state that was highly centralized. This was typified by the “Family Compact’s” desire to block the reform efforts of elected colonial assemblies. Reformers,

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by contrast, desired a state – and by extension an educational state – that was under the control of local property. The period between 1836 and 1850 was marked by the tensions underlying these opposing visions of the state. The Schools Act of 1850, argues Curtis, “created the basis of a broad educational agreement among the governing classes in Canada West; the basis for the construction of a particular form of hegemony.” By then a true public educational system had emerged that was marked by the “peculiar mix of local election of trustees, appointed and semi-autonomous County Boards, and a strong central authority with broad regulatory powers and well-developed information gathering procedures.”6 c a n a d a ’ s r a c i a l s tat e a n d j i m c r o w i s m

I have written fairly extensively of the history of “Jim Crowism” in Canada.7 The term “Jim Crow” has imprecise origins. Jim Crow burst across the minstrel stage in the antebellum US as part of the larger culture of blackface minstrelsy. In this uniquely American (or perhaps North American) art form, white performers “blacked up” their faces using a sooty mask of burnt cork, after which they took the stage. Minstrel shows were one of the most popular art forms that emerged out the racial and class firmament of antebellum New York City and other northern and midwestern metropolises.8 No one is sure exactly how, but eventually the term “Jim Crow” leapt from the minstrel stage to describe the racial formation that began to take root in antebellum America and later, and perhaps most dramatically, in the postbellum period. Jim Crowism referred to the racial caste system that shaped the social order in post-slavery America. While it had continuities with slavery in terms of its insistence on the non-negotiability of white supremacy as the foundation of this social order, Jim Crow had marked differences from white supremacy under slavery. While slavery was an extremely harsh institution by any measure – be it psychological or physical – physical intimacies and proximities were features of plantation life. Physical intimacies across the colour-line ran the gamut from working in close proximity in the plantation households or in the fields to sexual intimacies, both “consensual” and coerced.9 Jim Crow societies, by contrast, emphasized social distance – more specifically, hierarchical social distances – between white people and Black people. Jim Crow in the United States was both legally codified and a matter of social customs and preferences. Black people in the United

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States were consigned to second-class status in the form of segregated schools, neighbourhoods, and commercial spaces. Black people, with the emergence of the Ku Klux Klan and other such groups, were also subject to a wave of violent terror that was most dramatically evidenced in the widespread lynching of Black men (and some women). In Canada, there was also a version of Jim Crow that both differed from and mirrored its American counterpart.10 What distinguished the Canadian version of Jim Crow was that it was, in the main, almost entirely de facto rather than a mixture of de facto and de jure. Black Canadians faced many of the same exclusions and humiliations as Black Americans, including social segregation and economic marginalization, but in the main these expressions were legally supported rather than legally codified. The essence of Canadian Jim Crowism was when the state, through the rule of law and the courts, supported the rights of individuals and groups to socially discriminate against people belonging to what classic sociologists have called “out groups.” As scholars such as Robin Winks, James W. St G. Walker, Sara Jane Mathieu, and Constance Backhouse have argued, Black Canadians faced myriad forms of social discrimination that looked remarkably similar to those Blacks faced south of the border, such as segregated hospitals, communities, taverns, and even cemeteries. All of these social customs were backed by the law. There were, however, two noteworthy areas where Canadian Jim Crow was legally codified. The first – immigration policy – was quite unambiguous. This was particularly evident with the passing of the first overtly racially codified immigration act of 1906, an act that excluded potential migrants to the country via the use of explicit racial criteria. The second area where black letter law was employed to enforce a colour-line was in the realm of education. But here the role of the law, unlike immigration policy, was ambiguous and even slightly elusive. Much of the question of Black people and their communities hinged on questions of law and public policy, including tax policy. ta x at i o n , r a c e , a n d a n t i - b l a c k n e s s

At the heart of questions of taxation and tax policy are often questions about race. The point is made beautifully in Nancy MacLean’s Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America. MacLean’s work recounts the rise of the radical right in US politics and its decades-long attack on liberal civic

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American political culture and its attendant institutions. Surveying the ideas of economist James McGill Buchanan, businessmen Ed Koch, Charles Koch, and others, MacLean traces the intellectual and policy foundations of a movement that has rocked the very foundation of American politics in our time. Issues of taxation, representation, and citizenship are at the heart of the American political project, as every American school child knows. Less well known, perhaps, is the central role that race played in these conversations during the era of slavery. MacLean, drawing on the work of tax historian Robin Einhorn, notes the influence in early US history of political figures such as John C. Calhoun, who has been dubbed the “Marx of the master class” and a “strategist of ruling class power.” Calhoun, argues MacLean, was the progenitor of the radical US right and the architect of the strategy of saving the ruling elite and their wealth from the destructive power of democracy. Calhoun, and his ilk in the slaveholding class, were squarely against the idea of taxation that took hold amongst “early free-state American voters.” For these voters, “liberty meant having a say in questions of governance.” These voters “taxed themselves for public schools, roads, to travel from place to place, canals to move their goods, and more.” Planters such as Calhoun saw this as a threat to the sort of liberty that they envisioned, one that was rooted in limiting the power of government to interfere with their rights of property in slaveholding. In sum, “The paralyzing suspicion of government so much on display today, that is to say came not from average people but from elite extremists such as Calhoun who saw federal power as a menace to their system of racial slavery.”11 Christopher Petrella also draws on the work of Einhorn and he has also highlighted how the question of taxation in the early American republic had slavery at its very heart. He argues that “By attempting to adopt a colorblind yet pro-slavery federal tax policy as the first federal tax program, those who were present at the Second Continental Congress sought to sidestep the apparent contradiction between the reality of Black enslavement and the lofty ideals of universal freedom enshrined in the Declaration of Independence.” The delegates at the convention, all of whom were white men and a third of whom were slaveholders, “understood that conversations about federal tax policies were really about the sectional geopolitics of U.S. slavery.” Petrella goes on to argue compellingly that “these early deliberations demonstrate that colorblind white supremacy should not be periodized as

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exclusively a distinctly modern technology of the U.S. racial state following de jure Black enslavement and Jim Crow segregation but rather constitutive of the types of politics that birthed the nation itself.” At this time the rhetoric of “no taxation without representation” was one of the slogans that animated the framers of the American constitution. When the question of taxation was brought before the delegates – who should pay them and on what basis taxes should be apportioned – it brought the question of slavery squarely to the fore. Why? Petrella argues that the delegates “were forced to consider the following question: is a slave a piece of property or a person?” Neither option, he argues, was desirable, but for different reasons. “If slaves were property, then slave-owners would surely be taxed on their wealth. If slaves were persons, however, then the institution of slavery would likely be deemed illegitimate.” Slaveholders worried that a heavy tax levy on property would mean the end of slavery, forcing them to rid themselves of their assets. Realizing that the question of taxation was inextricably bound to slavery, the delegates sought to avoid the question entirely “by designing in 1781 a ‘flat 5% ad valorem duty on all imported goods’” or “impost” tax to pay the country’s war debts. While the measure eventually failed to gain ratification from Rhode Island, the enthusiasm for the measure was clear. Petrella suggests, again drawing upon Einhorn, that this led to the “3/5 clause,” which along with the impost clause “emerged as a Revolutionary-era alternative to taxation based on property apportionment.”12 Just as slavery and taxation were linked, so too were questions of taxes and the status of free Black people. Another colonial jurisdiction, 1860s British Columbia, is instructive in this regard. The notoriously racist editor of The British Colonist who dubbed himself Amor De Cosmos (Lover of the World) was in fine form when he published a column illustrative of his well-known anti-Black attitude. De Cosmos charged that the colonial government of James Douglas (who was of part African ancestry) was guilty of financial mismanagement and opacity with regard to its debts, legislated tax increases, and expenditures. He also voiced particular scorn for Franklin (presumably Selim Franklin), one of Douglas’s supporters, to whom De Cosmos had lost his election bid in 1860. De Cosmos charged: “Everything has been done by Gov Douglas and his myrmidons to keep him in the House. He has thrown obstacles in the way of unseating him – though Franklin has no more right to sit here than the Yankee negroes who elected him. Striking out the other subjects of misplaced confidences

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and taking the majority of one to be Mr. Franklin, then it resolves simply into this, – that His Excellency, the Governor prepared the estimates entailing the taxes, and runaway slaves vote them. Gratifying historical fact is it not?”13 De Cosmos’s screed graphically illustrates that many of the tensions around taxation in the colony were inseparable from question of race. For De Cosmos and his ilk, it was an affront for a mixed-race governor to levy taxes against the white citizens of the colony with the help of a cabal of “runaway slaves” – not free Black citizens – who should have had no place in determining fiduciary matters. t h e r a c i a l s tat e a n d t h e e d u c at i o n a l s tat e : blacks and the schools question

In the mid-nineteenth century, education in Canada West coalesced around the question of Black people and the common schools.14 There is a well-developed literature on the question, and issues of taxation figure prominently in this work. For example, Kristen McLaren argues that although Black parents in Canada West fought to have their children admitted to the province’s common schools, they could not, even though they paid common school taxes and “had no desire to be set apart.”15 Similarly, Afua Cooper notes that while Blacks “obtained the right to open separate schools, they still nevertheless had to pay local common school rates.”16 As we shall see, this “right” to separate schools was granted whether Black parents wanted it or not, and the question of taxation loomed large in these conversations. Daniel G. Hill’s The Freedom Seekers discusses the question of Black people, their communities, and the common schools in nineteenth-century Canada West at some length, and taxation is a central theme in his work. For example, Hill notes that in 1837, in Brantford, Black families had a school that was of higher quality than the common school and, as a consequence, many white parents sent their children there. The trustees, fearing the common school might close as a result, decided to admit Black students to the common schools. Hill tells us of a letter to the Brantford Expositor on the subject of a teacher who introduced the “national music” of the United States into the classroom – “Negro songs” – that the writer found “a direct insult to the colored taxpayers who support such schools.”17 With only the exception of the Black church, schools were perhaps the most important civic institutions for Black peoples in the

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post-emancipation eras. Schools, like land, embodied the freedom that slaves were denied on plantations. In virtually all US states it was illegal to teach slaves – and in some cases even free Blacks, for that matter – to read. Such legal prohibitions did not exist in New France or British North America, in keeping with the legal cultures of slavery that existed in “Canada,” but it is certain that outside of religious instruction, white slave-owners discouraged teaching slaves literacy because they feared the potentially deleterious effects of Black literacy on the social order. As such, education was one of the things that post-­ emancipation Black societies most coveted. The problem that Blacks confronted, however, was that while their desire for access to education should have dovetailed with the democratizing state that was now ready to embrace publicly funded schools for the societal benefits of moral and social reform, the scope of these liberalizing sentiments was curtailed by the racial state, for the underlying sentiments of what David Theo Goldberg has elsewhere called the “racial naturalism” that animated much of the opposition to Black children attending the common school with white children. By 1844, according to Robin Winks, just over 2,600 schools existed in Canada West with a student population of “nearly ninety-seven thousand pupils, and the problem of maintaining equal education for a few hundred Negro students received low priority compared to the many more pressing issues that confronted a sprawling frontier education system.”18 Thus, what emerged in the wake of the 1841 Common Schools Act was what Winks calls “unofficial segregation” in the schools. One of the classic examples that he and others cite is the violent expression of anti-Black racism that emerged in Amherstburg in 1866. “In January of that year Isaac J. Rice wrote to the provincial superintendent of education, Egerton Ryerson, on behalf of the Negro ratepayers of the community. The local school trustees, Rice said, declared that rather than send their offspring ‘to school with niggers they will cut their children’s heads off and throw them into a road side ditch.’”19 Despite their best efforts, Black parents could not get access to the common school. Black families did not have the support of the local school superintendent – Robert Peden – who acknowledged that racism against the Black population was “exceedingly strong.” Peden, says Winks, warned white school leaders that they had to allow Blacks access to the schools in the absence of Black schools. They shot back that Peden had no authority to withhold their grant if they did not comply with his wishes. Peden did not concede this point, but he did urge Black families to open their

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own school. Ryerson supported Peden, says Winks, and told Black families to demonstrate that “British institutions … deprive no human being of any benefit which they can confer, on account of their colour of his skin.” But in typical British fashion, how exactly Black families were supposed to go about this in the wake of racist and intransigent white parents and communities was never spelled out.20 The province passed a Separate School Act in 1850, which “permitted any group of five Negro families to ask local school trustees to establish such a school for them.”21 Unfortunately for many Black families, although they paid school taxes like all propertied citizens, over and over again white families and school leaders denied their children access. Ryerson seemed sympathetic to their plight and remarked that, although he had “exerted all the power I possessed, and employed all the persuasion I could command … the prejudices and feelings of the people are stronger than the law.”22 Black people began to turn increasingly to the courts to address the problem of school segregation that Mary Ann Shadd called an “unmitigated insult” in the pages of the Provincial Freeman. These cases had mixed results, and all exemplified the complicated tensions borne of the intersection of the rule of law, white supremacy, racial naturalism, and the fragility of Black claims to citizenship in the post-slavery era.23 In Colchester in the 1870s, the white school board tried to circumvent Black families’ access to the common schools by omitting the property assessments of Blacks, thereby not evaluating their properties for school taxes.24 conclusions

In her well known 1852 Black emigration and colonization treatise, A Plea for Emigration; Or Notes of Canada West, Mary Ann Shadd, in the section titled “Political Rights, Election Law, The Oath and Currency,” proudly and boldly proclaimed: “There is no legal discrimination whatever affecting coloured emigrants in Canada, nor from any cause whatever are their privileges sought to be abridged.” Turning specifically to Canada West’s election law, Shadd informed her prospective émigrés that: The qualifications for voters at municipal elections in townships are freeholders and householders of the township or ward, entered on the roll for rateable property, in their own right

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or that of their wives, as proprietors or tenants, and resident at the time in the township or ward. In towns, freeholders and householders for rateable property in their own names or that of their wives, as proprietors or tenants to the amount of 5 (pounds) per annum or upwards, resident at the time in the ward. The property qualification of town voters may consist partly of freehold and partly of leasehold.25 Clearly for Shadd, propertied rateholder status conferred the right of citizenship upon Black settlers and marked the boundary between slavery and freedom.26 Thus, alongside the question of taxation and the schools is the question of taxation and suffrage, a theme that needs to be explored in future work on Black communities, taxation, and citizenship in Canada West. For Shadd, Canada West’s failure to allow Black children equal and unfettered access to the common schools in the face of the ratepayer status of their parents – the price and the guarantee of their freedom in the promised land under the Lion’s Paw – was an abrogation of the rights of citizenship and an affront to the principles of British justice. And it troubled the claim in her Plea that there was no legal discrimination in Canada. The schools question in Canada West shows that the state did certainly lend legal support to anti-Black racism and that unfair taxation was one of its methods. This is precisely why Black parents who paid their taxes for their children to enter the schools fumed that “the disgrace of the place the little colored school house should be left to rot down, or to stand as it is a monument of the injustice the colored people sustain.” Taxation is not the first thing that comes to mind when one thinks of the history of Black people in Canada. Traditionally the historiography has been preoccupied with correcting certain long-standing myths about the place and the history of Black people in Canada that have become embedded in the nation’s common-sense understandings of this history. And the most powerful symbol of this national image, as numerous thinkers have pointed out, is the mythology surrounding the conventional narratives of the Underground Railroad. Over the past fifty years, historians have worked diligently to dispel the ideas that there was no slavery in Canada, that Canada was a unambiguous haven from white supremacy and racial discrimination, or that the nature of racial inequality that was endured by Blacks in Canada was relatively mild compared to that experienced by their US counterparts, who lived under repressive regimes of racial discrimination. The work

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of debunking these myths has now been largely done. Even recent scholarly works that are focused more upon the history of Black people who were (largely economic) successes have not shied away from the basic fact of the myriad forms of material and legally supported social inequality that Blacks faced in Canada throughout their history and in the present. Scholars now have an opportunity to think about the particular forms of racism and discrimination that Black people have faced in Canada, as well as their resistance in the face of them. In this article I have attempted to make the argument that with regard to the issues of race and the schools question in Canada West, the coercive and civil elements of taxation policy were simultaneously exerted on Black people and communities to further erode their fragile citizenship status. Historians of Black Canada – and scholars of race history in Canada in general – might well look to the history of taxation to find one of the most important levers of Canada’s racial state.

notes

 1 Provincial Freeman, “Grammar School,” 26 July 1856.   2 Susan E. Houston, “Politics, Schools, and Social Change in Upper Canada,” The Canadian Historical Review 53, 3 (September 1972), 250.  3 Ibid.   4 Bruce Curtis, Building the Educational State: Canada West, 1836–1871 (London, ON : The Althouse Press, 1998), 15–17.   5 Ibid., 23  6 Curtis, Building the Educational State, 131.   7 Barrington Walker, “Finding Jim Crow in Canada, 1789–1967,” in A History of Human Rights in Canada: Essential Issues, ed. Janet Miron (Toronto: Canadian Scholars Press, 2009): 81–96.   8 Blackface minstrelsy, scholars have argued, was a conduit and a mirror of many social tensions, forces, and political cleavages. Minstrel shows, for example, frequently weighed in on the political questions of the day in a country that was inexorably moving towards sectional crisis. Blackface performances were also, of course, examples of straightforward white racist lampooning and caricatures of Black people that sought to deny them equal status in American life, and their very humanity. Minstrel performers often subsumed Blackness to the realm of the grotesque, the monstrous, or the absurd. At the same time, the practice of minstrelsy could also betray certain racial, gendered, classed, and sexualized anxieties on the part of

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those who blacked-up – often crossing gender boundaries as well – as well as on the part of people who consumed these performances. Indeed, one of the most well-known scholars of minstrelsy has argued that “in blackface minstrelsy’s audiences there were in fact contradictory racial impulses at work, impulses based in the everyday lives and racial negotiations of the minstrel show’s working-class partisans.” See David Roediger, The Wages of Whiteness: Race and the Making of the American Working Class (London: Verso Press, 2007; 2nd ed.); Eric Lott, Love and Theft: Blackface Minstrelsy and the American Working Class (New York: Oxford University Press, 1993).   9 I recognize that the very idea of consensual sex in the context of a plantation is highly contentious and that one might well ask whether such a thing was possible, given the coercive context of slavery. 10 What troubles or complicates the story that I am telling of the law and the racial state is the narrative of the Chinese and Indigenous peoples visà-vis the law in Canadian history. What I am trying to get at here is the relationship between the law and anti-Black racism. Black letter law was used much more frequently in the case of Chinese and Indigenous people in Canada and this has to do, I believe, with the particular ways British racial liberalism in the post-slavery era framed Blackness; ways that highlighted liberality and racial environmentalism. These were discourses that also existed in the Crown’s colonial relationship with Indigenous peoples, but seldom were these sorts of conversations evident where Chinese communities were concerned. 11 Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America (New York: Penguin, 2017), 7. 12 Christopher F. Petrella, “Wealth, Slavery, and the History of American Taxation,” Black Perspectives 20 (April 2017). 13 “The Estimates,” The British Colonist, 21 June 1860. 14 Future scholarship might take a more careful look at the Irish and their pivotal role in the story of separate schools in Ontario. Much of the question of separate schools coalesces around the Irish and though the debate has been framed in primarily religious terms, there is a racial dimension to this debate as well. The history of the racialization of the Irish has been well developed over the past two decades in US historiography but not in its Canadian counterpart. Nonetheless, the solution reached to deal with the problem of the Irish was quite different from that dealing with Black families and their children. 15 Kristen McLaren, “‘We had no desire to be set apart’: Forced Segregation of Black Students in Canada West, Public Schools and Myths of British

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Egalitarianism,” in The History of Immigration and Racism in Canada: Essential Readings, ed. Barrington Walker (Toronto: Canadian Scholars, 2008), 75. 16 Afua Cooper, “Black Canada and the Law: Black Parents and Children in the Legal Battle for Education in Canada West: 1851–1864,” in The Education of African Canadian Children, ed. Awad Ibrahim and Ali A. Abdi (Montreal and Kingston: McGill-Queen’s University Press, 2016), 25. 17 Daniel Hill, The Freedom Seekers: Blacks in Early Canada (Agincourt: The Book Society of Canada, 1981), 149. 18 Robin Winks, The Blacks in Canada: A History (Montreal and Kingston: McGill-Queen’s Press, 1997), 368. 19 Ibid. 20 Ibid. 21 Ibid. 22 Ibid. 23 Ibid. The cases in question were: Hill v. Camden, 1852 Washington v. Trustees of Charlotteville in 1855, Simmons v. Chatham, 1861, Stewart and Sandwich East, 1864, Hutchison and Saint Catharines, Dunn v. Windsor and the “Thornton Case,” 1871. In Hill v. Camden, Dennis Hill, an elite Black property-owner, sued to get his son access to the common schools and failed. The court went to the Court of Queen’s Bench where Justice Robinson ruled that the intent of the legislature had been to compel Blacks to have their children attend separate schools if they already existed (though he admitted that this had been intended to be a temporary measure after prejudices had abated). In Charlotteville, the Black plaintiff, Simcoe, went through three trials to win a verdict for actions and costs against the trustees who refused to admit his child to the common schools. The case was important because Justice Robinson squashed an attempt to gerrymander a school district. Nonetheless, the plaintiff had to sell his farm in order to pay the court because the plaintiffs had no property, so the victory was Pyrrhic. In Simmons Robinson did it again, squashing Chatham’s attempt to gerrymander the school district in response to a petition from Black parents. However, in Stewart the judge ruled that if a separate school lapsed into disuse, then Blacks would have to be given access to the common schools; the opposite, however, was also true according to this ruling. In Hutchison v. St. Catharines, the schools were segregated before the 1850 Act in a way that nonetheless anticipated the law. This ruling was complicated, because the justice ruled against the school board being able to rely on broad powers to establish categories or descriptions of schools. At the same time, he denied Hutchinson’s children

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access to the school on the grounds that there was no room for them. In Dunn, a Black parent’s action of a “writ of mandamus” to admit his child to the common schools (he was barred on the basis that the school was full and that the child would be “unsanitary”) was denied by the court. In the “Thornton Case,” the questions of the separate schools was ­complicated because a Black school did not exist. Reverend Reuben H.R. Thornton maintained that twelve Black families in Colchester were denied the right to send their children to any school, despite the fact all but one of the Black schools in the area had closed. In 1875, the township granted these families schools that were deemed “exclusive” rather than separate. Three of the school districts had been designated for whites and one for Black families (contrary to Simmons). Black properties were omitted from the tax assessment “so in one region they were no longer assessed for school rates.” Because of this exemption, says Winks, two white ratepayers refused to pay their taxes and actions were brought before the court. The court found against the school board but Black families, nonetheless, ­continued to bring their families to separate schools. 24 Ibid., 375. 25 Mary A. Shadd, A Plea for Emigration; Or, Notes of Canada West, ed. Richard Almonte (Toronto: The Mercury Press, 1998), 74 26 See Barrington Walker, “Critical Histories of Blackness,” in Unsettling the Great White North: African Canadian History, ed. M. Johnston and F. Aladejebi (forthcoming, University of Toronto Press).

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5 How History Helps Us Think about the Politics of Tax Fairness Shirley Tillotson Canada has had no golden age of tax politics, where public opinion was well-informed, fair-minded, and inclusively representative of all interests. We are not in one as I write, and I doubt that you are in one as you read. Perhaps there has been progress. Looking at this history should not make us cynically despair, though. It prompts humility, to be sure, and usually counsels against panic. But most usefully, history requires us to see politics and policy choices as contingent on circumstances. Different periods afford different opportunities and threats. What can’t be done in one period may be done in another. So, to act strategically in making tax or any other project of public policy better, we need to observe accurately the circumstances of our moment. And to accomplish this, it is useful to have points of comparison and a sense of the forces that have produced our present circumstances. History can help with that. In this essay, I compare two periods of Canadian tax history. One is what I call the “Carter-Benson” moment, the period between 1962 and 1971 when demand for tax reform was pressing and bore fruit in the 1971 Income Tax Act, the first major revision since 1948. The other is the Great Depression of the 1930s, when a crisis in public finance generated new tax measures and a surge of tax resistance, even revolt.1 Neither of them are recent, yet both mark our moment and may do so for a while yet. There are constants in tax politics – the impossibility of satisfying everyone, the predictable efforts of every group to shift burdens to some other group. But alliances and options are historically specific, shaped by tactically significant contingencies.

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My comparison of these two important periods in Canadian tax history is organized around four kinds of contingency that determine political possibility in tax matters: 1 Configuration of taxpayer interests: Though always broadly organized around property and poverty, interests realign as markets, demographics, and non-tax institutions change. 2 Other aspects of electoral politics: Alignments ranging from sectarianism to regionalism to feminism complicate the strategic ground for political actors, and often connect to taxpayer interests. 3 Kinds of expertise: Changes in economics as a discipline and the nature of data available shape the kinds of imaginable options for tax policy and administration. 4 Means of political communication: How knowledge and opinion are disseminated change over time, affecting the actors and relationships of policy change. In what follows, I leave largely unexamined the processes that produced the world of the 1960s out of the world of the 1930s. That larger story figures in my 2017 book,2 but would make this piece too long. Instead, I have chosen just to compare the two periods. In both, there were demands for reform, resistance to change, competing ideas of expertise, clashing ideologies, and rethinking of politics. These parallel phenomena took historically contingent forms. In broad strokes, the difference between the two periods is that the later period, arguably the more conflictual, shows the workings of a more developed democracy. In what follows, I treat each of the four kinds of contingency in order for each period. t h e g r e at d e p r e s s i o n

Configuration of Taxpayer Interests: Tax Grievances in a Middle-Class Voice In 1931, a full-blown crisis in public finance had hit major world powers. German banks failed, and Britain went off the gold standard. Governments everywhere, Canada’s local and national governments among them, faced plummeting revenues from their usual property and trade tax sources. Demands for aid to the unemployed pressed

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hard. With credit markets disrupted, the prospect of borrowing internationally to cover ballooning deficits was poor. Prime Minister Bennett, as finance minister, judged that Canada could not risk an inflationary monetary policy. Inflation might pay the bills in the short term, but it would deter purchasers of Canadian bonds. As a debtor country, dependent even in normal times on international lenders, Canada had to protect its ability to borrow. In this calculus, maintaining Canada’s credit meant increasing the federal government’s ability to tax.3 The changes in tax law and administrative practice that ensued would determine the contours of tax protest. Since the big tax reduction budget of 1926, the federal income tax had slid almost into political insignificance. It played only a minor role in federal revenues: in 1927, income taxes (at their lowest absolute amount) generated in relative terms only 15.8 per cent of tax receipts – the rest came almost entirely from sales, excise, and customs revenue.4 Newfoundland had abolished its war income tax in 1924, and some Canadian voices thought Canada should do the same. In their view, income tax evasion was so easy that it brought the income tax and revenue administration generally into disrepute. The biggest supporters of income taxation were farm and labour organizations. They saw progressive rate taxation of personal income as a means to equalize sacrifice in a tax regime where consumption taxes, borne disproportionately by their constituents, did the heavy lifting of public finance. After 1926, higher personal exemptions and generous allowances for the support of dependents meant the federal income tax became truly only a charge on the urban rich – and it was as a result neither very productive nor especially controversial.5 But conditions in the 1930s would prompt new taxation practices and, with them, livelier tax politics. In the budgets of 1932 and 1933, personal exemptions dropped, allowances for dependents were restricted, rates increased (both personal and corporate), and surtaxes added.6 By 1933, the moderately salaried people and elite wageearners who paid tax on incomes of $2,999 or less totalled 68 per cent of all income tax payers, up from 42 per cent in 1930.7 Solidly middle class, this group paid quite small amounts: their top marginal rate was 2 or 3 percent.8 Nonetheless, there were complaints. Some of those new taxpayers were facing other burdens born from the hard times: unemployed adult children, parents whose investment income had taken a hit, brothers or sisters in need. Supporting these kin didn’t

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reduce your tax bill: none of them counted as deductible dependents. Although the taxes paid by these numerous angry taxpayers constituted “an insignificant part of the revenue,” Finance Minister Rhodes expected that all tax sources be fully exploited, to reassure holders of the public debt.9 With many new payers of personal income tax, now almost 20 per cent of gainfully employed urban men,10 Rhodes’s letter box filled with advice on how he might tax more fairly. Mostly, the advice came from people who thought they themselves paid quite enough and others were paying less than they should. Nothing unusual in that! But one figure of public finance in the 1930s incited a common chorus of complaint. That was the bondholder. In particular, since the war, there had been a constant mutter about the tax avoidance enabled by the tax exemption allowed on interest income from the Great War’s Victory Bonds. Others paid the taxes that went to foot that interest bill. And even taxable bond interest was easily kept out of the tax authority’s sight, if, as was often the case, the bond was not registered to an individual, but held anonymously as a bearer bond. On the left, concern about this sort of escape from taxation was framed in terms of class injustice. Others saw it in liberal terms as a failure of fair play. The old muttering against tax-exempt Victory Bonds grew louder and more respectable.11 A senior Toronto bond dealer and M P , R.C. Matthews, suggested to Bennett that he knew how to tax bond income, and found himself minister of National Revenue.12 Backed by a broad consensus against bondholders’ evasions, Finance Minister Rhodes implemented new requirements to register the ownership of bonds. This new tax law generated some fresh evasions. As one investment insider observed, “a great many owners of bonds who had previously not declared their interest earnings … were allocating their bonds to relatives and employees, to avoid the embarrassment of an investigation into their previous interest earnings.”13 In the 1935 budget, with an election in the offing, Bennett’s government enacted a deterrent to such stratagems – a gift tax, described by the Toronto Globe’s business columnist as a “blow at the rich.”14 “Gifts” of income-generating property to someone trustworthy in a lower income bracket had been a good deal for some wealthy taxpayers: such gifts dropped the giver into a lower tax bracket. Even if the wealthy taxpayer covered the new owner’s tax on the property income, it would be at a lower rate. The gift tax was meant to deter such deals: it was a charge to the

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original owner of a percentage of the capital value of the property.15 In this and other ways, Rhodes stiffened enforcement. Rhodes and the income tax collectors in National Revenue knew that evasion was quite common, but they also knew that enforcement had to be complemented by other means of encouraging compliance. National Revenue was not a large agency, and the politically injurious optics of expanding civil service jobs in the 1930s meant they would not get new staff. Cheapness in enforcement was the agency’s watchword. With that in mind, Rhodes repeatedly emphasized the fact that most Canadians with a tax obligation were “honest and decent and above-board” and paid “their just dues to the treasury.”16 And at the same time, he successfully hid information about non-compliance by – astonishingly – judges.17 In 1934, National Revenue’s commissioner of income tax went on the radio to address Canadians on the subject of income taxation and, rather than berating the dodgers, he asserted that Canada’s income tax was collected cheaply because income tax payers gave their “loyal cooperative and patriotic support.” A rhetoric of reassurance designed to inspire confidence in the system was less costly than actively pursuing cheaters.18 In adopting the least expensive way of fostering compliance, National Revenue could rely on a certain cultural norm among income tax payers, a genuine belief many shared that tax was a debt to the state that an honourable person should not shirk. Taxpayer honour had its limits, but it was not merely a finance minister’s wishful invention.19 Appealing to that honour while cracking down on bondholders was a compliance strategy suited to the upper-middle-class income tax payer of the 1930s, men and women for whom reputation as honourable was a material asset in business and professional life. Intersection with Other Kinds of Politics: A Revolutionary Moment and a Reactionary Response This kind of tax talk took place in a context where revolutionary socialism seemed to be a real possibility – either promise or danger. Echoes of 1917’s Russian revolution inspired union organizers and the organizers of various political projects that were aimed at defending workers’ class interests. Conservatives worried that the masses might seize power through elections. The stakes were high. Sir Robert Borden, who had been prime minister in Canada during

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the traumatizing events of 1917, wrote to Finance Minister Rhodes about the fiscal risks represented by Roosevelt’s New Deal in 1935. If Roosevelt’s plan failed, and the public credit of the US collapsed along with commodities markets, “six million men would not consent to starve.”20 In Canada, a new political party had been formed on the left in 1933 as a coalition of farm and labour organizations – the Cooperative Commonwealth Federation (CCF). They began immediately to win seats in provincial elections. When private profit drove the economy, CCFers argued, economic chaos was inevitable. The way forward was to end private ownership in “our natural resources and principal means of production and distribution.” In the transition to a socialist future, taxation must be aimed at wealth and high incomes, rather than regressively at consumption.21 To counter the democratic socialist threat, leading businessmen in Canada followed others internationally in proposing that electoral politics was a danger to the nation. The big parties spent money to buy votes, one way or another. There could be no fiscal prudence while party loyalties trumped the good of the country – as they saw it. In early 1935, anticipating a federal election, some of Canada’s wealthiest businessmen bankrolled a League for National Government. Its purpose was to unify all who understood the importance of slashing public expenditure, shrinking national debt, and, of course, cutting taxes. They wanted the parties not to contest an election. If the CCF had not existed, their plan might have worked. But in the coming 1935 federal election, Bennett’s Conservatives were sure to lose. The aspiring prime minister, Mackenzie King, saw nothing to gain in combining with the Conservatives. The CCF would never join them. The old parties united would in effect anoint the CCF as the only electoral alternative, increasing its chances of forming the government.22 Fear of socialist government inspired an attack on electoral democracy, and fear of socialist government pushed it back. In a nutshell, the forming of the C C F and the League for National Government (along with other novel parties of the 1930s) marked deep dissatisfactions and divisions. Major revisions to taxation were among the remedies everyone proposed, though of diametrically different kinds. Between remedies, there was little common ground. Where C C F ers and business groups agreed, however, was that the division of powers in Canadian federalism was a mess. Caught between dramatically competing views of what government should do, the Liberal government elected in 1935 convoked a royal commission on

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Dominion-provincial relations (i.e. federalism). Whatever the purpose and design of the Canadian tax regime, it had to do better at matching spending and taxing powers.23 Kinds of Expertise: Politics of Federalism, Meet Macroeconomics Faced with defaults on public debt (both municipal and provincial), threats of defaults, and rumours of municipal tax strikes, King’s government undoubtedly used the Royal Commission on DominionProvincial Relations (the Rowell-Sirois Commission) as a safety valve, a means to give tax protesters a channel to express their grievances. But the commission’s work did more than just spreading oil on troubled waters. With the help of an unprecedented mustering of economists, the commissioners undertook to see Canada in a fresh way, through modern social science. The commissioners saw economics as objective, fact-based, a remedy against the irrational expedients and the populist pandering and patronage that they called “politics.” Measuring by social scientific standards, they found Canada’s taxes both unfair and inconsistent with the efficient production and use of wealth. Worse still, they pointed out, the investigation of tax incidence was so rudimentary in Canada that it was “impossible to say with confidence what weight of taxation any one taxpayer bears.”24 Politics, with its eye to short-term effects, had created this situation, hiding rather than revealing the true workings of the economy. The normal methods of politics offered no solution to the unfairness of the tax system: “The ultimate consequences of taxation may be so obscure that it is quite futile to rely on the taxpayers themselves making known through their parliamentary representatives the full effects of the tax.” Commonsensically now, but startlingly then, the commissioners held that taxation was not simply a burden. In theory, increased taxation, correctly targeted and up to an unspecified percentage of the national income, could improve purchasing power or increase available credit, making higher taxes, however paradoxically, a net benefit to at least some voters. But the ability to see such macro-level tax effects depended on data that most taxpayers could not access and mathematical skills that few possessed. Taxpayers, the commissioners implied, lacked the capacity to know their own interests. The economic science of the Rowell-Sirois report squared off against the ill-informed play of selfinterest that, according to the commissioners, was politics.25

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Though conservatives in the 1930s called this sort of perspective undemocratic, they were wrong. The economists of the Rowell-Sirois Commission were urging better material for political platforms, rather than, as the League for National Government did, the abolition of elections. Most promisingly, the Commission’s 1941 report offered a solution to the stalemated wrangles over the division of powers, one that protected accountability while shielding fiscal federalism from party-influenced intergovernmental quarrels. Federal-provincial jurisdictional disputes had often been fairly transparent legal devices by means of which politicians or business interests, or both, pursued rather grubby goals. Given that history, constitutional politics amid the devastation of the 1930s seemed either profoundly divisive or irritatingly petty. In setting themselves firmly against narrow provincial rights agitations, the Rowell-Sirois commissioners innovated by framing the problems of public finance as requiring better science. This was a modestly conservative approach, confirming the mainstream economic liberalism of most Canadian business and political leaders. However, given how little Canadians in the 1930s knew about basic questions of national accounting and the actual scale of taxable capacity, the call of the Rowell-Sirois commission for less politics and more research also spoke to progressives.26 The commissioners’ solution to Canada’s tax chaos – national adjustment grants – would take form in 1957 and evolve over the decades as the equalization program. In devising its form, both economists and politicians played their parts. Though the calmer 1950s produced the final scheme, the intense tax problems of the 1930s were its seedbed. Means of Political Communication – The Limits of Localism Many kinds of taxation were discussed locally, rather than nationally, in the Canada of the 1930s. Canadian cities and provinces taxed in widely varying ways. Until the 1930s, only British Columbia and Prince Edward Island taxed income, but municipal income taxation was quite common in Ontario, New Brunswick, and Nova Scotia. There were other direct taxes in municipalities – poll taxes and property taxes – mixed with charges for municipal services like water. For many Canadians, municipalities were the most visible tax collectors. National tariffs and excises operated in the background to consumers’ daily lives, but municipal tax bills could mean the loss of your home. When the crisis hit, however, the federal tax authority became more

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visible. For example, an increased tax on sugar in the 1932 budget prompted outrage on a national scale. An eminent member of the Liberal opposition, future finance minister J.L. Ilsley, deplored the impact on low-income consumers. Better to tax away 100% of income earned over “a certain ample amount,” he urged, than cut so cruelly into household budgets.27 Prime Minister Bennett reported that, in letters he received from across the country, he found that Canadians understood the crisis and were happy to do their part for the national revenue.28 But how reliable were his sources of information? Not very. There was a bewildering mix of local and national voices in the tax talk of the 1930s. Tax policy was made without the benefit of public opinion surveys, national or otherwise. Politicians read newspapers avidly and maintained networks in their ridings. But most of their constituents lived very local lives. As Paul Pross has argued, knowledge of local concerns had long been the main expertise that politicians brought to national politics.29 But this was changing. Interest groups that were organized on a national scale were assuming a larger role in politics and public administration. Evidence of this trend in tax matters, a business-funded organization called the Citizens’ Research Institute of Canada (C R I C ) had launched an annual tax conference in 1923. Dedicated to the scrutiny of public finance, the CRIC supplied mayors and other politicians with a datapacked monthly publication called Canadian Taxation. This was a mainstream publication, but its numbers read oddly now because they were not adjusted for inflation (or deflation). From the point of view of professional economists, the CRIC’s research basis was suspect and its analysis doctrinaire. Even among M P s, one Toronto economist suggested, “rustic ignorance” prevailed in tax discussions. In the Department of Finance, a newly hired cohort of young economists would invest hours writing explanatory letters to the many citizens, often ill-informed, who wrote to advise the government about the economics of taxation and debt.30 In this context, there were few tax measures on which the federal government could build a broad democratic consensus. The politics of class was compounded by regional contests and by uncertainty about what counted as expertise. Accomplishments and Limits of Tax Reform in the 1930s Short summaries are not the best way to present the past. Readers will want to explore further to test my analysis. That said, my brief account

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here outlines a few ways in which the atmosphere of crisis and fierce class conflict of the 1930s opened up some possibilities for constructive tax politics and innovations in policy. The addition of a new cohort of middle-class income tax payers supported a solution to the long-festering injustice of the tax-exempt Victory Bonds, a solution that in turn led to the federal gift tax. Organizing on the parliamentary left and anti-democratic organizing among big business fostered a sense of urgency about Canadian politics that paid off in the formation of a landmark royal commission. Part of what lifted that commission’s work to canonical status was broader currents in public administration, specifically the increasing influence of economics. One of the continuing limits on reform to taxation in Canada was that national communication around tax matters was still rudimentary. The democratic public sphere was livelier on a local level than nationally. In the 1950s and 1960s, however, Canada’s tax conversation would broaden and deepen, as would its contribution to democratic politics. t h e c a rt e r - b e n s o n m o m e n t

Configuration of Taxpayer Interests: Grievances Proliferate In a period stretching from the late 1940s through the 1960s, new publics were forming in tax politics.31 In this process, events during the Second World War had been crucial. One of the new tax publics that emerged from the war was that which consisted of low-income wage and salary earners. In their number also figured the small business owners who, in the 1948 Income Tax Act, first enjoyed a special, lower, corporate income tax rate. Another increasingly anxious population of income tax filers during the 1950s were the owners of substantial investment property, for whom the non-taxation of capital gains was a valued means of countering the impact of marginal tax rates that had been reduced only modestly at the top of the scale from their stratospheric wartime levels.32 Both the lower-income and the wealthy tax filers would shape the politics of the Carter-Benson moment. Their activities produced both wider engagement on income tax questions and increasing alienation and conflict. The conception of “the income tax payers” as a homogenous group, roughly accurate in the 1930s, was now nonsense. By 1962, when the Carter commission began, there were proportionately more low-income taxpayers than there had been in 1949. A

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slow but fairly steady inflation during the 1950s, spiking after 1965, had reduced the purchasing power of the basic exemption, which remained unchanged from 1949. This numerous class of low-income taxpayers were told from the 1940s onward that their many small income-tax contributions funded social security though, in fact, specific charges such as provincial health taxes and unemployment insurance premiums played a large part. In the background, the federal sales tax made a healthy contribution to the general revenue.33 Still, paying “their share” through the new federal personal income tax (new in its mass scope of incidence in peacetime) became the foundation of claims to federally funded social services. Opposition to this exchange of tax for services found a political home only among the Créditistes, a rural and working-class populist party in Quebec. In 1962, they were calling for the married breadwinner’s personal exemption to be raised to $5,000, which would have ended the mass income tax.34 In spite of its broad basis for consent (outside Quebec), the federal income tax after 1948 brought many Canadians into a fraught relationship with the state as the practices of tax administration slowly evolved. Once the 1948 Act was in place, the tax authority signaled a more vigorous enforcement. In newspaper and magazine stories from the late 40s through the 1950s, readers were told that “tricks” used to evade income tax were unlikely to work. For small business, the threat of stepped-up enforcement was especially important. Along with owners of professional practices, they would learn that this betterstaffed tax authority was prepared to teach Canadians that income tax reporting and paying were serious legal obligations. Pre-war habits of paying what seemed a “reasonable” amount on a roughly estimated income, rather than an amount based on solid accounts, were no longer acceptable. After the war, the expanded National Revenue agency actively pursued fraud prosecutions, and investigations reached back into the war years. One rural Cape Breton merchant learned to his distress that he had in fact made a taxable profit every year for the ten years since 1936, and the tax bill on those profits was overdue. In 1950, a Saskatchewan farmer worried that the truck he had purchased with his veteran’s allowance would be seized for income tax debt. Frictions like these gave politicians such as the new Progressive Conservative (P C ) party leader, John G. Diefenbaker, material they could use to woo voters.35 For tax filers at the other end of the wealth scale, a particularly bitter battle was fought over taxation of capital gains during the postwar

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period. In the 1950s, the gain from selling capital assets was usually tax-free: it didn’t count as income for the purposes of the Income Tax Act. As a result, disputes flared between richly propertied tax filers and the tax authority over whether particular transactions generated a capital gain or income taxable under the act. A tax advisor provided one answer and the tax authority disputed the accounting involved. Shock. Horror. Surely tax obligation should not be so uncertain! Commenting on a 1950 case in which a supposed capital gain was taxed as income, the Globe and Mail editors struck an almost American note of tax outrage: “The very essence of tyranny is the levying, at the whim of officials, of taxes not clearly specified or intended by the law. Our national Government, as is its wont, is seizing with enthusiasm an opportunity to employ the tyrannical method.”36 My tone of gentle mockery here is not meant to discount the real problem of uncertainty in tax incidence, a problem that successive revisions of the statute would aim to address. But it must be acknowledged that accountants and lawyers specializing in tax were, in the 1950s, beginning actively to market methods of converting income to capital gains without it passing through the tax collector’s hands. Small wonder, then, that inclusions in taxable income were contested. Tax advisers and their clients constituted a greatly expanded element of public opinion in the 1950s and 1960s. Their avoidance practices signaled the limited consent to steeper, higher graduation of personal income tax rates at the higher reaches of the income scale.37 In contrast to the mass of income tax payers, there was among the small number of big taxpayers something approaching contempt for the welfare-state deal, in which (as they saw it) lower-income taxpayers got much more than they paid for. As one eminent tax specialist put it in 1966, “Who today in the midst of this collectivist indoctrination fed down from the national government can really blame anybody for deciding that the smart thing to do is to collect as much [from public programs] as possible? After all[,] he can say that he is paying the taxes.”38 Other critics of progressive rate income tax pointed to the dangers of a mass electorate and organized to manage, and if necessary manipulate, public opinion. Democracy’s dangers for the wealthy minority was their worry.39 Intersection with Other Kinds of Politics: Cold War Oppositions and Incipient Populism Income tax issues had helped define left and right in politics in the interwar years.40 In the 1950s and 1960s, the international politics of

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the Cold War took those divisions to a new level. The frictions with the tax authority that were now so ordinary found a useful kind of extravagant rhetoric in Cold War vocabulary. This early period of the Cold War, peaking in the 1959 Cuban Revolution and the US reaction to Cuba, generated an intense language of polar opposition: “freedom versus communism.” Tax complainers seized on this form of expression. Militant anti-communism among Catholics helped fuel anti-tax feeling and opposition to social spending in rural and even urban working-class Quebec, providing voters for the anti-statist Créditistes. But anti-statist tax rhetoric could be found in mainstream politics too, without regard to religious affiliation. In the early 1950s, Diefenbaker himself floated small state rhetoric about “keep[ing] the tax collectors poor.”41 Tax cutting, especially for the vote-rich ranks of lower-income earners, was part of the Diefenbaker P Cs’ program after their 1957 election win. By the June 1962 federal election, Finance Minister Fleming and Prime Minister Diefenbaker were pushing stories about personal income taxes being raised by “30 to 40” percent, or 50 percent, or even 60 percent if the Liberals were elected. The choice, Dief asserted, was between the PCs and free enterprise or the Liberals and confiscatory socialism.42 Canada’s Chamber of Commerce joined in with their 1962 “Operation Freedom.” They aimed to fight high taxes and excessive social security (“excessive” before medicare, C P P /Q P P , or student loans), to overcome Canadians’ “apathy and indifference with respect to freedom.”43 Against the grain of this anxious Cold War talk, Toronto’s Board of Trade firmly discouraged Operation Freedom. It seems the Chamber’s activities were drawing accusations of John Birchism from the New Democratic Party, recently founded and shiny with promise. Calling the Chamber’s campaign “naïve” and suited only to small towns, Toronto’s business leaders misread Operation Freedom’s electoral appeal. In the 1962 election, the weekly press of rural English Canada vigorously supported this anti-tax anti-communism. In Quebec, similar small towns and not so small ones gave the Créditistes enough MPs (along with four western-Canadian Socreds) to hold the balance of power in the new federal parliament.44 With looming pressure from the right, Diefenbaker’s P C s made comprehensive review of the tax system the main plank of their platform in the 1962 election. He announced the objectives of the review in terms that spoke artfully to different audiences, audiences whose interests were not only disparate but opposed. The Royal Commission would “examine anomalies in the existing laws, consider inequitable

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tax burdens, close loopholes that now existed and ease hardships now caused by some tax laws.”45 Canadians who loathed rich tax-dodgers and thought that exemptions were too low could have heard that message as a commitment to do something for them. Tax advisers and their clients who worried that capital gains were not reliably protected or that compliance costs were too high would also have heard a promise in “examine anomalies” or “ease hardships.”46 The comprehensive review was delivered through Carter’s Royal Commission on Taxation (1963–66), but not before the Diefenbaker government was defeated in 1963 – on its own failings, to be sure, but also by the Créditistes / Social Credit voting with Pearson’s Liberals. The angry energies of populism had given Diefenbaker two big victories in 1957 and 1958, with unprecedented voter turnouts, but in 1962 those same currents put the knife into the Créditistes’ hands, and they wielded it soon after, turfing the Tories. Diefenbaker had tried to use tax grievances to generate anti-Liberal sentiment. But that sentiment could easily turn against any party in government. Though the Liberals defeated the PCs, the tax resentments Diefenbaker had fostered would remain as a political current to be contended with throughout the Carter-Benson moment. Tax-reform politics would have to speak to a mass electorate, as well as to narrower, well-organized interests. Kinds of Expertise: Macroeconomics, Meet Micro Politics Among the experts on the eve of 1960s tax reform, the economics profession was well-established as a source of policy ideas, though healthy debate certainly existed. Points of disagreement within the policy community had been made public by the report in 1957 of the Royal Commission on Canada’s Economic Prospects, (“the Gordon commission”).47 Some of the divisive questions were: How serious a threat was inflation and what level of unemployment was tolerable as “frictional”? Could fiscal and monetary policy be coordinated (the former a matter of politics, the latter central banking)?48 The Gordon commission thought yes, but acknowledged that there were difficulties and “honest differences of opinion” among government, the central bank, and other agencies.49 They acknowledged that government intervention in the business cycle was still “a new art which [was] relatively untried.”50 And they confessed that the federal government’s economic interventions could be undone by the provincial governments: this was “a real problem for the future” to which they bluntly said they saw no solution.51

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As remedies for the other points of conflict, the Gordon commission called for a beefed-up and more rapidly reporting Dominion Bureau of Statistics, more economics research, and a permanent, non-partisan council of experts to work through differences, to educate the voting public, and to give voice to a credible consensus on economic questions.52 They acknowledged, in other words, that on key economic issues, ones in which tax was intimately involved, voters might well be unable (or unwilling) to take expert guidance, as then constituted, as their guide. This perception of a profession divided and as yet uncertain can only have been reinforced in 1961, when a group of economics professors challenged the governor of the Bank of Canada, James Coyne, to a showdown on macroeconomics. Often, in the 1960s, when finance ministers were challenged on “high taxes” they replied that the record of postwar prosperity surely meant that the level of taxation was doing no harm.53 But as economics, that was pretty thin. The Gordon commission had deemed tax too big a topic to include in their work. But the conflicts alluded to in their report foreshadowed the troubles that later beset Carter and Benson. The Carter Commission’s report echoed the Rowell-Sirois’s theme of modernist men of economic science in white hats, cleaning up the fiscal chaos caused by the black-hatted politicians. But the Carter Commission did the research, rather than just calling for it. Their program for reform was impressively coordinated and principled, offering improvements to a very wide array of constituencies. It ran afoul of businessas-usual, however, and some especially well-organized interests rejected the trade-offs Carter offered. In response, Finance developed a more conventional package of policy proposals, albeit still far-reaching ones – Proposals for Tax Reform, usually known as the Benson White Paper. It too met considerable resistance. In the exceptionally inclusive debate that followed, Finance Minister Benson’s every proposal became a promise for some and a threat for others, mostly at a microeconomic level. The promise that income tax reform could reduce the vulnerability of the poor was compelling to some, but a sign of state socialism to others. One sector’s essential incentive – say, the small-business tax rate – was to other taxpayers both ineffective and a pointless drain on the public revenue. Tax subsidies to mining and petroleum, offering a haven to investors and clearly distortionary in one view of taxation, from another perspective were an attack by Ottawa on a regional industry. Most radically, the proposed methods of taxing capital gains generated intense objections, even among some

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who acknowledged that it was probably time to include capital gains in taxable income.54 The breadth of the commission’s vision and the subsequent Benson budget proposals meant a mobilization of equally unprecedented breadth from opponents of change. Neither the scale of the reform nor the scale of the reaction could have happened earlier. Modern economics had been successfully represented as connecting taxation to a vast array of economic effects and even, by means of incentives, to economic behaviour that reached into the social and moral realms. Tax reform was no longer a matter of tweaking the tax structure to manage public finance and more fairly distribute the burden by region, sector, and class. It was about all of that, but it was now also about childcare and home ownership and education and retirement planning and the role of the state, not to mention Canadian control of the economy and the redistribution of wealth for a more just society.55 There were even a few ultra-­ Protestants still banging the drum about favours to Catholics extended through the non-taxation of priests’ incomes. For all that macroeconomics had enhanced the policy voice of economists, the breadth of macroeconomics and microeconomics combined also exposed tax policy to an enormous array of policy interests. Finding points of consensus, much less agreement, on a whole new logic of taxation, required enormous political creativity. Means of Political Communication – The Expansion of Group Politics As tax policy’s connections to various interests proliferated, so too did organizations designed to defend and promote tax-related interests. These organizations were part of a larger political pattern. Paul Pross pointed to its beginnings in the 1920s and 1930s. Civil service departments that were building professional expertise sought out national organizations as sources of reliable policy-relevant information. As a result, civil society, outside parties and parliamentary politics, mobilized on a new scale.56 A new and thoroughly credible organization of tax experts, both public and private, the Canadian Tax Foundation, was organized in 1948 and replaced the CRIC. Other constituencies that had been organized in local forms went national (not necessarily bridging the divide between French-speaking and English-speaking Canada). For example, Canada’s previously scattered pensioners’ organizations had formed the National Pensioners’ and Senior Citizens’

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Federation (NP&SCF). Its membership of over 200,000 featured prominently in Justice Minister John Turner’s representation to Benson of its policy wishes during the tax debates of the Carter-Benson moment.57 The White Paper debate was itself an accelerant to organization in tax matters. To the left of the NP&SCF, Canadian Pensioners Concerned would be formed to advocate on tax matters, especially for low-income seniors.58 Anti-tax activism flourished, too. The White Paper prompted a Toronto man, John Bulloch Jr, to organize the Canadian Council for Tax Fairness, soon renamed the Canadian Federation of Independent Business. The somewhat shadowy Equitable Tax Foundation would help pay to publish a high-profile tax adviser’s objections to the White Paper, The Benson Iceberg.59 The Department of Finance used all of the now abundant means of public relations to engage these many publics, and the better-bankrolled of the White Paper’s critics did so too. National television broadcasts gave Finance Minister Benson’s message a wide reach, but also amplified his critics. One especially well-funded opponent was a London insurance executive, Colin Brown. He ran a massive newspaper ad series with clippable coupons for readers to use in letters to Benson. He also paid for a remarkably biased opinion poll to feed his story that everyone was opposed to the Benson reforms. Brown’s lasting legacy was to organize the National Citizens’ Coalition shortly after the 1971 budget.60 Accomplishments and Limits of Tax Reform, 1962–71 Throughout the debates of 1969 to 1971, Benson argued, with reasonable numbers, that most taxpayers would be better off under the proposals and that the income tax burden would follow “ability to pay” more closely. Doing the electoral arithmetic, he hoped to show that everyone would benefit, in various ways. But those who stood to lose from the reforms found in the mechanisms for achieving those good goals alarming threats, some perhaps real, some certainly imaginary. Under the leadership of people such as Bulloch and Brown, a significant electoral force was mobilized to unite “taxpayers,” underplaying differences to emphasize risks and potential losses. Currents of the Cold War fears – creeping socialism! – meshed well with the anxieties of small businesses that were stretched by economic restructuring. Tax dangers provided a focus for their fears and made it possible to mobilize them against change. This mobilization helped justify

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tax expenditures to benefit consuming households in small ways. With these and other compromises, a version of capital gains taxation was achieved, blended with the end of federal succession duties.61 The breadth and intellectual ambition of the Carter commission report was possible in part because the scope and policy weight of economics had grown enormously since the 1930s. The ferocity of the debate that Carter inspired was equally the result of the enlarged vision economics had helped to build, not without controversy, of a welfare state that used new means to build a more stable and prosperous society. But these changes meant that Canada in the 1960s faced some deep conflicts about tax fairness and economic efficiency, social responsibility and social power. Finance Minister Benson called the grueling debates of 1969 to 1971 an exercise in participatory democracy, and in a sense he was right. It was a flawed exercise, with paid speech from well-heeled groups shaping the issues. The debate was not simply a clear mirror of public opinion. It was a product of a political communications environment in which mass organization techniques and mass media presented new challenges. But it was an exciting time to be a citizen and a taxpayer. The tax reform process put important questions on the table, and sometimes into the streets. Robust democracy is not quiet, and organizing consent to tax changes is not, shall we say, a tea party. conclusion

Tax utopia is a perpetually receding goal. Raising a public revenue, in service of social objectives, is always central to political life. Interests vary and often conflict. Ideals of a good society aren’t shared in every respect. Given how full of difficulty tax politics are, there was something admirable about the attempt in the 1960s, capped by the 1971 budget, to remedy a wide array of injustices, to enable efficiency, and to enshrine an array of taxpayer rights. This was tough political work, undertaken without the impetus of an extraordinary fiscal crisis. By contrast, the reforms of the 1930s were desperate crisis measures, narrow in the electoral base they spoke to and hobbled by an old constitutional order. Something got done: the taxation of bondholders, who had long been seen as beyond the tax collectors’ reach, was partly successful. Much unfinished business remained, however, when, in 1939, the war changed everything in public finance. In the 1950s and 1960s, the revolution in scientific economics would lift tax-policy

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thinking out of some very old ruts. In some circles, distaste for mass democracy and contempt for the welfare-state bargain persisted into the 1960s and 1970s. But compared to the 1930s, the Carter-Benson moment’s politics of taxation were more inclusively democratic – both in voices organized and projects served. Capital-gains taxation, even only partial, was a real innovation. The world changes and tax issues change with it. In recent years, concerns about our tax policy and administration have mounted, expressed in a wide range of political vocabularies. As we think about how to address current concerns, there are a few contingencies we might consider. Taxpayer interests are no longer just personal or provincial, sectoral or familial. They are also more international: tax havens are no longer on the fringes of nation-centred tax regimes. International tax now connects us all to a reconstituted world of empire.62 Policy-makers and citizens are digesting the implications. We are now better positioned than were earlier Canadian citizentaxpayers to know the facts on income flows and the distribution of income and wealth within nations. But the international flows remain somewhat opaque, sometimes (often?) deliberately hidden.63 In all sorts of tax questions, the ill-moderated, easily manipulated world of social media makes the risk of misinformation at least as high as, possibly higher than, it has ever been. If we want policy based in science, we will have to fight hard for it. If we want tax that manages both fairness and efficiency, we will have to reject blinkered definitions of both those terms, and be creative about finding what we can do together, democratically, to finance our common life.

notes



Parts of this chapter were first published by the Canadian Tax Foundation as “Policy Forum: Then and Now – A Historical Perspective on the Politics of Comprehensive Tax Reform,” Canadian Tax Journal 66, 2 (2018): 363–74. Other parts were first published in Shirley Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy, 1917–1971 (Vancouver: U B C Press, 2017).   1 A related and significant change was the termination of the Dominion Succession Act and the parallel measures that eliminated provincial succession duties gradually until they were all gone in 1985. David Duff has described this process: “The Abolition of Wealth Transfer Taxes: Lessons

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from Canada, Australia, and New Zealand,” Pittsburgh Tax Review 71, 3 (2005), 71–120.  2 Tillotson, Give and Take.   3 Ibid., 153–8.   4 Calculated from Table B-2, columns 1–8, in W. Irwin Gillespie, Tax, Borrow and Spend: Financing Federal Spending in Canada, 1876–1990 (Ottawa: Carleton University Press, 1991), 274.  5 Tillotson, Give and Take, 53–8, 66–8, 80.   6 Ibid., 162–3.   7 Calculated from Table 3, ibid., 325.   8 Canada, House of Commons, Debates, 15 April 1926, 2457.   9 Confidential memo from A.K. Eaton to J.R. McGregor, 28 January 1935, Nova Scotia Archives (N S A), E.N. Rhodes fonds, MG 2, vol. 1196, doc 75060-61; Tillotson, Give and Take, 86–90. 10 Tillotson, Give and Take, 84–5. 11 Ibid., 63–4, 14–4. 12 R.C. Matthews to R.B. Bennett, 28 October 1932, Library and Archives Canada (LAC), Richard Bedford Bennett fonds, MG 26-K, doc.466005. 13 V.M. Drury to Deputy Minister of Finance W.C. Clark, 10 April 1933, L A C , Department of Finance fonds RG 19, vol. 3989, file Income Tax T-1-1. 14 William Marchington, “Blow at Rich,” Toronto Globe, 23 March 1935, 1. 15 Canada, House of Commons, Debates, 22 March 1935, 1986–7. 16 Canada, House of Commons, Debates, 31 January 1933, 1679. 17 Tillotson, Give and Take, 164–5. 18 Ibid., 140–8, 163–5. 19 Ibid., 148–53. 20 R.L. Borden to E.N. Rhodes, 30 January 1935, NSA , Rhodes fonds, MG 2, vol. 1185, file 12, doc. 71753. 21 “Regina Manifesto (1933),” http://www.socialisthistory.ca/Docs/CCF/ ReginaManifesto.htm. 22 Tillotson, Give and Take, 111–13. See also Don Nerbas, Dominion of Capital: The Politics of Big Business and the Crisis of the Canadian Bourgeoisie, 1914–1947 (Toronto: University of Toronto Press, 2013), 138–9. 23 Tillotson, Give and Take, 166–7; “National Finance Probe Is Asked,” Globe and Mail, 9 December 1936, 7. 24 Tillotson, Give and Take, 167. 25 Ibid., 167–8.

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26 Ibid., 169–70. 27 Canada, House of Commons, Debates, 28 March 1933, 3495. 28 Canada, House of Commons, Debates, 1 July 1931, 3269. 29 A. Paul Pross, Group Politics and Public Policy, 2nd edition (Toronto: Oxford University Press, 1992), 34–5. 30 Tillotson, Give and Take, 64, 145, 189–90. 31 Ibid., 210–37. 32 J. Harvey Perry, Taxes, Tariffs, and Subsidies, vol. 2 (Toronto: University of Toronto Press, 1955), 411 and Table 34, 692. 33 Stated as a percentage of G N P , the federal sales tax was a close third by size in the source for federal fiscal requirements (aside from debt). Gillespie, Tax, Borrow, and Spend, Table C-3, 288. 34 Tillotson, Give and Take, 210–13, 280–2. 35 Ibid., 222–7, 243, 279–80. 36 “Taxation by Stealth,” editorial, Globe and Mail, 23 May 1950, 6, quoted in Tillotson, Give and Take, 235. 37 Tillotson, Give and Take, 214–16, 233–5. 38 A. Kenneth Eaton, Essays in Taxation (Toronto: Canadian Tax Foundation, 1966), 132–56. 39 Tillotson, Give and Take, 214. An organization that dedicated itself to behind-the-scenes manipulation of the mass public was the Canadian Council for Economic Studies, active until 1956. Their work is described in Don Nerbas, “Managing Democracy, Defending Capitalism: Gilbert E. Jackson, the Canadian Committee on Industrial Reconstruction, and the Changing Form of Elite Politics in Canada,” Histoire sociale / Social History 46, 91 (2013), 173–204. 40 David Tough, The Terrific Engine: Income Taxation and the Modernization of the Canadian Political Imaginary (Vancouver: UB C Press, 2018). 41 Canada, House of Commons, Debates, 10 December 1951, 1724, 1725. 42 Tillotson, Give and Take, 283, 285. 43 “Face Threats to Freedom, Nation Asked,” Globe and Mail, 10 July 1961, 6. 44 Tillotson, Give and Take, 248–9, 283–5. Many small-town weekly newspapers published a syndicated column of conservative journalist Ambrose Hills (pseudonym of Walter A. Dales). See, for example, “Of Many Things. Election Opportunities,” Kingsville Reporter, 10 May 1962, 5. 45 “Will Review Tax Laws, Dief Says. Main Tory Plank Revealed by PM in Keynote Speech,” Winnipeg Free Press, 7 May 1962, 1–2.

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46 Tillotson, Give and Take, 285. 47 Canada, Royal Commission on Canada’s Economic Prospects, Final Report (Ottawa: Queen’s Printer, 1957). 48 Ibid., 421–3. 49 Ibid., 436. 50 Ibid., 426. 51 Ibid., 435 52 Ibid., 433–6. 53 Tillotson, Give and Take, 299. 54 Ibid., 287–8, 294–301. 55 Ibid., 231–2, 259–75, 296–9, 303–4 56 Pross, Group Politics, 38–60, 64–8. 57 On the disorganized state of pensioners in the early 1950s, see James Snell, The Citizen’s Wage: The State and the Elderly in Canada, 1900–1951 (Toronto: University of Toronto Press, 1996),181–5; John Turner to Edgar Benson, 25 February 1971, LAC, Department of Finance fonds, R G 19, vol. 5222, file “White Paper Tax Reform Proposals from the Public Generally.” 58 Kenneth Kernaghan, Coordination in Canadian Governments: A Case Study of Aging Policy (Institute of Public Administration of Canada, 1983), 33. 59 Tillotson, 299, 303, 217–18. 60 Ibid., 29–34. 61 Ibid., 305. 62 There is a large and growing literature. It is well represented and linked to the history of empire in Vanessa Ogle, “Archipelago Capitalism: Tax Havens, Offshore Money, and the State, 1950s-1970,” American Historical Review 122, 5 (2017): 1431–58. 63 Lukas Linsi, “Problems and Pitfalls in the Statistical Measurement of Foreign Direct Investments,” pre-print version of chapter 4, “Foreign Direct Investments,” in The Language of World Trade Politics: Unpacking the Terms of Trade, ed. Klaus Dingwerth and Clara Weinhardt (London: Routledge, 2018), https://www.fickleformulas.org/output.

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t h e e c o n o m i c s o f ta x fa i r n e s s

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6 How to Sell Tax Reform: Lessons from Canada’s Three Major Postwar Tax Reforms William Watson

In the way of many conference papers, I suspect, the title preceded the paper and as a result is at least a little misleading: it turns out I don’t actually have a recipe for selling tax reform. My one and only attempt to do so was an eight-page insert into the Financial Post that Andrew Coyne and I wrote in the late 1980s.1 It was entitled “The G ST: A Generally Sensible Tax.” The country did get the G S T , so perhaps our effort was successful. On the other hand, the party that introduced the generally sensible tax fell from 169 seats in 1988’s federal election to just two seats in 1993’s. There were many reasons for public dissatisfaction with the Mulroney Tories, but unhappiness about the GST was certainly one. Andrew’s and my attempt at public education on the virtues of value-added taxation evidently had only limited impact. There is a large literature on the theory of tax reform. See, for instance, the thirty-six items in the references to Ethan Ilzetzki’s recent paper on the subject.2 For the most part, however, what follows does not draw on that literature. Instead, I will use Ilzetzki’s framework to try to filch insights from J. Harvey Perry’s recounting of three postwar Canadian tax reforms – he would say “the three” – in his magisterial 1989 Canadian Tax Paper, A Fiscal History of Canada: The Postwar Years, a 1,058-page “paper”! The three are the Carter Commission reform, which Perry dates from 1962 to 1971, the MacEachen reform (1980–82), and the Wilson reform (1985–88), which actually extended beyond 1988 to at least 1991, when it was capped off with the

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introduction of the G S T on 1 January of that year. Perry describes these reforms in two chapters of his book, chapters 13 and 14, respectively, “Reform by Royal Commission” and “Ministry Reform: MacEachen and Wilson.” I’ll make more of this idea of “ministry reform” towards the end of this chapter. The book’s forty-one [sic] other chapters make clear, as does even a cursory review of federal budgets, that the federal government is almost always tinkering with the tax system in one way or another so that “taxes are in a constant state of change.”3 If so, what then makes a set of changes a reform? Perry says a reform takes place when “the public, legislators, tax specialists, economists, and others … see the tax system as a whole.”4 There have been other episodes of substantial re-examination of the existing system, of course, as well as occasionally rapid renovation of tax practices. Most of the highest-speed work took place in wartime, notably 1917, when the “income war tax,” as it was officially called for three full decades, was introduced, and 1943, when income-tax withholding began. More detailed and deliberate reform-like re-examinations occurred both just before the Second World War, with the Rowell-Sirois report, and just after, leading up to extensive revisions to the income tax in 1949, the result of several years of debate and reflection, some of it by royal commission. Still, Perry considers the Carter/Benson, MacEachen, and Wilson reforms to be the only efforts worthy of that name in the postwar period. Though his judgment was made in 1989, it seems unlikely that any tax changes made since then, at least at the federal level, have been so thoroughgoing as to qualify as a reform. What stylized facts about tax reform can be drawn from Perry’s ninety-page discussion of these three episodes? At least four come to mind: reform has a common theme; it takes a long time; it doesn’t always succeed; and it’s usually a case of “go big or go home.” To expand briefly on each: 1 reform has a common theme

“Broaden the base and lower the rate” has been a traditional mantra of tax-policy economists almost since economists started studying taxes. Each of the three postwar tax reforms aimed explicitly at this end. The Carter/Benson exercise had grander conceptions of fairness in mind and elaborated its “buck is a buck is a buck” theme at some length, both in the Carter Royal Commission’s five-volume report and in its

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more than thirty commissioned research papers. But its recommendations for the income tax involved lowering the top rate from 80 to 50 per cent and broadening the income tax base, principally by including capital gains in taxable income for the first time. Similarly, the MacEachen exercise was a follow-up to the Department of Finance’s first published studies of tax expenditures,5 and quite explicitly offered reductions in top and lower rates in exchange for the withdrawal of selected tax expenditures. Finance Minister MacEachen sold his changes to cabinet as being revenue-positive: i.e., the revenue lost by lowering rates ($1.3 billion) was forecast to be less than the revenue gained by reducing tax expenditures ($2.1 billion), for a net revenue gain of $800 million – an amount that was regarded as consequential in 1981.6 For its part, the Wilson reform of the 1980s aimed at reducing reliance on the income tax by modernizing corporate taxation and by finally ending the six-decades-old and much-derided Manufacturer’s Sales Tax, which by definition had a narrower and narrower base every passing year as services gradually eclipsed manufacturing as a share of output in the Canadian, as in all other rich economies. The economic theory behind “broaden the base, lower the rate” is that, in partial equilibrium terms, at least, the cost of any tax rises with the square of the tax rate, so that lower is almost always more efficient.7 For those unfamiliar with this aspect of the geometry of tax triangles – squares and square roots seldom making it into the public discussion of anything – a more compelling intuition may be that if everything is taxed, tax rates can be lower than if only some things are taxed. To many people this will seem on the face of it both fairer and more efficient. In fact, theory makes clear that in terms of tax rates, lower and uniform is not necessarily better. In cases where demands and supplies are not very responsive to prices, high taxes may raise revenue at relatively low cost in terms of discouraged activities: because people aren’t very responsive to prices, the activities end up being not very discouraged. By the same token, where supply in particular is very elastic, the cost-minimizing tax simply has to be low, otherwise the activity all but ceases. According to this view, it makes sense to have higher taxes on some activities than others, rather than taxes that are as low as possible on everything.8 However, a practical difficulty with the idea that some tax bases can only sustain very low tax rates is that some such bases, including investment by large international firms, are associated with groups or individuals who are out of political favour at the moment and perhaps never have been in

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favour. Beyond that there is the difficulty of determining, not exactly, but within reasonably small margins of error, what the elasticities actually are. The appeal of broader bases and lower rates may therefore continue to trump more sophisticated notions of tax reform such as “Lighter taxes on the mobile, heavier taxes for homebodies.” 2 reform is long

Prime Minister Diefenbaker appointed the Royal Commission on Taxation in 1962. It reported in 1966. Finance Minister Edgar Benson’s White Paper on taxation came out in 1969, and the bulk of the reforms that survived the ensuing public discussion were enacted only in 1972. So, not even counting the “inside lag” of getting the commission in place, it was at least a ten-year process that involved the governments of three prime ministers, one of whom (Pearson) was so lukewarm on the recommendations he did not authorize spending the $50,000 ($355,435 in 2017 dollars) needed to publish the commission report in other than its original typescript. Though the Wilson reforms of the 1980s did not involve a royal commission, there were several discussion and background papers from the Department of Finance along the way. Minister Wilson mentioned his intention to reform sales taxation within months of the Mulroney government’s taking office in 1984 but the GST finally came into effect 1 January 1991, so the effort took essentially seven years. Only the MacEachen reform was relatively brief, though it may not have seemed so to the minister, who came under considerable political pressure because of his proposals and less than ten months after the pivotal November 1981 budget was moved to External Affairs. The Department of Finance published its first estimates of tax expenditures in 1979.9 Mr MacEachen signalled in the 1980 budget that he intended to take action on many of them, with the goal of reducing tax rates, including top rates. Even so, the 150 measures he did take in the 1981 budget came as a surprise and sparked substantial agitation against them, including by business lobbies, which “crowded Ottawa-bound planes with their representatives as winter set in.”10 After several months of discussion the government modified a number of the proposals and the two- to three-year reform effort came to a close. The 1981 budget also effectively ended the tradition of budget secrecy. The rule in Ottawa ever since has been that budgets best not surprise, so their most important measures are usually leaked.

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In our current century, political cycles are measured in hours and days. Even in the late 20th century, however, a week was proverbially a long time in politics. Policy time may not move as quickly as political time. But ten years, the length of the Carter Commission effort, is long by any human standard. So is seven, the time sales-tax reform took in the 1980s.11 Whether any government operating in the current social (and anti-social!) media environment would be willing to take on a seven- to ten-year effort is not at all clear. Of course, it’s also not clear the Diefenbaker or Mulroney governments knew what they were getting into with the tax reforms they initiated. Given the opportunity to do it all over again, they might well not have. And twenty-first-century governments do sometimes take actions whose benefits will accrue only in the long run, reduction of carbon emissions being only the most obvious example. Whether tax inefficiency can be made as compelling in the public mind as planetary warming is another question. 3 r e f o r m d o e s n ’ t a lway s s u c c e e d

It’s interesting that Harvey Perry, who was himself one of the six members of the Carter Royal Commission on Taxation, regarded the Carter reform as a failure, in that much of what the Commission recommended was not enacted, with what did make it to legislation being “full of compromises and half measures.”12 At the same time, unlike most non-specialist observers, Perry considered the MacEachen reform a success, in that the minister ultimately got most of what he was after. As he put it in the Fiscal History: “Not the least interesting aspect of this mini-reform budget is that, though the Minister achieved 90 percent of his objective, it has since been referred to as an abortive effort that was stopped in its tracks by public protest. Although the Minister involved won no great public esteem for his performance – despite his signals in 1980 everyone was taken by surprise – it is a rare political accomplishment to have achieved most of one’s objective and at the same time leave protesters convinced that they were the winners.”13 Many commentators believe the opposite, namely, that the MacEachen episode, which by common consensus was at the least badly managed, was a failure,14 while the Carter Commission had an important long-term influence, thus confirming the possibly exaggerated belief of Harold Laski, the influential mid-century social democratic thinker, that royal commissions take on average twenty-eight years to have effect.15 What may be taken as Perry’s final word on the

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report does adopt this longer view: “Perhaps in the end it [the Report] has been vindicated. Anyone at all familiar with the course of Canadian tax development in the last two decades would agree that at least the agenda, if not the actual performance, has been strongly influenced by the concepts and analyses presented by the commission.”16 In the Fiscal History, Perry does not really say how he viewed the Wilson reform, as the sales tax part of it was still in process. I suspect most economic commentators would regard it as having been mainly a success, in that even an imperfect GST was an improvement over the policy oddity that was the manufacturer’s sales tax: a relatively steep tax imposed on a sector of the economy whose relative underdevelopment many influential Canadians had always been anxious about. Political analysts are likely to have a different view, however, given the more or less immediate demise of the government and party that introduced it. 4 go big or go home?

This final stylized fact coming out of the three postwar Canadian episodes is not actually a fact but rather a question about how tax reform should proceed. In each of the three reforms, opposition was vigorous and in varying degrees effective. That even a “successful” tax reform like Michael Wilson’s – we do still have a G S T , after all – led to the destruction of the political party that initiated it raises a conceptual and practical consideration no analysis of tax reform can avoid: How does reform make political sense? The various tax exemptions, credits, and rules17 that a “broaden the base, lower the rates” reform aims to eliminate must all have made political sense when first introduced. They may not have made economic sense but, if not, they presumably at least satisfied the key political prerequisite of inefficient policy innovations, namely, that their benefits were concentrated while their costs were diffuse. On the benefit side, the company, industry, or region that was the target of the provision enjoyed and may still enjoy an important rent. As for costs, the resources thus misdirected came from many places in the economy, while the small rise in tax rates that was necessary to make up the revenues forgone by the provision hit a large number of taxpayers in ways they almost don’t notice. Although the sum of the damage done exceeds the benefit to the beneficiary, no individual victim loses much and therefore has only slight incentive to object.

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The beneficiary, by contrast, has abundant interest in lobbying for his or her benefits. A government thinking about sweeping away many of these inefficient past innovations can take satisfaction in knowing that because the innovations it is targeting had costs greater than their benefits, doing away with them will do the reverse and generate benefits greater than costs. But it still must confront the political fact that the reform’s benefits will be diffuse and its costs concentrated. In particular, those losing tax privileges they have grown comfortably accustomed to will have plenty of incentive to resist. As Ilzetzki puts it: “An interest group that was powerful enough to secure a tax exemption is sure to resist attempts to eliminate this exemption when reform is on the table.”18 By contrast, the average citizen whose taxes will fall slightly when the exemptions are removed may well not have sufficient incentive to mobilize in support of reform. So if it made sense politically to introduce all these inefficiencies, how can it also make sense to get rid of them? In short, the important and curious thing about “reform” is “re.” Why do governments decide to reverse policies that must have made sense when they were undertaken? The key to the conundrum is that either the victims must somehow have become empowered to exercise their majority power and reduce the inefficient innovations that made them victims in the first place or the beneficiaries must in some way be persuaded that reversing the innovations will make them better off, so they too will mute or even abandon their opposition to reform. The existence of a possible tipping point for reform results from the fact that, as the accumulation of inefficiencies proceeded, more and more people became victims of it. And, Ilzetzki’s focus, the victimization may also have become more extreme: The higher that tax rates had to rise in order to finance the marginal inefficient innovation, the greater the cost to victims.19 Ilzetzki argues that as inefficiencies accumulate, there is even the possibility of getting buy-in to reform from those who have themselves benefited from the offending carve-outs. But that possibility depends on all the inefficiencies, or at least a substantial number, being eliminated at once. The (diffuse) benefits of the deal have to be noticeable. If support for reform is to be unanimous, they have to be more than noticeable: They have to be greater than the loss that rent-holders will experience from elimination of their privileges. Reform, therefore, can’t be done piecemeal. A government trying to remove one inefficiency at a time will confront special interests that see no gains from

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elimination of their tax privileges, only losses. Only if everyone’s ox is being gored, as the process is sometimes described, does it have a chance of succeeding. There are at least two reasons why this might be so. The first, as Ilzetzki emphasizes, is that with everyone taking a hit from an accumulating number of inefficiencies, the welfare gains from reform do become noticeable and attractive, even to holders of tax privileges. The second is that people may have less objection to having their own ox gored if everyone else’s is being subjected to the same treatment. The gored-ox metaphor often seems to close off discussions of this subject, as if it satisfactorily resolved the problem. But without Ilzetzki’s point the question arises: Why does it not simply produce a veritable Pamplona of gored oxen, with politicians running for their lives as a herd of enraged rent-holders chases them down? One advantage of Ilzetzki’s approach is that it is consistent with reform being a periodic exercise, which it does seem to be. To a certain extent, of course, reform being periodic is a logical necessity. If a reform has just taken place, there is little justification, whether logical, rhetorical, or political, for an immediate re-reform. “Tax reform!” will seem “so last year” as a political rallying cry – because it really was done last year, or near enough to last year. As time passes, however, legislators find it is still politically expedient to introduce economic inefficiencies even despite the bad odour surrounding them in a postreform era. Eventually, like barnacles on a ship’s hull, enough of these inefficiencies will accumulate both to justify and also, on Ilzetzki grounds, enable another thorough scraping of the hull. A couple of other possibilities come to mind as to why tax reform may from time to time make political sense. Multiple political equilibria. In a politics of steadily if slowly shifting coalitions, a different coalition may come to power. It will have a different view of the policies introduced by its predecessors than those predecessors did. The Carter Commission was established in 1962 by a party that hadn’t formed a government since 1935, and had only held power for five years in total (1930–35) since the birth of the income tax in 1917, forty-five years earlier. Canada’s tax system, for good or ill, was at that stage a Liberal edifice. John Diefenbaker was not elected mainly to institute tax reform. It hadn’t figured prominently in either the 1957 or 1958 elections. Though he did make it an issue in 1962, he doesn’t even mention the Carter Commission in his memoirs.20 But he had considerable disregard for the policies his Liberal

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predecessors had put in place and was therefore presumably open to doing things differently – though it fell to his (Liberal) successors to at least partly implement the reforms recommended by the commission he appointed. Similarly, the Mulroney Conservatives were at least slightly different in their ideological complexion than the Trudeau Liberals had been. They weren’t elected mainly to undertake tax reform. But once in office, reform may have appealed to them more than it would have to a John Turner government had the electorate kept Turner in office as prime minister in 1984. Indeed, why in 1981, having been in power for most of the preceding thirteen years, the Trudeau Liberals undertook a substantial base-broadening, ratereducing exercise, including elimination of many exceptions they themselves had introduced, is a more difficult question, though the born-again nature of the Liberals after their near-death experience of 1979 may explain something of their urgency, as might Allan MacEachen’s leadership aspirations. Times change and so does the economic and political calculus. Tax preferences that may at one stage have appealed for their purported effects in terms of growth or employment may in a different era become unattractive because of their perceived effects on the distribution of income, which may in the interim have assumed a greater political pertinence in the public mind than it once had. We seem to have entered an era in which people are less forgiving of tax measures that benefit higher-income earners, whatever the supposed efficiency or stimulus arguments in favour of them. Such a change in mood may suddenly render a cluster of policies less attractive than they had been, so that doing away with them may well assume the name of reform. Finance is forever. The Department of Finance, at least in part, is a more or less permanent lobby for base-broadening, rate-lowering reforms. Perry, himself an insider, first at Finance and then in the Toronto business community, argues that it was a group of Finance insiders who persuaded the Diefenbaker government of the need for a Royal Commission. In much the same way, departmental work on tax expenditures in the late 1970s laid the groundwork and may have provided the impetus for the MacEachen budget of 1981. Similarly, it is hard to believe the main motivation for tax reform in the 1980s came from within the Progressive Conservative Party rather than from within the Department of Finance, at least not insofar as sales tax reform was concerned. Lowering income tax rates and flattening rate schedules would have appealed to many conservative voters and

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activists but the need to reform the Manufacturer’s Sales Tax was hardly top of mind for most members of the general public. In its first year to eighteen months, the Mulroney government had the reputation of being essentially policy-free. That was in many ways unfair but with every passing year, as its popularity declined and another election loomed, the government seemed to take greater and greater pride in attempting and achieving hard policy changes, whether free trade, constitutional reform, or the G S T . Given the outcome of the 1993 election, that may not have been the wisest political strategy. Whatever its leader may say after the fact, no political party is likely to agree that its death in the pursuit of hard choices is a good thing. h o w t o s e l l ta x r e f o r m

In closing, is it possible to say anything at all about my chosen topic, how to sell tax reform? A first thought is: if possible, arrange for a war. Or at least take advantage of a war. Most of the biggest changes in the income tax system, starting with its birth in 1917, took place during wartime, when political calculus, though it still does exist, is very different from what it is in peacetime. More seriously, reformers need to address public mistrust about whether reform will collect taxes more efficiently or will instead increase taxes so as to send more resources to public sector activities many taxpayers may not favour. In 2008, Liberal leader Stéphane Dion addressed such concerns (in my mind clearly and effectively) in a party document introducing his “Green Shift,” a proposed switch to carbon taxation from other forms of taxation: The Green Shift is as simple as it is powerful. We are going to shift Canada’s tax system away from income and towards pollution. And we are going to do it in a revenue-neutral way – putting it in law that every dollar that is raised in pollution taxes will be returned to Canadians in tax cuts [emphasis in original]. The Auditor-General will ensure the Green Shift’s revenue neutrality.21 That is a clear, easily understandable statement of principle that takes only seventy words – though, in modern parlance, 320 characters and

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therefore two tweets. In the end, voters did not trust the Liberals, in part because the party itself decided that not all Green Shift revenues would go back to taxpayers but would instead be used to finance policies such as public childcare. A third consideration for would-be reformers is to avoid concentrated losses. In its 2017 effort to reduce “income sprinkling” among family members by a high-income minority of owners of small businesses, the federal government ran into a buzz saw of resistance from taxpayers who, because of the size of their prospective losses, had a very strong interest in opposing the proposed changes. As many of them were accomplished business people, they also had the initiative and ability to organize opposition to the reforms, while not having been so successful as to qualify as big businesses and therefore suffering from the populist animus often directed at large corporations. That there were conceptual and practical difficulties with the reform both justified a strategic retreat by the government and made it more likely. Finally, economics can offer one major, if perhaps obvious, insight into the art of the political or any other kind of deal. If there are potential gains from trade – if a change will bring more benefits than costs – it should be possible to mollify losers at least somewhat. Perhaps not sufficiently to give up their resistance to change and actually sign on in support of it. But at least enough to allay the concerns of others not themselves affected by the change who nevertheless worry about those who are. If there are net gains from tax reform, as there usually should be, an obvious way to help sell reform is to distribute the gains in a way that offsets political opposition. In effect, potential opponents should be bought off, a tactic that is also consistent with the Paretian principle that any losers from a policy change receive compensation. Whether compensation is deserved if the loss they are about to suffer is removal of an inefficient, possibly unfair advantage, compensation may be morally dubious: Should they really be compensated for having to cease ripping off their fellow citizens? That may not be in any sense fair. On the other hand, if they remain politically influential, it may be tactically necessary. How do you make sure losers in fact gain? Ilzetzki refers to the 1986 US tax reform, in which base broadening was accompanied by substantial rate reduction. The reduction of income tax liabilities attendant on rate reduction is not the entire welfare gain from reform but if people do receive the benefits of

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reform in this very palpable way, they may resist reform less or even decide to support it. To address a major concern about the G S T , namely the regressive unfairness of taxing consumption, the Mulroney government introduced the GST tax credit, which was designed in effect to rebate G ST paid by low-income Canadians. In fact, as Perry notes, the government introduced the sales tax credit before introducing the G S T : “The announcement of a ‘refundable sales tax credit’ [in June 1987] established an advance bulwark against those who would oppose an increase in consumption taxes as being inequitable to lower income groups.”22 It has turned out to be a breachable bulwark. Those who receive the GST tax credit presumably know about it, but many other citizens may not and will therefore be unaware of its progressive effect on the consumption tax. An economic perspective is not the only one available for considering tax reforms. But if policy changes are not to produce net gains, as economists would prescribe, it’s hard to know on what other grounds they should be recommended or undertaken. In the end, tax reform seems always likely to be a hard sell, even if, our three postwar episodes suggest, not a completely impossible one.

notes

  1 Andrew Coyne and William Watson, “The GST: A Generally Sensible Tax,” Financial Post, 19 December 1989.   2 Ethan Ilzetzki, “Tax Reform and the Political Economy of the Tax Base,” Journal of Public Economics 164C (2018): 197–210.   3 J. Harvey Perry, A Fiscal History of Canada: The Postwar Years, Canadian Tax Paper No. 85 (Toronto: Canadian Tax Foundation, 1989), 277.  4 Ibid.   5 Department of Finance, Government of Canada Tax Expenditure Account: A Conceptual Analysis and Account of Tax Preferences in the Federal Income and Commodity Tax Systems (Ottawa: December 1979).   6 In 2017 dollars, the $800 million in question would be $2 billion – not really significant in budgetary terms today. See Perry, A Fiscal History, 313; Stephen Clarkson and Christina McCall, Trudeau and Our Times: Volume 2: The Heroic Delusion (Toronto: McClelland and Stewart, 1994), 232–3.

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  7 The loss depends both on how high the tax raises the price of the activity in question and on how much the activity is discouraged. How much the price rises clearly depends on the tax. But so does how much the activity is discouraged. Thus the product of the two is related to the square of the tax. Anything that increases as a square gets bigger and bigger faster and faster.   8 Kevin Milligan, “Tax Policy for a New Era: Promoting Economic Growth and Fairness,” C.D. Howe Institute Benefactors Lecture, Toronto: 25 November 2014.   9 Department of Finance, Government of Canada. 10 John English, Just Watch Me: The Life of Pierre Elliott Trudeau: 1968– 2000 (Toronto: Knopf Canada, 2009), 541. 11 Indeed, by some estimates reform had been underway since the late 1920s, when the rate of Manufacturer’s Sales Tax reached as low as 1 per cent, temptingly close to abolition. 12 Perry, A Fiscal History, 307. 13 Ibid., 317. 14 For instance, Christina McCall and Stephen Clarkson title their chapter on the episode “The Disastrous Budget and the End of the Dream,” though they don’t quite make clear whether the dream that ended was Allan MacEachen’s aspiration to lead the Liberal party after Pierre Trudeau left or the dream of the left wing of the party to close important tax loopholes thought mainly to serve the interests of the rich. Clarkson and McCall, Trudeau and Our Times, 224–40. 15 Philip F. Vineberg, “Report and Procedures of the Royal Commission on Canadian Tax Reform,” Bulletin of the Section of Taxation. American Bar Association 20, 1, 1 (October 1966), 32. 16 Perry, A Fiscal History, 292. 17 Perry refers to the experience of 1974–89 as “the over-indulgence in tax unneutralities … most of them ineffectual.” Ibid. 18 Ilzetzki, “Tax Reform,” 197. This obvious point apparently escaped Allan MacEachen: “When [deputy clerk of the Privy Council Rob] Rabinovitch … read an advance copy of the budget he raised the political question of how the government was going to handle the ‘coalition of losers’ that the loophole-closing would create, and found to his astonishment that the old political wizard, [Finance Minister Allan] MacEachen, had not concerned himself with this immediate problem.” Clarkson and McCall, Trudeau and Our Times, 238. 19 Unfortunately, as Ilzetzki points out, the higher the tax rate the greater the benefit of an exemption from taxation, and thus the greater the incentive

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to seek one. On the other hand, as we have seen, although that incentive increases linearly, the damage of taxation grows exponentially – usually to the power of 2. 20 John G. Diefenbaker, One Canada: Memoirs of the Right Honourable John G. Diefenbaker: The Years of Achievement 1956 to 1962 (Toronto: Macmillan, 1976). Nor does Pearson. Lester Pearson, Mike: The Memoirs of the Rt. Hon. Lester B. Pearson: Volume Three: 1957–1968 (Toronto and Buffalo: University of Toronto Press, 1975). 21 Liberal Party of Canada, The Green Shift: Building a Canadian Economy for the 21st Century (2008). 22 Perry, A Fiscal History, 321.

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7 The Limits of Taxation for Reducing Income Inequality Stephen Gordon

1 introduction

By any measure, income inequalities have increased in Canada over the past couple of generations. The Gini coefficient1 for market incomes increased from 0.384 in to 0.439 in 1996,2 and while it has remained relatively stable since then, it remains well above the levels observed in the mid-1970s. This increase in inequality in Canada is part of a broader trend observed across industrialized countries.3 While its causes are not fully understood, the conventional explanation is based on technical change: the arrival of information technology disproportionately increased the productivity of workers with higher levels of education. Since highly educated workers already received above-average wages, the effect of the new technology was to widen the existing gap. Globalization was also a contributing factor, as competition from low-wage workers in developing economies held back wage growth for industrialized workers with whom they were in direct competition. In a distinct – albeit related – development, Canadian incomes have become more concentrated among a very few high earners.4 Between 1982 and 2006, the share of total income in Canada going to the top 1 per cent of the income distribution increased from 7.1 per cent to 12.1 per cent. This trend towards increased top-end income concentration has been even more pronounced in the United States, but it is not as widespread across countries as was the increase in the Gini coefficient: top-end income concentration appears to be restricted to English-speaking countries.5

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These transformations of the shape of the income distribution have renewed interest in ways in which governments might reduce income inequality, and in tax policy in particular. This chapter presents an analysis of the economics behind two proposals for using tax policy to reduce income inequality in Canada: higher corporate income-tax rates and increases in the marginal personal income-tax rate paid by high earners. It is argued here that these measures are unlikely to be significantly effective in reducing income inequality, and that the risks that they would be counter-productive are non-negligible. The chapter concludes with alternative strategies for reducing inequality that other industrialized countries have already successfully adopted. 2 t h e e c o n o m i c s o f ta x e s : efficiency, equity, and incidence

The question of how much revenue a particular tax measure generates is not the only dimension under which economic analysis of taxation is conducted, and there are many tax instruments for which revenue generation is not even of primary importance. For example, the objective of Pigouvian6 taxes is to ensure that the price paid by the consumer includes all the costs of production, including environmental degradation: carbon taxes are an example. Pigouvian taxes are designed to correct market failures; the revenue they produce is a secondary consideration. This section provides a brief overview of some aspects of the economics of taxation relevant to the topic at hand. Economists typically define efficiency according to the Pareto criterion: an allocation is efficient if a redistribution of economic resources will make at least one person worse off. Equivalently, an allocation is Pareto inefficient if it is possible to make at least one person better off, without lowering anyone else’s welfare. For policy makers, the identification of Pareto inefficiencies indicates sub-optimal allocations and provides the opportunity to increase social welfare. The First Welfare Theorem says that in the absence of externalities,7 competitive markets result in a unique Pareto-efficient outcome. This result is usually interpreted as a formalization of Adam Smith’s famous “invisible hand” metaphor for the process by which the interaction of individuals acting in their own self-interest can bring about a social optimum.

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Taxes almost always cause Pareto inefficiencies. A tax that affects production and/or consumption decisions – that is to say, almost all of them – will lead to distortions away from the Pareto optimum. Much of the economic research agenda on taxation is devoted to estimating the size of these distortions. However, as Amartya Sen once remarked, Pareto efficiency is at best a weak guide for evaluating economic outcomes: “An economy can be optimal in this sense even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich … In short, a society or an economy can be Pareto-optimal and still be perfectly disgusting.”8 Equity considerations must also be taken account; economic analyses of equitable taxation revolve around the following dimensions: 1 Vertical equity: Everything else held constant, the tax system should redistribute income from people with higher incomes toward those with lower incomes. The more progressive a tax structure is, the stronger the redistribution. 2 Horizontal equity: Individuals with identical characteristics should receive equal tax treatment. Efficiency and equity concerns are usually seen as being in conflict, but they need not always be. For example, if a high-income individual is benefitting from monopoly profits, then a tax on those proceeds would increase efficiency (monopolies are a distortion away from the competitive market outcome) and would also satisfy the vertical equity tax-policy criterion. Equity and efficiency analyses are best seen as complements in evaluating tax policy. A characteristic related to equity analyses is the notion of tax incidence. If the statutory incidence of a tax is on the entities that must remit payment to the government, the economic incidence is on the persons who see a reduction in their after-tax purchasing power. The economic incidence of a tax on a particular good is determined by the relative bargaining power9 of the buyer and the seller, and is in fact independent of the tax’s statutory incidence. If the seller has more bargaining power – for example, if she is able to sell on markets where the tax is not in force while the buyer cannot – then the seller will be able to pass along the tax to the purchaser by charging a higher price. If the purchaser has more bargaining power, she will be able to pass

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the tax along to the seller by lowering the price she is willing to pay. Generally speaking, the economic incidence of the tax will be borne by the side that has the lesser bargaining power, regardless of where the statutory incidence lies. 3 c o r p o r at e i n c o m e ta x e s

Corporate incomes – revenues net of costs – are roughly 10 per cent of Canadian GDP, and increasing the taxes paid on corporate profits is a popular revenue-generating instrument among politicians, not least because corporations don’t vote. 3.1 The incidence of corporate income taxes The annual profits of many corporations are measured in the billions of dollars, but it does not necessarily follow that increasing corporate income taxes (CIT) satisfies the vertical equity criterion for tax policy. The first point to be made in an analysis of the incidence of the CIT is that it cannot be borne by corporations, because corporations are not people. The fact that corporations are legal persons10 does not make them human. Anthropomorphizing corporations may be a convenient heuristic at times, but it is a mistake to refer to “wealthy corporations.” Corporations are not human, so they cannot be wealthy: corporations are a form of wealth. A related point revolves around the fact that ownership of a corporation can be divided. One implication is that increasing taxes for corporations with large incomes and reducing the tax rate paid by small businesses does not necessarily result in a more progressive tax structure. If ownership of a large corporation is widely dispersed among a large number of modest pensioners while a small business is entirely owned by a high-earning professional, then this attempt to make the structure of corporate tax rates more “progressive” may have regressive effects. Although the statutory incidence of the CI T falls on corporations, its economic incidence falls on humans. There are three groups that could bear the burden of the C I T : 1 Investors. The C I T is paid out of profits, thus reducing the rate of return the owners of the corporation receive on their investment.

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2 Workers. Workers will be obliged to accept lower wages in order to maintain the same after-tax rate of return received by the owners. 3 Consumers. The cost of the increased tax will be passed on in the form of higher prices. Most research attention focusses on the first two channels; competition from producers in the unincorporated sector and in other jurisdictions limits the ability of producers to pass the C I T along to their customers. The apportionment of the economic burden of corporate taxes depends on the relative bargaining power of workers and the owners of capital. If capital is in fixed supply,11 investors will have no bargaining power: there is no alternative outlet for their savings and they cannot simply sell their holdings and purchase consumption goods instead. In this case, the entire economic incidence of the corporate income tax is borne by the owners of capital, in the form of a lower after-tax rate of return on their investments. These are strong assumptions, particularly in an environment where capital depreciates12 and where the development of international capital markets has greatly reduced the cost of placing one’s savings in jurisdictions not subject to local taxes. Competitive forces will result in a common after-tax rate of return for all investors. In a small open economy such as Canada, the world rate is exogenous. In such a world, investors will not bear the economic incidence of the corporate tax; they can always get the world rate of return by shifting their holdings to other jurisdictions. In order to offer competitive after-tax rates of return, before-tax profits will have to increase. If competitive pressures prevent firms from increasing prices, then those higher profits must come at the expense of lower wages. The incidence of a particular corporate tax will depend on how closely its situation resembles either of these two extremes. For example, at the subnational level, where it is relatively easy for domestic and foreign investors to shift investment from one jurisdiction to the other, one would expect that labour would bear the lion’s share of the CIT’s economic incidence. Empirical analyses of subnational CIT tax incidence appear to confirm this prediction: once the potential for profit shifting is taken into account, the reduction in wages paid is often greater than the revenues generated by the increase in the subnational corporate tax rate.13 At the national level, the typical finding14

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is that most of the incidence of the C I T falls on labour. However, the consensus here is less clear,15 and conclusions obtained for one country may not be generalizable for other contexts. Analysis of the economic incidence of corporate income tax is subtle and complex, but the available evidence is not consistent with a conclusion that an increase in the corporate tax rate will necessarily make the general tax structure more progressive. There is a significant likelihood – perhaps even a stronger likelihood – that an increase in the corporate tax rate will have regressive effects. 3.2 Corporate Taxation and Efficiency Efficiency analysis of the corporate tax rate is more straightforward: higher corporate tax rates reduce the after-tax rate of return on investment. To the extent that lower after-tax rates of return reduce investment – marginal projects that were profitable before the tax increase may no longer be economically viable with the higher rate – then higher corporate taxes result in lower investment, lower stocks of capital, reduced productivity, and reductions in wages and incomes. As noted earlier, this is a general result: virtually all taxes produce efficiency losses. However, it is generally acknowledged that the losses generated by corporate income taxes are more severe than those generated by other tax instruments. A common ranking16 of the efficiency losses associated with the various tax instruments puts corporate income taxes as most costly, followed by personal income taxes, and then consumption taxes. According to one estimate,17 the cost of generating one dollar of revenue from the federal corporate tax is $1.71, compared to $1.10 from the GS T . 3.3 Corporate Taxes and Revenues A mechanical approach to estimating the revenues generated by an increase in the corporate tax rate is to multiply the tax base by the incremental increase in the tax rate. If the CIT rate is 15 per cent and revenues are $45 billion, then this method would yield an estimate of $3 billion for each percentage point. Between 1997 and 2017,18 Canadian federal corporate tax rates decreased by almost half, from 29.12 per cent to 15 per cent; provincial rates saw more modest decreases. Nevertheless, even after these sharp reductions in the corporate tax rate, federal corporate tax

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revenues continued to fluctuate in a narrow interval just above 2 per cent of GD P s. Provincial C I T revenues also remained stable at just above 1 per cent of GDP during this period. In other words, the corporate income tax base increased faster than the economy. There are two classes of explanations for why lower corporate tax rates would increase in response to a lower tax rate. The first is that lower CI T rates encourage investment and capital accumulation, and so increase the income generated by capital. The other is that multinational corporations will shift reported profits to the lower-tax jurisdiction.19 Taken together, the effects of lower tax rates and a larger tax base have roughly cancelled each other out. The Canadian experience is not unique; it resembles that of the other O E CD countries over the past thirty-five years (Figure 7.1). The raw coefficient of correlation between corporate income tax rates and corporate income tax revenues is in fact slightly negative. 3.4 Corporate Income Taxes: A Summary If higher corporate tax rates generate no significant increases in revenues, incur large efficiency costs, and cannot easily be motivated on equity grounds, then the case for increasing corporate income tax rates as an instrument for reducing income inequalities is not particularly compelling. This would also seem to be the conclusion reached by policymakers across the industrialized world; Canada is only one of the many countries to have reduced its C I T rate over the past decades.20 4 p e r s o n a l i n c o m e ta x e s o n h i g h e a r n e r s

Although a link is often made between corporate profits and the income of high earners, the primary driver of the recent surge in the concentration of incomes at the top has been salaries and wages, not investment income. The top 1 per cent’s employment incomes grew almost twice as rapidly as their investment incomes between 1982 and when the total income share of the 1 per cent peaked in 2006. In 1982, just under half of the income of the top 1 per cent was in the form of labour income and this ratio had been stable over the previous thirty years. By 2006, this ratio had increased to two-thirds.21 An obvious policy response to increased top-end concentration of market incomes is to increase the top marginal personal income-tax

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Figure 7.1  Corporate income tax rates and revenues in OE C D countries, 1981–2016

rate in order to attenuate its effect on after-tax income; the extra revenues are a secondary benefit that can be redistributed to households lower down in the income distribution. However, as is the case with the corporate income tax, behavioural responses on the part of high earners to higher taxes make this argument less clear-cut. Moreover, policy measures that may be effective in the United States may not be appropriate for Canada. 4.1 The Incidence of Taxes on High Earners The economic incidence of increased personal income taxes on high earners will depend on their bargaining power. If highly skilled employees can obtain the same after-tax income by simply moving to another jurisdiction, then employers will be forced to offer higher pre-tax salaries in order to retain their services. In this case, top earners will bear little of the economic incidence of the tax, even if they do bear its statutory incidence. In contrast, if highly skilled employees do not have equally well-paying outside opportunities, then their weaker bargaining power will oblige them to accept the lion’s share of the economic incidence.22 In the United States, the latter case is more likely to better characterize the labour market for high earners. Since they already earn salaries that cannot be matched anywhere else in the world, high earners in the US cannot credibly use outside offers as leverage during salary negotiations. It seems likely that US high earners bear both the economic and statutory incidence of a higher top marginal personal income-tax rate.

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This cannot be said with the same level of confidence in Canada. Many Canadian high earners are able to use job offers from potential US employers as leverage in their salary negotiations. Indeed, that outside option is a plausible explanation for why top-end income concentration increased in Canada during the 1980s and 1990s, and for why it began to decrease after 2006. The combination of increasing top-end salaries in the United States and a depreciating Canadian dollar led to renewed fears of a “brain drain” of highly skilled Canadians moving to the US in search of better-paying positions.23 The net flows of high earners emigrating to the United States were never very large, but one way of reconciling the widespread concern about the brain drain with emigration data may simply be that many Canadian employers were persuaded to at least partly match those US salaries in order to retain highly skilled workers. This would also explain why the Canadian and US surges in top-end income concentration occurred around the same time. This theory would also predict that the appreciation of the Canadian dollar during the 2000s would weaken the value of the outside US option, and indeed, the Canadian trend to increasing top-end income concentration began to reverse itself when the Canadian dollar value of US top-end salaries began to decline (Figure 7.2). To the extent that these data illustrate the ability of highly skilled Canadian workers to demand and receive higher salaries as the gap between Canadian and US top-end salaries diverges, they suggest that there may also be a divergence between the statutory and economic incidences of an increase in the marginal personal income tax rate. If an increase in Canadian tax rates reduces top earners’ after-tax incomes, they would be in a position to use their bargaining power to obtain an increase in their pre-tax incomes in order to maintain their after-tax incomes. If so, then the economic incidence of the increased tax will not fall on high earners. 4.2 Efficiency and High Incomes The efficiency debate underlying the debate on top-end income concentration revolves around the question of to what extent these high salaries consist of economic rents. In an efficient market allocation, the factors of production receive the minimal payment necessary to retain their services. Remunerations above this minimum are termed “economic rents” and are symptoms of inefficiencies: the excess payments could be put to better use elsewhere.

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1600

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Figure 7.2  US top incomes and Canadian top income shares

Although there are as yet no definitive explanations for the increase in top-end income concentration, the timing in the United States suggests a plausible cause. The beginning of the surge in the 1980s coincided with the reductions of the top marginal personal income tax from 70 per cent in 1981 to 28 per cent in 1988. While the effect of these cuts on after-tax incomes is obvious, it is less clear how lower tax rates would increase pre-tax incomes. One framework24 characterizes the determination of executive salaries as a game in which owners and executives of a corporation bargain over the distribution of net revenues. For executives, lower tax rates offer a greater incentive to negotiate harder for higher pay. The extra pay is not required to retain the services of the executives: their salary increases are rents, and reflect an efficiency loss to the economy. Since tax reductions are the cause of these greater inefficiencies, the policy remedy is simply to restore top marginal personal income-tax rates to their previous levels. This narrative does not translate well to the Canadian context. Firstly, the Canadian surge in the 1980s was not accompanied by reductions in the top marginal personal income-tax rate. Secondly, the sharp reduction in the Canadian top rate in the early 1970s was not accompanied by an increase in top-end income concentration. Moreover, if employers are offering higher salaries to highly skilled Canadians in order to retain their services, then these pay increases are not economic rents. Unlike in the United States, higher top marginal personal income-tax rates in Canada are difficult to motivate on efficiency grounds.

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4.3 Top Marginal Personal Income-Tax Rates and Revenues As was the case with the corporate income tax, a static analysis – that is, an analysis that doesn’t take into account behavioural responses – would involve multiplying the tax base by the incremental increase in the tax rate. Again, as was the case with the C I T , a dynamic analysis that incorporates behavioural responses suggests that the potential revenues that could be generated by an increase in the Canadian top marginal personal income-tax rate are modest. The parameter at the heart of a dynamic analysis of the revenues produced by higher tax rates is again the elasticity of taxable income, denoted by e and obtained from the following expression: log(tax base) = e ∙ log(1 – tax rate) + controls A positive value of e implies that higher tax rates will reduce the tax base. The three main channels are a reduction in the number of workers (for example, a “brain drain” to another jurisdiction), a reduction in the number of hours worked, and the more aggressive use of taxplanning strategies. Research attention has mainly focused on the latter mechanism.25 Available evidence suggests that Canadian high earners are more likely to make use of tax avoidance26 strategies than are their US counterparts. The mid-point for the range of US estimates is roughly e = 0.25,27 while Canadian estimates range between 0.5 and 0.7, with some estimates going as high as 3.28 Another key piece of information is the shape of the income distribution in its upper tail. Top-end incomes are well-approximated by a power law, and by a Pareto distribution in particular. The Pareto distribution is defined by a lower bound and a parameter a, which can be obtained according to a=

Mean Mean – Lower Bound

Lower values of a are consistent with distributions that are more concentrated at the top. When this formula is applied to US topincome data, one obtains values of roughly 1.5,29 while Canadian data yield estimates between 1.7 and 2.0.30

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If top-end incomes can be well approximated by a Pareto distribution with parameter a, and if the elasticity of taxable income is e, then it can be shown31 that the tax rate τ* that maximizes revenue is τ* =

1 1 + ae

Applying estimates from US data – that is, a = 1.5 and e = 0.25 – yields τ* = 0.73, which is the basis for Diamond and Saez’s (2015) wellknown recommendation for sharply higher US personal income taxes for those with high incomes. However, when this formula is applied to estimates based on Canadian data – that is, a between 1.7 and 2.0 and e between 0.5 and 0.7 – one obtains values for τ* between 0.42 and 0.53. Since this interval also corresponds to the existing range of combined federal/provincial top marginal personal income-tax rates, higher Canadian top rates are unlikely to result in higher revenues, and significant tax increases run the risk of moving the rate into the region where revenues are actually reduced. 4.4 Personal Income Taxes on High Earners: A Summary The case for higher top rates in the United States can be stated with a certain level of confidence: higher rates would increase equity and economic efficiency, and are potentially an important source of revenues. None of these arguments can be advanced with equal confidence in Canada. If the driving force behind high incomes in Canada is the surge in top-end incomes in the United States, then the economic burden of higher tax rates may simply be passed on further down in the income distribution, and potentially increase income inequality. As has just been noted, the available evidence suggests that such a measure is unlikely to generate significant new revenues. In his testimony to the House of Commons Standing Committee on Finance, Professor Veall suggested a different set of priorities for using tax policy to reduce top-end income concentration: “I do not believe we currently have the evidence to be sure that an increase in marginal tax rates at the top will raise much tax revenue. Perhaps a better, immediate approach is to eliminate those tax expenditures that both distort productive activity and benefit the affluent.”32 The recent tightening of the tax treatment of Canadian-Controlled Private Corporations in order to make it more difficult to use them as tax shelters is an example of this sort of tax agenda.

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5 transfers and the limits o f p r o g r e s s i v e ta x at i o n

The presumed goal of increasing corporate income taxes and/or the top marginal personal income tax rate is to make the tax structure more progressive so that the distribution of disposable income is less unequal. However, a progressive tax structure is not a sufficient condition for a robust redistribution of income, and it may not even be necessary. While it is widely recognized that the United States redistributes income to a lesser degree than almost all of the other industrialized economies, it is less well known than the US also has the most progressive tax structure in the O E C D .33 The explanation for this apparent paradox is twofold: 1 The United States makes much less use of regressive tax instruments such as value-added taxes and payroll taxes than do other countries, and 2 The United States has a much less generous structure of transfers to low-income households. Direct cash transfers have attractive efficiency properties. If the First Welfare Theorem is less than helpful for bringing about equitable outcomes, the Second Welfare Theorem is more promising: it states that any Pareto-efficient outcome – including one considered to be equitable – can be brought about by means of an appropriate set of cash transfers. Once the transfers have been made, market forces will produce an outcome that is both efficient and equitable. Kenworthy notes that in countries that are most successful in reducing income inequality, “[r]edistribution … is accomplished mainly, and in some countries entirely, via government transfers.”34 The main role of tax policy in a progressive tax-and-transfer system is not to reduce inequality, but to generate large revenues than can in turn be used to finance generous transfers to low-income households. Countries that have successfully adopted this strategy – in particular, the Nordic countries of Denmark, Norway, Sweden, and Finland – have also taken care to minimize the economic costs of bearing large tax burdens by making use of tax instruments that produce the lowest efficiency losses; equity considerations are secondary.35 For example, it is well known that consumption taxes such as the GST are relatively more efficient than income taxes and that they are strongly regressive.

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Focusing on equity issues would lead to recommend against valueadded taxes, and indeed the lack of a VAT is an important reason why the tax structure in the US is relatively more progressive. Nevertheless, focusing on efficiency issues in taxation has led policymakers in the Nordic countries to adopt VAT rates of 24 and 25 per cent. (Quebec’s combined GST /QST rate is currently 14.975 per cent.) Using one instrument – taxes – to achieve the twin policy goals of equity and efficiency is a difficult task: it may even be impossible. A more promising progressive agenda would be to focus on efficiency issues in taxation, with the goal of generating the most revenues at the least economic cost, and to achieve equity objectives by means of cash transfers.

notes

  1 A Gini coefficient of zero implies perfect equality, with incomes equally distributed across the population. A Gini coefficient of 1 is consistent with one person receiving all the income.   2 Statistics Canada vector v96439636.   3 Peter Gottschalk and Timothy M. Smeeding, “Empirical Evidence on Income Inequality in Industrialized Countries,” Handbook of Income Distribution, 1st ed. Vol 1, ed. A.B. Atkinson and F. Bourguignon (Holland: Elsevier, 2000): 261–307.   4 Emmanuel Saez and Michael R. Veall, “The Evolution of High Incomes in North America: Lessons from Canadian Evidence,” American Economic Review 95, 3 (2005): 831–49; Michael R. Veall, “Top Income Shares in Canada: Recent Trends and Policy Implications,” Canadian Journal of Economics 45, 4 (2012): 1247–72.   5 Anthony B. Atkinson and Andrew Leigh, “The Distribution of Top Incomes in Five Anglo-Saxon Countries over the Long Run,’” Economic Record 89, S1 (2013): 31–47.   6 After the economist Arthur Pigou.   7 That is to say, if the costs and benefits of production are entirely borne by the producer and the consumer, and do not affect people not directly involved in the exchange.   8 Amartya Sen, Collective Choice and Social Welfare (San Francisco: Holden-Day, 1970).   9 More formally, the economic incidence of a tax depends on the relative sizes of the elasticities of supply and demand. If supply is relatively more

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elastic than demand, most of the economic incidence is borne by the purchaser. If demand is relatively more elastic than supply, then the economic incidence falls mainly on the seller. 10 Legal personhood endows corporations with certain rights and obligations, such as entering into binding contracts. 11 That is to say, the supply of capital is perfectly inelastic; this is the assumption made by Arnold C. Harberger, “The Incidence of the Corporation Income Tax,” Journal of Political Economy 70, 3 (1962): 215–40. 12 Depreciating capital must be replaced by new investment. Even if the ­initial capital stock was in fixed supply, investors can adjust their capital holdings by choosing the appropriate level of investment. 13 Robert Carroll, “The Corporate Income Tax and Workers’ Wages: New Evidence from the 50 States,” Tax Foundation Special Report No. 169 (2009). Kenneth J. McKenzie and Ergete Ferede, “The Incidence of the Corporate Income Tax on Wages: Evidence from Canadian Provinces,” S P P Technical Paper, School of Public Policy, 10, 7 (2017). 14 See, for example, Céline Alzémar and R. Glenn Hubbard, “Country Characteristics and the Incidence of Capital Income Taxation on Wages: An Empirical Assessment,” Canadian Journal of Economics 48, 5 (2015): 1762–802 and the references therein. 15 Kimberly A. Clausing, “Who Pays the Corporate Tax in a Global Economy?” National Tax Journal 66, 1 (2013): 151–84. 16 See Jens Arnold, “Do Tax Structures Affect Aggregate Economic Growth? Empirical Evidence from a Panel of OEC D Countries,” OEC D Economics Department WP 643 (2008) and Åsa Johannson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, “Tax and Economic Growth,” OEC D Economics Department WP 620 (2008), for rankings from a panel of O E C D countries; Bev Dahlby and Ergete Ferede find the same ranking in Canadian provincial data: “The Effects of Tax Rate Changes on Tax Bases and the Marginal Cost of Public Funds for Canadian Provincial Governments,” International Tax and Public Finance 19, 6 (2012): 844–83. 17 Bev Dahlby and Ergete Ferede, “What Does It Cost Society to Raise a Dollar of Revenue?” C.D. Howe Institute Commentary (2011). 18 The source for all statistics referred to in this section is the OEC D. 19 Profit-shifting is an important policy issue in itself, and is beyond the scope of the current survey. Comprehensive approaches require collective action on the part of all jurisdictions. In the absence of collective action, any one country must take the phenomenon as given.

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20 It is perhaps worth noting as well that the countries with the largest total tax takes and that are most effective in reducing income inequality do so without high corporate income tax rates. For example, the C IT rates in Denmark, Norway, Sweden, and Finland are all lower than in Canada. 21 Saez and Veall, “Evolution of High Incomes,” Statistics Canada series v62791043. 22 More formally, the supply of highly skilled workers is relatively more ­elastic than the demand in the first case, and demand is more elastic than supply in the second case. 23 Stephen Gordon, “The Incidence of Income Taxes on High Earners in Canada,” Canadian Journal of Economics 53 (2020). 24 Thomas Piketty, Emmanuel Saez, and Stefanie Stanycheva, “Optimal Taxation of Top Labor Income: A Tale of Three Elasticities,” American Economic Journal: Economic Policy 6, 1 (2014): 230–71. 25 Lars Osberg, “How Much Income Tax Could Canada’s Top 1% Pay?” Canadian Centre for Policy Alternatives (October 2015). 26 It is important here to make the distinction between tax avoidance (which is legal) and tax evasion (which is not). 27 Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” Journal of Economic Perspectives 25, 4 (2011): 165–90. 28 Veall, “Top Income Shares in Canada.” 29 This is the value used by Diamond and Saez, “The Case for a Progressive Tax.” 30 Veall, “Top Income Shares in Canada.” 31 Diamond and Saez, “The Case for a Progressive Tax.” 32 Canada, Parliament. House of Commons. Standing Committee on Finance. Evidence. Meeting 117, 13 April 2013. 41st Parliament, 1st Session. Available: http://openparliament.ca/committees/finance/41-1/117/ dr-michael-r-veall-1/. 33 Monica Prasad and Yingying Deng, “Taxation and the Worlds of Welfare,” Socio-Economic Review 7, 3 (2009): 431–57. 34 Lane Kenworthy, “The High-Employment Route to Low Inequality,” Challenge 52, 5 (2009): 77–99. 35 Peter H. Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge: Cambridge University Press, 2009).

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8 Who Pays for Municipal Governments? Pursuing the User Pay Model Lindsay M. Tedds

Canadian municipalities are important drivers of productivity, innovation, and economic growth. To achieve their full economic potential, they need to be able to deliver a wide range of public services. This includes both “hard” services such as water, sewers, and roads, but also “soft” services such as cultural facilities, parks, and libraries. These are the services that will not only meet the social needs and expectations of constituents but are also required to attract high quality businesses and skilled workers and address the challenges that result from a growing and highly diverse population. Despite the importance of municipal public services, discussions about how to fund municipalities are rarely had outside of small – and let’s be honest, a little nerdy – niche circles. This is despite several facts. First, the first fifty years of Canada’s taxation history (1867–1917) were predominantly focused on local finance,1 and not federal and provincial taxes, because the only visible tax Canadians encountered was the property tax2 and it was municipal governments that interacted most directly with citizens. Second, there are more local governments, currently numbering 5,200,3 than any other level of government in Canada. Third, municipal governments account for more than 13% of total government revenue in Canada.4 And fourth, municipal governments continue to be directly responsible for many of the services that are necessary for the daily lives of Canadians. Naheed Nenshi, the mayor of the city of Calgary, famously made this point by stating: “If the federal government disappeared tomorrow it would probably take Canadians a few weeks to notice ... and perhaps a few hours, or even days, in the case of a provincial government. If your municipal

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government disappeared, well, you’d have no roads, you’d have no transit, you’d have no parks, you’d have no police, you’d have no firefighters, you’d have no clean water. You’d notice pretty quickly. We provide the services that keep people healthy and safe and happy every hour of every day of their life.”5 These services that municipalities provide that keep people healthy and safe and happy include roads and transit infrastructure, police and fire services, water distribution, garbage and recycling, land development, recreational facilities, libraries, street lights, and snow clearing, to name just a few. It is undeniable that the goods, services, and privileges that municipalities provide are vital for Canadians’ well-being and that municipalities are facing increasing pressure to provide more infrastructure and services to more Canadians at a higher level of service. In order to provide this infrastructure and these services, however, municipalities have to find a way to pay for them. How do cities raise enough revenue to deliver high-quality public services that will attract and retain businesses and residents in a way that does not undermine their competitive advantage and that is fair, accountable, equitable, and within their authorities? The answer to this question is “wherever possible, charge.” That is, where possible, the direct users should pay the cost of providing municipal services. The rest of this chapter will outline the two main funding choices for Canadian municipalities, property taxes and user levies. It will explore the nature of these revenue instruments, the adoption of these instruments by municipalities in Canada, and what might be driving the municipalities’ decisions in using them. Finally, the chapter will explore which revenue tool is preferred and why, using the principles of tax fairness, tax accountability, and tax equality. In essence, this chapter suggests that the process of picking the right revenue tool should be guided by the principle of establishing a strong link between expenditures and revenues, leading to a preference for user levies. m u n i c i pa l a u t h o r i t i e s a n d f u n d i n g c h o i c e s

It is first important to consider what choices Canadian municipalities have amongst revenue instruments. Municipalities in Canada are known as “creatures of the province.” This means they are only allowed to exercise the powers that are delegated to them by provincial governments, who have final jurisdiction. This has meant that Canadian municipalities are constitutionally restricted by the provinces to limited revenue sources. While there is some variation across the provinces,

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municipal own-source revenues6 are typically limited to property taxes and user levies, and this limitation has remained virtually frozen since it was established more than 150 years ago. defining funding choices

Since the choices for municipalities for own-source revenues are between property taxes and user levies, we need first to ask: What are taxes? What are user levies? How are user levies different from taxes? What are the various user levies available to municipalities in Canada? How can user levies be differentiated? To what activities do these levies apply? The information presented below is a synthesis of work done by Lindsay M. Tedds, Catherine Althaus, Allen McAvoy, and Kelly Farish,7 whereas proprietary charges have yet to be well detailed in the literature. Taxes vs User Levies The key distinction between a tax, such as a property tax, and a user levy is that the former is a payment for the purpose of raising revenue with no connection to the activity being taxed, whereas the latter is a payment connected to the activity being charged. Notably, tax revenues can be used to fund any government activity and the size of the tax is unrelated to the cost of providing the resulting goods or services, whereas user levies are constrained in this area. For example, revenue from property taxes, which are imposed on the market value of real property,8 can be used to fund police services, public walkways, beautification efforts, streetlights, and so forth. Importantly, an individual need not pay taxes in order to benefit from the provision of the goods and services funded through taxes. That is, they cannot be excluded from the benefits. Tax revenues may be earmarked for specific purposes, for example the revenues from a property tax may be earmarked for the purposes of providing municipal infrastructure to benefiting properties, but that earmarking is a political choice rather than a legal constitutional requirement. User Levies A user levy is a charge to ensure that those that directly benefit from a service pay for it. Charging users directly ensures that the goods or services are consumed by those who value them most; the government

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thereby obtains direct feedback as to whether citizens really desire the provision of a good or service at the cost incurred. User levies are directly comparable to the price charged for a good that is available in the marketplace. In Canada, there are three main types of legally recognized revenue instruments that are most in line with the user charge model: user fees, regulatory charges, and proprietary charges (referred to collectively as user levies). These three user levies are available to be used by all levels of government in Canada, including municipalities, having been generally devolved by all the provinces. user fees

A user fee is a charge for a publicly provided good or service, the revenues for which must be solely used to fund the provision of that good or service. The fee charged is dictated by the cost of providing the good or service. Further, payment of the fee is a necessary condition for consuming the good or service. User fees, therefore, are valuable tools for offsetting the operating costs of municipal services. There are many examples of user fees, particularly at the municipal level, such as public transit fares, recreation fees, and garbage collection fees. These conditions have several implications for the design, implementation, and use of user fees in Canada. First, user fees are a costrecovery revenue tool. This means that the fees must be used to recoup actual costs incurred, the revenues from user fees must be solely used to offset the costs of providing the good or service, and there must be a tight link between the activity being charged for and the activities funded by the user fee revenue. That is, there is a need to track the money collected as well as how that money is spent. Second, the user fee must be designed to not intentionally generate a surplus of revenues. Ongoing surpluses are a clear indication that the fee charged exceeds the costs incurred, violating the cost-recovery nature of the revenue tool. There is, however, no requirement for the revenue from the user fee to fully offset costs, but any shortfall in revenues must be made up from revenues from taxes. Third, the fee charged must be reasonably connected to the costs incurred by providing the good or service to that user. Notably, if the costs of providing the service are fixed, so that it costs the same amount to provide each unit or it costs the same amount to provide the service to every user, the fee charged cannot vary by unit or user. Unlike taxes, the legal constraints

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associated with user fees make their employment as a general revenue tool or to cross-subsidize publicly provided goods and services very problematic. Such uses would not withstand a court challenge. r e g u l at o r y c h a r g e s

While a user fee is a charge related to a publicly provided good or service, a regulatory charge is a charge related to a right or privilege granted by a government. Regulatory charges are a broad category and include such levies as development charges, local improvement charges, removal and dumping charges (e.g. sand, gravel, water, landfill, electronics, and beverage containers), fines, inspections, environmental protection, and licences (e.g. liquor, animal, and business). There are four key components to a regulatory charge: (1) a specific regulatory purpose: (2) a detailed code of regulation; (3) the actual costs incurred; and, (4) a relationship between the regulation and the person being regulated.9 Under a regulatory charge, the revenues must be used to recover the costs of the regulatory scheme, in whole or in part. That is, much like a user fee, a regulatory charge is a cost-recovery tool and the conditions described above that a user levy must meet must also be met by a regulatory charge.10 This means that for Canadian municipalities, regulatory charges and user fees differ only in purpose. Both are cost-recovery tools: a user fee is a charge for a good or service (e.g. taking municipal transit, accessing a municipal recreation centre, or taking a load of waste to a municipal landfill), whereas a regulatory charge is for a right or privilege (e.g. serving liquor, owning a dog or cat, or disposing of specific products). p r o p r i e ta r y c h a r g e s

In addition to user fees and regulatory charges, a government may invoke charges that are the “exercise of proprietary rights over its public property.”11 There are two uses for proprietary charges: first, selling directly or granting permits, leases, licences, rents, or royalties that permit private firms to extract publicly owned natural resources;12 and second, selling goods and services that are supplied by a government “in a commercial way.”13 Under the constitution, governments own the natural resources within their boundaries, and they often sell the rights to those resources in exchange for payment of a resource royalty. Resource royalties and similar regimes fit the

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definition of a proprietary charge, meeting the first use listed above. However, such examples do not fall under municipal governments’ purview, since municipal governments are not devolved ownership of natural resources. The second use of proprietary charges appears very similar to user fees, with the key qualifier being how goods and services are supplied by the government in question, specifically in a commercial way. For a proprietary charge to apply as opposed to a user fee, the government must be acting like a private proprietor (a business). Here, the charge may be determined by market forces and the government is free to generate both a profit and flexible general revenues (as opposed to earmarked revenues) from the imposition of the charge. That is, unlike user fees and regulatory charges, revenues from proprietary charges are not required to be used solely for cost recovery. Examples of proprietary charges include the mark-up (i.e. profit) applied to alcohol that is owned and sold by a government commercial supplies (e.g. the L C B O in Ontario),14 stumpage levies to harvest timber from public land, and payments made to the government related to a rental (e.g. the rental payment applied for publicly provided housing) or leasing of government-owned land or property (e.g. the lease payment for a daycare to operate out of a school).15 In addition, governments can elect to provide core services, like water, electricity, and natural gas, through proprietary structures like wholly owned subsidiaries, in which case they issue proprietary charges for these utilities (as opposed to user fees). There are, therefore, two main ways that we see proprietary charges employed by municipalities in Canada. First, through core services supplied in a commercial way. An example would be the City of Calgary commercial structure Enmax (a municipal Crown corporation), which provides water, electricity, and natural gas to city residents in a commercial way. In this case, charges for water, electricity, and natural gas are proprietary charges and not user fees. In comparison, in the Greater Victoria Regional District, the regional district itself (a form of local government) provides the residents with water services. Since the regional district is not operating in a commercial way, the fees it charges for water services are user fees. The other way municipalities can charge proprietary charges is through franchise or access agreements, which is when the municipality negotiates individual agreements with private companies that set conditions regarding the use of municipal rights-of-way on municipal property (e.g. roads, laneways,

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or parks). The franchise agreement can establish a fair market rate for access to the publicly owned right-of-way as permitted under a proprietary charge. Such agreements are common between municipalities and linear property owners, rail property owners, cable property owners, and the like. a d o p t i o n o f m u n i c i pa l r e v e n u e instruments in canada

If the choice, then, is between user levies and property taxes, what has been the take-up of these revenue instruments by municipalities in Canada? Figure 8.1 presents the share of own-source revenues raised by taxes, user levies, and other revenue sources by the various levels of government in Canada for the year 1998 and 2016. Figure 8.1 shows that while all three levels of government rely on a mix of taxes and user levies, municipalities have been increasing their reliance on user levies and decreasing their reliance on taxes since 1998, the earliest year the data were available. Municipalities used to raise 21.9% of their revenues from user levies but this had increased more than 70% to 37.1% in 2016. According to Tindal et al.,16 the reliance on user levies by municipal governments has increased five-fold from 6.5% in 1965 to 37.1% in 2016. Figure 8.2 shows the share of own-source revenue raised by taxes, user levies, and other revenues by municipalities across each of the Canadian provinces for the year 2016. The share of own-source revenues raised by user levies varies from a low of 26% in Quebec to a high of 57.8% in Saskatchewan. It is interesting to note that municipalities in the four western provinces show the highest reliance on user levies, averaging 47.1%, while municipalities in the eastern provinces show a lower reliance. In fact, there does appear to be a high degree of correlation between the reliance on user levies at the provincial level and the municipal level in the provinces. Regardless, the municipalities in all the provinces all show a higher reliance on user levies than their provincial and federal counterparts. What the data show is that municipalities are relying more and more on user levies to fund their priorities. This move towards greater reliance on user levies has long been predicted, and is a more useful funding model for municipal governments for several reasons. First, property taxes, long considered the mainstay public finance tool for municipalities, are increasingly becoming politically unfavourable

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1998 2016

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Figure 8.1  Share of own-source revenue raised by source and level of government, 1998 vs 2016 Source: Statistics Canada Table 385-0002 for 1998 and Tables 385-0033, 385-0034, and 385-0037 for 2016. Classification of revenues by categories done by author.

because of the perception that municipal governments determine how much they are going to spend and then determine the property tax rates necessary to pay for that spending with little consideration to the affordability of the tax increase or accountability for the tax increase. User levies, on the other hand, have a large degree of accountability associated with them. This is because, as noted previously, only those that directly benefit from a service pay for it. From

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1,2%

0,0%

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27,3%

28,1%

26,0%

37,7%

44,6%

57,8%

40,8%

45,1%

63,8%

59,8%

72,3%

71,0%

72,5%

59,4%

53,2%

38,9%

55,7%

51,0%

nl

p ei

ns

nb

qc

Ont

Man

Sask

Alta

bc

0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 Taxes

User Levies

Other Revenues

Figure 8.2  Share of own-source revenues by municipal governments by province, 2016 Source: Statistics Canada Table 385-0037. Classifications of revenue by category done by author.

an accountability perspective it is, therefore, heartening to see an increase in user levies by Canadian municipalities. Second, municipalities that are home to federal or provincial properties (including universities) and other tax-exempt assets like churches have to provide goods, services, and privileges for those properties and their associated workers and constituents, yet are not able to collect property taxes. While historically, payments-in-lieuof-taxes (also known as grants-in-lieu) from these high order levels of government to affected municipalities are supposed to compensate municipalities for the forgone property-tax revenues, such payments have been declining,17 eliminated,18 or disputed19 in recent years. As a result, many municipalities are moving to user levies to ensure that these tax-exempt entities contribute to those municipal goods, services, and privileges which they consume and rely on. Finally, as noted in this introduction, municipalities, especially when compared to provincial and federal governments, are increasingly likely to be delivering goods and services where the direct beneficiary,

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the user, is well defined and it is a simple process to extract payment from the user. In fact, these two criteria – an easily identifiable beneficiary from whom payment can be extracted (or, more importantly, who can be excluded from benefiting if they do not pay for the good, service, or privilege) – are essential characteristics for determining if a user levy is an appropriate policy instrument. Public transit is an example of a service that meets these criteria. When there is a tokencollection system, non-payers are generally excluded from using public transit. The same is true for recreation facilities, municipal water, and refuse collection. On the other hand, other municipal services, such as police and fire services, are not as amenable to user levies, as this link is lost. Those that do not pay for the police or fire services cannot be excluded from the benefits of a secure community or fire safety. This means that municipalities cannot be fully funded through user levies, as demonstrated in Figure 8.1, and that there is a balance that must be struck between taxes and user levies. This leads to an important question: How should a municipality determine the appropriate balance between property taxes and user levies? p r o p e rt y ta x e s o r u s e r l e v i e s : which is preferred?

The municipal funding decision, in essence, boils down to who should bear the burden for the costs of a city’s goods, services, and privileges. Should it be users, through some form of user levy, or local taxpayers, through property taxes? Public finance experts generally agree that governments should prefer to use revenue instruments that minimize distortions (in the language of economists, revenue tools that are “efficient”) and maximize fairness. In accordance with this principle, many argue that the best way to design a municipal revenue system is to provide the goods, services, and as we learned above, even rights, that residents desire and then put in place the funding system that matches those desires.20 The way to do this, to link expenditures to revenues, is to ensure that the costs of providing a good or service are borne as directly as possible by those benefiting from them. This leads to the argument that a government’s approach should generally be “wherever possible, charge!” That is, where possible, the direct users, the beneficiaries, of the goods, services, and privileges should pay the price of providing those same goods, services, and privileges. Charging beneficiaries directly ensures that the goods,

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services, and privileges are consumed by those who value them most; simultaneously, the government obtains feedback as to whether citizens really desire the provision of those goods, services, and privileges at the cost incurred. This is what economists call an “efficient” outcome. Efficiency is achieved when goods and services are produced at the lowest possible cost to the producer and the quantities that are provided are of the greatest possible benefit to the consumer. That is, efficiency is supported when goods and services are consumed by those who value them the most, and those consumers demonstrate that value through a willingness to pay for them. When goods and services are instead funded through property taxes, the implicit price of using a particular good, service, or privilege is zero. When something is free, people tend to use more than they would otherwise, thereby imposing higher costs on everything through increased property taxes. Consider, for example, if a user has to pay $5.00 for each bag of garbage they set out for pick-up and disposal. This pricing scheme incentivizes the user to reduce waste production. When garbage collection is, instead, funded through property taxes, there is no similar incentivizing effect. Taxpayers can readily set out as many bags of garbage as they want without incurring additional costs. There are a few additional things to consider. This efficient outcome, the best use of available resources, also leads to an equitable outcome, a fair outcome as defined by the benefits-received principle: you pay for what you get. Municipalities, especially when compared to provincial and federal governments, are increasingly likely to be involved in the provision of goods, services, or rights where the direct beneficiary is well defined, such as public transit and community pools. However, while user levies are equitable according to benefit-based principles, they may not be equitable with relation to individuals’ ability to pay. With user levies, all consumers pay for the cost of the good or service regardless of their income, a key measure for ability to pay. In terms of the “ability to pay” principle, the most frequent, and likely the strongest argument against user levies, is that they are considered to be a regressive revenue instrument. This means that the cost of user levies is a heavier burden on lower income individuals. The literature, however, is not conclusive regarding the regressive nature of user levies. In fact, the evidence suggests three main arguments against user levies’ regressivity. First, upper-income households benefit disproportionately from free public services. For example, upper-income households are more likely to live in large homes and

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consume more than their share of sewage, water, and refuse collection than lower-income households when these services are funded through property taxes and not user levies. Second, user levies allow lowincome consumers to adjust their consumption to lower levels, thereby paying less than they would under a property tax system. Third, any regressive or disproportionate effects can be minimized or even reversed with careful design, revenue uses, and compensation mechanisms, particularly discounts and exemptions for readily identifiable groups. If the public places a high value on the provision of the good or service and its broad accessibility, the imposition of a user levy may not be appropriate unless access to the good or service by lowincome individuals can be accommodated through such tools as discounts. Most economists take the position that good user levy design dictates that equity concerns based on ability to pay should not be taken into account initially but rather through discounts after the regime is designed. Property taxes may also be said to suffer from regressivity. Property taxes are tied to the assessed value of a property, which is only loosely tied to the income of the property-owner. This incongruence has led to property tax circuit-breaker programs that provide property tax relief to low-income residents and cancellations of planned propertytax increases. Suffice to say, while user levies dominate on efficiency concerns, both instruments arouse concerns regarding on the “ability to pay” side of things, but user levies at least gain some credibility on the “benefits-received” measure of equity. User levies also have built-in visibility and accountability that taxes do not. This is because with user levies, consumers are more aware of how much they are paying for a specific good or service compared to when they are paying taxes. Also users recognize the benefits they receive from paying the user levies, which is more difficult with property taxes. As user levies are applied to a specific good or service, it is easier for the consumer paying to know what benefit was received and how much it cost. With property taxes the link is much more tenuous. Property taxes are collected and applied to a broad range of goods and services, making it difficult for the consumer to know what benefits they are paying for and receiving. Finally, property taxes mean that only residents within the boundaries of the municipality pay for the goods, services, and privileges provided by the municipality. User levies, on the other hand, have to be paid by all users, regardless of their residency. Municipalities

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provide many goods, services, and privileges that can be enjoyed by non-residents, including public transit, libraries, recreation facilities, and the like, and user levies ensure that non-resident beneficiaries pay the cost of providing them. With aspects of efficiency, equity, and accountability settled in favour of user levies, possibly the most important issue to tackle is the overlapping nature of these user levies. What is a service? What is a right or privilege? What is a commercial purpose? When do you favour a user fee over a regulatory charge or a proprietary charge? A parking levy, for example, can be all of these things: street parking can be a service, parking on your driveway can be a right, but parking can also be provided on a commercial basis via parking lots and garages. Again, a municipality can deliver the same services either though user fees, regulatory charges, or proprietary charges, the latter applicable if the municipality creates a commercial entity with which to administer the charge. While the lines can be and often are blurred between these three types of user levies, the limitations placed on these charges means that a municipality simply needs to be clear about the intention of the levy, the objectives of the levy, and the legislative mandate of the body collecting the levy. Regardless of their form, all user levies are still direct charges to the direct beneficiaries. conclusion

Municipal governments deliver vital goods, services, and privileges to Canadian citizens on a daily basis, yet how they fund these goods, services, and privileges receives little attention in debates on taxation. While municipal governments rely on property taxes, user levies are becoming an increasingly important portion of their revenues. User levies are efficient, equitable from a benefits-received principle, and accountable. They can ensure that non-resident beneficiaries pay for the goods, services, and privileges they enjoy. Given the strengths of user levies to fund Canadian cities, it is worth considering new ways in which user levies can be deployed by municipalities. It may be that the best time to convince users that they should pay for the services they consume is when the initial investment needs to be made, or when something increases the importance of increased investment in or highlights the pressure on existing infrastructure. Such novel uses for user levies include storm water levies and electric vehicle levies, both increasingly important in a time of climate change.

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  1 E.A. Heaman, Tax, Order, and Good Government: A New Political History of Canada, 1867–1917 (Montreal and Kingston: McGill-Queen’s University Press, 2017).   2 The first income tax was not introduced until September 1917, more than 100 years ago.   3 Statistics Canada, Census in Brief: Municipalities in Canada with the Largest and Fastest-growing Population between 2011 and 2016 (Ottawa: Statistics Canada Catalogue no. 98–200X2016001 7 March 2017): http:// www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016001/ 98-200-x2016001-eng.cfm (accessed 14 June 2018).   4 Statistics Canada, Table 10-10-0020-01 Canadian Government Finance Statistics for Municipalities and Other Local Public Administrations (x 1,000,000) (Ottawa: Statistics Canada, June 2018): https://www150. statcan.gc.ca/t1/tbl1/en/tv.action?pid=1010002001 (accessed 14 June 2018).   5 Gordon Omand, “Big-City Mayors See Themselves at Heart of Issues Closest to People,” CTV News, 21 April 2016.   6 Own-source revenues are revenues that are raised directly by governments. For Canadian municipal governments, this excludes intergovernmental transfers (grants) and borrowing. While historically both intergovernmental grants and borrowing were important sources of funding for municipal governments in Canada, that is no longer the case due to both federal and provincial governments retreating from intergovernmental grants and provincial governments imposing significant borrowing limits on municipalities.   7 Catherine Althaus, Lindsay M. Tedds, and Allen McAvoy, “The Feasibility of Implementing a Congestion Charge on the Halifax Peninsula: Filling the ‘Missing Link’ of Implementation,” Canadian Public Policy 37, 4 (2011): 541–61; Kelly Farish and Lindsay M. Tedds, “User Levy Design by Canadian Municipalities: Considerations Arising from Case Law,” Canadian Tax Journal 62, 3 (2014); Catherine Althaus and Lindsay M. Tedds, User Levies in Canada: A Municipal Design and Implementation Guide (Toronto: Canadian Tax Foundation, 2016); Lindsay M. Tedds, “Municipal User Levies in Western Canada,” in Financing Municipal Infrastructure: Who Should Pay? ed. Enid Slack and Richard Bird (Montreal and Kingston: McGill-Queen’s University Press, 2017); Lindsay M. Tedds, “Non-Tax Revenue for Funding Municipal Governments: User Levies – Adoption, Constraints, and Emerging Opportunities,” in Funding

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the Canadian City, ed. Enid Slack, Lisa Philipps, Lindsay M. Tedds, and Heather L. Evans (Toronto: Canadian Tax Foundation, 2019).   8 To calculate the property tax, the assessed value of the property is multiplied by the mill rate which is then divided by 1,000. For example, a ­property with an assessed value of $100,000 located in a municipality with a mill rate of 5 mills would have a property tax bill of $500.   9 Farish and Tedds, “User Levy Design,” 658; Althaus and Tedds, User Levies in Canada, 53. 10 There is a second permitted use of a regulatory charge: one where the size of the charge levied on persons is set to proscribe, prohibit, or encourage a specific behaviour. If the purpose of the regulatory charge is to change behaviour, then a surplus of revenues may be a permitted outcome. However, the presence of a behavioural modification aspect has been found by the courts to mean the regulatory charge meets the criteria of an indirect tax. The authority to charge indirect taxes, however, is not ­delegated to the provinces and, therefore, cannot be delegated to municipalities. Therefore, a regulatory charge enacted by a municipality must still meet the definition of a direct tax, which, according the courts, means that the objective of behavioural modification as a principal objective of a regulatory charge may not be available to Canadian municipalities, or provinces for that matter. 11 Peter W. Hogg, Constitutional Law of Canada, 5th ed. (Toronto: Carswell, 2014). 12 In comparison, a levy on the extraction and production of privately owned resources would be a tax. 13 Hogg, Constitutional Law, 31.10. 14 Toronto Distillery Co. v. Ontario (Alcohol and Gaming Commission), 2016 O N CA 960 (CanLI I ). 15 Quebec (Attorney General) c. Algonquin Développements Côte-SteCatherine inc. (Développements Hydroméga inc.), 2011 QC C A 1942. 16 C. Richard Tindal, Susan Nobes Tindal, Kennedy Stewart, and Patrick J. Smith, Local Government in Canada, 8th ed. (Toronto: Nelson Education, 2012), 262. 17 For example, in British Columbia, the pool of funds set aside for payments-in-lieu of taxes has not increased since its inception. As a result, the payments have not kept pace with inflation, let alone with the expansion of services offered. The payments per property have also been reduced because the pool of properties, particularly the number of post-secondary institutions, covered by the funds has expanded.

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18 For example, in the 2017 provincial budget, the Government of Saskatchewan eliminated payments-in-lieu of taxes to municipalities for properties owned by SaskPower and SaskEnergy, eliminating $36 million in annual funding to municipalities in the province. 19 The City of Halifax provides an example of such a dispute. The federal government owns the Halifax Citadel National Historic site. In calculating the amount of the payment-in-lieu of taxes, the federal government valued the forty-two acres of land in downtown Halifax at $10, despite a local assessment of the land of $19 million. The nominal value set by the federal government reduced the amount of the grant-in-lieu of taxes by millions of dollars. 20 Enid Slack and Richard Bird, “Municipal Taxation in Canada’s Federal System: Linking Taxes and Expenditures?” in Funding the Canadian City.

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t h e g e n d e r o f ta x at i o n a n d   ta x b r e a k s

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9 Tax Fairness for Families: Evolution of an Idea Frances Woolley

The fair tax treatment of Canadian families has been long contended. From the time of the 1966 Carter Commission, if not earlier, politicians and policy analysts have struggled with the question of whether couples should be taxed on the basis of their joint income, or separately. For decades there have been debates about to what extent, and under what circumstances, family members should be able to transfer income, assets, tax credits, or tax liabilities to each other. In the 1960s and 1970s, policy analysts were asking whether a husband should be allowed to pay his wife a salary for working in the family business.1 Half a century later, the legitimacy of “income sprinkling” – that is, the self-employed reducing their tax liabilities by paying a salary or paying out dividends to family members – is still a focus of policy debate.2 Students of taxation learn that fairness means that likes are treated alike; this is known as “horizontal equity.” In addition, fairness requires that differential treatment be justified. A greater tax burden, for example, is warranted by a greater ability to pay taxes. This is known as “vertical equity.” The application of the concepts of horizontal and vertical equity to taxation of the family requires making judgements about what measures of similarity are relevant for tax purposes. A lack of consensus as to what “fairness” requires with respect to the tax treatment of the family arises because people do not agree how the concepts of horizontal and vertical equity should be applied. Those who advocate taking the family or couple as the basic unit of taxation typically make comparisons across couples, across families, or across households. For example, the Carter Commission, which

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recommended joint taxation of all family members, argued that a family’s total income was the relevant measure of likeness in tax design, declaring “it is the continued income and financial position of the family which is ordinarily of primary concern, not the income and financial position of the individual members” (Carter Commission, 123). The Conservative Party of Canada has advocated moving Canada’s tax system more closely to one of joint taxation by allowing “income splitting.”3 Their benchmark case for fairness is the tax treatment of “couples with the same number of children and the same total income” but different divisions of earnings between the spouses. Matt Krzepkowski and Jack Mintz likewise defend income splitting by referring to the “equity of families under the tax system.”4 While advocates of family-based taxation tend to evaluate the fairness of tax systems by comparing the treatment of couples or families in varying circumstances, advocates of individually based taxation typically assess fairness by considering how individuals in varying circumstances are taxed. Louise Dulude’s 1976 report for the Canadian Advisory Council on the Status of Women, which set out a strong case against the Carter Commission’s recommendations, evaluated fairness in terms of the taxation of “people” or “women.” For example, Dulude argued against taxing the marital unit because of its “discriminatory effect on married people in general … and working married women in particular.”5 (Under the joint taxation system proposed by Carter, two married people would have paid more tax than two singles in the same situation; the earnings of married women would generally have been taxed more heavily than those of single women.) The Law Commission of Canada’s 2001 report, Beyond Conjugality, clearly articulates an individualistic notion of fairness, and uses it to argue for taking the individual as the tax unit: “it is fair to tax two individuals who earn (or control) the same amount of income the same since they both face the same options and choices.”6 A consensus on what fair tax treatment of the family requires is unlikely to be reached when participants in the debate cannot agree on how to apply generally accepted notions of fairness. Yet if it is impossible to end disagreement, perhaps we can at least try to understand its underlying sources. In this paper, I argue that people’s reference points for tax fairness are shaped by their interests and their experiences. In making this case I begin with the Carter Commission, as it still represents one of the most carefully articulated examinations of the philosophical underpinnings of family taxation and

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demonstrates clearly how the case for family taxation assumes no possibility of conflicting interests among family members. I then show how people’s interests shape their articulations of tax fairness by demonstrating how selectively the Carter Commission has been used: its recommendation for joint taxation is remembered; its recommendation for taxing families at a higher rate than singles is not. I then consider the value of women’s work, both paid and unpaid, and the debates over its fair tax treatment. I contrast different perspectives about the value of women’s work and show how they translate into perspectives on fairness. I end with a discussion of fairness and autonomy. 1 t h e a s s u m p t i o n s u n d e r ly i n g j o i n t ta x at i o n

The members of the Carter Commission “were not concerned,” in their Report, “with sociological issues.” Yet their case for treating the family as the tax unit was, at root, a sociological one: “We believe it is important that the tax system should recognize the existence of the family as the primary social unit. Where there is a family, it is the discretionary economic power of the family, rather than of its separate members, that should be taken into account. In most families, incomes are pooled, major decisions are collective, and responsibilities are shared. We therefore advocate a system that treats the family and the unattached individual as the basic units for taxation” (v 3, 12–13). The Carter Commission’s recommendation for joint taxation is based on a series of empirical statements about how families function: family members pool their incomes, make decisions collectively, and share responsibilities. The statements are not supported by any references or citations: they are taken to be self-evidently, obviously true – so true, in fact, that the Carter Report found “ludicrous” (118) the idea that “two families with the same total income could have different tax liabilities, depending upon how the income was divided between the spouses.” Given that these statements were not supported by any academic references, one can only conclude that they stemmed from the personal experiences and intuitions of the commissioners and their research team. Any person’s experiences and intuitions are shaped by their position in life – male or female, rich or poor, powerful or powerless. All but one of the Carter commissioners were male; all were highly successful in various walks of life. It is reasonable to assume that few members of the Carter Commission team had ever experienced

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powerlessness within the family: for example, having to ask their partners for money to buy basic necessities. The commission’s research team were, for the most part, young, American-trained, male economists – Richard Bird, Thomas Wilson, and Douglas Hartle. They learned economics at a time when the discipline emphasized “empathic emotional connections” between family members, rendering invisible men’s advantages and power inside the household (England, 1993).7 Less reliance on personal intuition, and more on sociology, might have led the Carter Commission to a somewhat different view of the family. There is a large sociological literature which finds that income is only partially shared within households.8 Some of this, such as Eleanor Rathbone’s work advocating for family allowances, long predates Carter. Economists have documented that incomes are not fully pooled, and although decisions may be collective, a partner’s say in those decisions reflects his or her power within the family, for example, his or her share of household income. However, advocacy of jointness in taxation continues despite the empirical evidence against income pooling and collective decisionmaking. It underlies, for example, the Conservative Party of Canada’s position on income splitting, as set out in the 2011 election platform: “As it stands, couples with the same number of children and the same total income are not treated equally. A two-income couple, in which one spouse earns more than the other, pays more federal income tax than a two-income couple in which the two spouses earn equal amounts. And a single-income couple pays even more. Conservative Party of Canada.”9 Fairness, the platform implies, would demand equal treatment, where two-income and single-income couples pay the same federal tax. There are, however, many ways of creating a tax system in which a couple’s tax liabilities depends upon the couple’s total or combined income. Yet only one version of joint taxation receives consistent political support. In the next section, I argue that this reveals the importance of interests in the construction of “fairness.” 2 ta x i n g m a r r i a g e

The Carter Commission proposed two separate rate schedules: one for families, and one for unattached individuals. Much of the justification given for the schedules proposed in the report is framed in terms

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of units’ ability to pay taxes, consistent with Richard Bird’s observation that the Carter Commission “focused on equity as the goal.”10 The members of the Carter Commission believed that each family or individual’s tax liability should be based upon their “discretionary income.” Family circumstances affected the amount of a person’s income that could be considered discretionary. Marriage could increase discretionary income because “there are some economies to be realized through living together … in general when two people with the same income marry, the total tax on the couple should be greater than the sum of the taxes they paid when single” (v 3, 15). The Carter Commission held the view that two people earning equal incomes should experience a “marriage tax” (190): that is, an increase in tax liabilities upon marriage. When one spouse had little or no income, however, the Carter Commission’s ideal tax system would generate a “marriage tax saving” (190). The report argues that a married couple should pay less tax than a single individual at the same income level, because “in general, a married couple has a smaller fraction of its total economic power available for discretionary use than an unattached individual with the same total economic power” (14). Thus, a person who partners with a stay-at-home spouse should see a reduction in his or her tax liabilities upon marriage. The Carter Commission set out a number of criteria the tax treatment of the family should satisfy: the family should be the basic tax unit, with tax liabilities based on the family members’ joint income; married couples should pay less tax than single individuals with the same total income; individuals earning equal incomes should see an increase in their tax liabilities upon marriage; the special expenses of working mothers should be recognized. In the early 1960s, when the Carter Commission was doing its work, both the American and British tax systems met most of these criteria. Both had largely joint taxation systems. Both provided some tax relief for married couples over singles with the same total income. The British system, furthermore, provided a special tax credit for working wives, and also, in some situations, led to increases in tax liabilities upon marriage. Yet the two provided diametrically opposed models of joint taxation. The Carter Commission attempted to find a compromise between the American and British models of joint taxation. Their proposal proved to be politically unacceptable. Yet these contrasting models of joint taxation, and Carter’s choice between them,

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reveal the assumptions policymakers and others make about women and men inside families, and other forces that shape taxation policy. In the United Kingdom, where the income tax act predated the married women’s property act, joint taxation emerged from the doctrine of coverture: the idea that when a man and a woman marry they became one, and that one is the man; a wife’s assets effectively belong to her husband.11 As late as the 1970s, the tax system was explicitly gendered. Even though women could opt to be taxed individually on their earnings, for tax purposes “the wife’s investment income must be aggregated with the husband’s income.”12 Figure 9.1 compares the average tax rates as a function of income for a single-earner married couple with two dependent children in Canada (light grey, middle line) and the UK (top line) in 1966. The Canadian rates are taken from the Carter Report; the UK rates from the financial statements tabled with the budget in the House of Commons. It is assumed that all income is from employment, and UK incomes and taxes are converted to Canadian dollars at the 1966 nominal exchange rate, taken from the Penn World Tables.13 Aside from enjoying a higher personal allowance – two cannot live quite as cheaply as one – a married British worker was taxed at the same rate as an unmarried one. Income aggregation, combined with a steeply progressive rate schedule, with a top tax rate on employment income of 91.25 percent, produced the relatively high average tax rates shown in Figure 9.1. The US represented another, diametrically opposed, form of joint taxation. As Edward McCaffery explains, the 1930 case of Poe v. Seaborn successfully established that, under a community property regime, husbands and wives could file taxes as if each had earned half of family’s combined income.14 Income splitting was born, and began to spread across the country. When the Second World War ended, the US federal government, bowing to pressure to end inequities in the tax treatment of residents of different states, and enjoying a “peace dividend” resulting from the sudden drop in military spending, adopted a taxation schedule for families that effectively extended the benefits of income splitting to all married couples. In other words, the US suggests a fundamentally different model of joint taxation: a married couple could be taxed as if it they were two individuals, each earning half of the couple’s combined income. The bottom line in Figure 9.1 shows average US tax rates, based on estimates from the Carter Commission, which assume that that the

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Average tax rates



Income (1966 $ Cd n) Figure 9.1  Average tax rates for married couple with two dependent children, one earner

taxpayer takes itemized deductions. In 1966, a married tax filer in the US paid significantly lower taxes than his Canadian counterparts. This is not because US tax rates were lower overall – for single taxpayers, there was little difference between US and Canadian tax rates. At some income levels, single Canadians paid higher taxes; at other income levels, single Americans did (181). No, the lower tax rates paid by married couples in the US were primarily due to the existence of a joint tax schedule which taxed couples as if their income was split. In 1966, married Canadian taxpayers faced tax liabilities midway between US and UK levels of taxation. The Carter Commission could go either way – recommending a UK-style joint schedule, according to which married couples paid taxes approaching those paid by an unmarried individual at the same income level, or a US-style income schedule, reducing the taxes paid by married couples relative to singles. Canada had deep historical ties to the United Kingdom. As the Carter Report notes, “many of the principles and rules established in United Kingdom jurisprudence have been followed in Canada.” UK judicial decisions “have had persuasive effect in the Canadian courts.” By way of contrast, as of the early 1960s, US income tax law had “had

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relatively little influence on the taxation of income in Canada” (Carter Commission, 64–5). So why not adopt the British system? In the 1960s, Canada was one of the wealthiest nations on earth. Yet Canadians then had much the same economic concerns as we do now: equality, jobs, and growth. The Carter Commission was tasked with investigating, first, the equity of the tax system, “the distribution of burdens among taxpayers.” A second task was to examine “the effects of the tax system on employment, living standards, savings and investment, industrial productivity, and economic stability and growth.” The changes the Carter Commission proposed to the tax treatment of the family have to be seen as part of a larger program of tax reform, designed to solve some fundamental economic problems. A serious consideration, then as now, was tax competition from the United States: “For many Canadian workers, the market for their services is continental, not Canadian. This is especially true for highly skilled and professional employees who are increasingly sought by United States and other foreign employers as well as by employers in Canada. The so-called ‘brain drain’ from Canada has been widely noted and deplored by many observers. We are anxious that the Canadian tax system should not contribute to that drain.” As noted earlier, and as shown in the tables reproduced from the Carter report here, there was not a substantial difference between the tax liabilities faced by unmarried individuals in the US and in Canada, but married people, particularly those with an uneven division of income between the spouses, faced higher tax liabilities in Canada. One of the three criteria the Carter Commission set out for its rate schedules was that “the weight of taxes on middle income tax units should be reduced to narrow the unfavourable income tax differential between Canada and the United States” (154). If the Carter Commission was to lower the taxes on a typical married couple to US levels within Canada’s existing individually based tax system, the resulting taxes on unmarried individuals would be much lower than those prevailing in the US. The revenue loss would be greater than that required to achieve a competitive taxation environment. A move to joint taxation, and the adoption of separate married and single rate schedules, allowed the Commission to recommend a more selective reduction in tax rates, one targeted more precisely on those workers most likely to emigrate. The black line in Figure 9.1 shows the average tax rate recommended by the Carter Commission. The effect of the Report’s

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Table 9.1 Income taxes payable by an unattached individual under the current rate schedules in Canada and the United States and under the recommended rate schedule Income Taxes Payable Income

Canada (1966 rates)

United States (1966 rates)

Recommended rates

$1,500 2,500 3,500 5,000 6,500 8,000 10,000 12,000 15,000 25,000 40,000 70,000 100,000

$51 202 394 691 1,018 1,384 1,940 2,585 3,730 8,175 15,620 32,510 50,955

$90 267 459 727 1,033 1,366 1,849 2,441 3,488 7,977 16,300 34,842 55,298

$54 211 395 714 1,063 1,423 1,942 2,501 3,400 6,747 12,495 25,692 40,090

Note: United States taxes include state and local income taxes of an average state; Canadian taxes include the provincial tax abatement but not provincial taxes in excess of the abatement, and the old age security tax. In all cases, it is assumed that the taxpayer claims only standard deductions. Under our recommendations, the standard deduction of $50 proposed in Chapter 12 is used. Reproduced from: Canada, Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966), Volume Three, Part A, 172.

recommendations would have been to lower the taxes paid by people, especially those with only employment income, to close to US levels. The Carter Report makes it very explicit that the realities of tax competition led them to recommend lower-than-ideal tax rates. Chart 11-1 in the report, reproduced as Figure 9.2, compares the ideal schedule of marginal tax rates with the one actually recommended. The chart is hard to read, because modern readers typically are not used to the idea of a marginal tax rate that increases steadily with income. What is noteworthy about the chart is that it shows that the departure from the ideal is greatest at an income of around $12,000 in 1966 dollars – the income range where the professional brains most likely to drain could be found.15 The Carter Commission’s recommendations with regards to rate schedules, with their plethora of tax brackets, rapidly rising marginal

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Table 9.2 Income taxes payable by a family with two children filing average itemized deductions under current rate schedules in Canada and the United States and under the recommended rate schedule Income

Canada (1966 rates)

United States (1966 rates)

Recommended rates

$1,500 2,500 3,500 5,000 6,500 8,000 10,000 12,000 15,000 25,000 40,000 70,000 100,000

$– – 67 294 586 865 1,316 1,827 2,744 6,758 13,666 29,362 46,571

$3 23 76 348 478 715 1,065 1,409 1,996 4,284 8,886 21,117 34,145

$– – 1 235 505 779 1,185 1,586 2,251 4,900 10,056 22,460 36,018

Note: Itemized deductions under the current Canadian and United States tax laws are the average deductions shown in Appendix H to this Volume. Itemized deductions under our recommendations are assumed to be the same as the average deductions under current Canadian tax law. United States taxes include average state and local income taxes. Canadian taxes include the provincial tax abatement but not provincial taxes in excess of the abatement, and the old age security tax. Reproduced from: Canada, Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966), Volume Three, Part A, 188.

tax rate rates, and their separate rate schedules for married and single taxpayers, might seem like a quaint historical anomaly. It is not. Separate married and single tax schedules, and a tax for equal earners upon marriage, is the only way of achieving (a) taxation on the basis of household income and (b) recognition of the economies of scale resulting from living together. Contemporary advocates of income splitting, such as Krzepkowski and Mintz, take selectively from Carter, referencing the Commission’s recommendations on joint taxation but completely ignoring its recommendations with respect to the taxing the economies of scale that couples enjoy. It is in the interests of anyone attempting to “bring fairness to Canada’s single-income families,” like Krzepkowski and Mintz, to do so. The case for allowing income splitting, which results in a high-income partner paying significantly less than an unmarried person, rests on more than the assumption that the earner transfers significant amounts of income to their spouse.

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Figure 9.2  The Carter Commission’s recommended rate schedules Reproduced from Canada, Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966), Volume Three, Part A, 166

Income splitting also assumes that economies of scale from living together are relatively unimportant, and that the value of household work done by an at-home spouse is relatively low. We have considered the issue of economies of scale in this section; in the next we turn to the value of household labour. 3 t h e va l u e o f h o u s e h o l d w o r k

Household work generates “imputed income” in the form of goods and services enjoyed by members of the household. The Carter Commission argued the appropriate tax base was income, comprehensively defined as “all of a person’s net gains over the year,” with no distinction between “wages, interest, dividends, business income, gains on shares, bequests, sweepstake winnings, and so on” (24). If all forms of income are to be taxed then, logically, the value of household production should be also: “It can be argued that where there are two couples with the same total money income the couple with one wage earner should pay higher taxes than the couple with two wage earners, because the one-worker couple should be taxed on the imputed income of the housewife” (118). The authors of the Report

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concluded that, because of “insuperable valuation problems,” as a practical matter imputed income had to be excluded from the tax base. The Commission saw “no justification for taxing the imputed income of the housewife” (118), when other forms of imputed income were not taxed. The Carter Commission’s proposed tax system would not have taxed imputed income, but would have recognized the cost of replacing it. As a general matter of principle, because “some specific nondiscretionary personal expenses are made by some tax units but not by others: “The allocation of taxes in accordance with ability to pay requires that tax units with these expenses should pay lower taxes than units with the same family responsibilities and the same income who do not have the same special expenses.” One such special expense was “[t]he special expenses of working mothers with young children” (19). The Carter Commission recommended recognizing childcare expenses with a tax credit “equal to the top marginal rate multiplied by the amount of the expense.” The tax credit for childcare expenses would go some way to allaying one of the most serious economic objections to the adoption of any form of joint taxation: its impact on incentives for labour force participation. For example, the Carter Commission estimated that in 1966, a wife earning $5,000 a year, with a husband earning $10,000 per year, would have paid an average effective tax rate of 19.7 percent on her earnings. This rate reflects both the taxes payable on her own income and her husband’s loss of the $1,000 tax exemption available to tax filers with a dependent spouse. The calculation assumes, implicitly, that the husband’s labour supply decision is made before the wife’s, and is not affected by it. Under the Carter Commission’s proposed joint taxation schedule, the wife’s effective tax rate would rise to 22.3 percent (192). The switch to joint taxation would cause her tax rate to rise, because she is now being taxed as a person increasing her family’s income from $10,000 to $15,000, instead of as a person increasing her own income from $0 to $5,000. These types of impacts on marginal tax rates are an inevitable feature of any system of joint taxation, and are one reason why, today, many economists advocate individual taxation, or a combination of individual and joint taxation, on efficiency grounds. Douglas Hartle, the Commission’s research economist, and the person who “held the pen” during the writing of the report, provided a slightly different version of the tax-exemption-for-costs-of-replacing-

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household-production scheme in a background paper on taxation written for the Royal Commission on the Status of Women, known as the Bird Commission.16 Hartle makes it clear that the reason that the Carter Commission was not concerned about the impact of joint taxation and income aggregation on female labour supply is that they simply did not believe there was a problem. As Hartle puts it in the background paper prepared for the Bird Commission (45): “The same point may be made in still another way. The problem of aggregation from the point of view of most women who want to work outside the home is not primarily that their earnings from such work would be added to the incomes of their husbands and taxed at a high rate, but rather that the imputed earnings from work in the house are undertaxed so that there is a great tax bias in favour of working in the home.” If the non-taxation of imputed income is the problem, one solution is to exempt from tax income from employment that replaces imputed income from household production: If every individual of working age were assumed to have an imputed income of $2,000, and the first $2,000 of employment income were made deductible, it would be possible to adopt aggregation and achieve the following results relative to the ­taxation of married individuals without aggregation. a) a more consistent tax on marriage b) a reduced tax barrier to work outside the home for the spouse with the lower income c) lower marginal rates of tax on employment income generally. (50) Hartle made such a convincing case for joint taxation that the Bird Commission actually recommended it in their final report – though Florence Bird later withdrew her support for the proposal. Krzepkowski and Mintz recommended a system of joint taxation with non-transferable exemptions which is very similar to that proposed by Hartle. Under their proposal, the incentive problems associated with joint taxation would be ameliorated by replacing the spousal amount tax credit with a non-transferable credit that could only be used to offset employment income. It is interesting to note that the size of the credits proposed by Hartle and Krzepkowski and Mintz were almost exactly the same in real terms: Krzepkowski and Mintz recommended a credit of $10,822 in 2012 dollars; Hartle’s

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proposed exemption, $2,000 in 1971 dollars, translates to $11,380.28 in 2012 dollars.17 What is noteworthy about all of these proposals is what they reveal about the authors’ valuation of household work. For the Carter Commission, only the care of young children is worth recognizing through deductibility of childcare expenses. For Krzepkowski and Mintz, as for Hartle, the difference in ability to pay tax between a single-earner and dual-earner couple can be offset by a tax credit worth around $11,000 in current dollars; this, implicitly, is the value of the additional household production created by an at-home spouse. This is an interesting example of how interests and experience shape perceptions of fairness. There are no recent Canadian estimates on the value of household production, but to put $11,000 into perspective, a person working twenty hours per week, fifty weeks a year, at a below-minimum-wage salary of $11 per hour, would earn $11,000 annually. Is that a reasonable description of what a typical at-home spouse does or what their production is worth? I would argue that one’s intuitions about the reasonableness of that figure are shaped by one’s experiences. Krzepkowski and Mintz as well as Hartle place a low value on household work, but their approach to the issue is conceptually sound: exempting from taxation the income required to replace foregone household production does go some ways towards achieving both fairness and equity goals. Dulude, on the other hand, quotes approvingly a Law Commission of Canada report that makes the following argument: The position of the Law Reform Commission study is more ­commendable. It states that: “Ideally, the solution would be for the government to recognize the provision of household services by housewives as contributing to the Gross National Product; as being valuable; and as being the contribution of these persons to the welfare of the country which in turn deserves consideration by way of remuneration. The idea of payment for the household services of women is not new and is likely to be more at the forefront of the feminist movement as time goes on … In terms of the perfection of the income tax system, it would be an ideal solution in that such transfer payments would presumably be taxable and therefore would be recognized as part of the income of the tax units … Furthermore, since payment would

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be received either for providing services in the home or out of the home the principle of neutrality would be observed.”18 In conversations about tax policy, it is not uncommon to hear the views expressed along the lines of “the work done by at-home spouses is valuable, therefore it should be recognized in the tax system through special credits and deductions.” People who make arguments along these lines are making a basic sign error. When a surgeon saves lives, she pays tax on the income she earns doing so. When an author writes a best-selling novel, he pays tax on the income he earns doing so. When people produce valuable goods and services, they pay tax on the value of what they create. It makes no difference that the value created by at-home spouses is nonmonetary. Logically, when something creates value, it should be taxed, not subsidized. The Carter Commission considered the idea that single-earner couples should pay higher taxes than dual-earner couples “because the one-worker couple should be taxed on the imputed income of the housewife” (118) but rejected it. The reasons for their rejection have lessons for current policy debates: “We can think of no way of arriving at even an arbitrary method of taxing the imputed income under these circumstances; the unemployed individual may be retired, unable to find work, unemployable, or just plain indolent. If imputed income cannot be taxed with even a modicum of consistency, we do not think it should be taxed arbitrarily when it is convenient to do so and ignored when there are difficulties.” I am not sure that, in 1966, that argument was convincing, particularly with respect to the taxation of women outside the labour force. Now, it might be more so. The technological revolution in household production – washing machines, microwaves, dishwashers, convenience foods – has drastically reduced the time required for basic home maintenance. The value of childcare services provided by an at-home spouse is large and economically significant. Otherwise, it is increasingly hard to argue that a couple with an at-home spouse enjoys a substantially higher standard of living than a couple without one. How many at-home spouses are part of the hidden unemployed or underemployed? And when can the man and woman who is providing for an unemployed partner quite reasonably say, “Don’t I deserve some kind of recognition for this?”

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One interpretation of fairness is absence of envy: an allocation of resources is fair if no one envies anyone else.19 The lens of envy sheds light on current debates over taxation of the family: one-income families envy two-income families’ material standard of living, and two-income families envy one-income families’ lifestyle. When the Carter Commission reported, a man’s standard of living was primarily determined by his own earnings. Two-income professional couples were rare. Today, the two-income couple is the norm, and a professional man with a stay-at-home spouse can expect to enjoy a lower standard of living than his contemporaries in dual-career relationships. It is entirely possible that some men in single-earner families look at their colleagues in dual-earner families, observe that the dual-earner families enjoy a much higher standard of living, and conclude that this is unfair. This is seen, for example, in Krzepkowski and Mintz’s use of the phrase “marriage penalty” to describe the difference in income taxes paid by one-earner and dual-earner couples with the same total income.20 While envy is understandable, it is not the job of the income tax system to remedy it. Women have, for centuries, had to deal with the fact that their standard of living was largely dependent upon their spouses’ earning power. Now men are faced with the same reality. Anyone is free to choose a partner with little interest in earning a good salary, or who desires “to work from home in growing a garden, in developing artistic talents, in writing for what is often perilously low income.”21 The Canadian taxpayer is not compelled to subsidize these choices. If the aim is to support families with children, then the tax system should support families with children, not some select sub-set of families with children. 4 autonomy and income transfers

The Carter Commission was writing at a time where the labour force participation of women was beginning to rise, and some of the existing aspects of the tax code were becoming increasingly problematic. The Report highlights one set of provisions in particular: “The provisions of the Act now cover not only transfers between spouses but also transfers to persons under 19 years of age by anyone, and certain transfers in trust; they disallow salaries paid by one spouse to another in a proprietorship or partnership; and give the Minister power in his discretion to allocate to one spouse the income of a husband-and-wife

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partnership” (121). What is striking, though, is what comes next: “These provisions were subject to sharp criticism by many of the witnesses appearing before us. It was said that they are inconsistent and discriminatory as between taxpayers, and are too rigid and restrictive in dealing with relationships between spouses” (121). This is the only place in volume 3 of the Report where any reference is made to witnesses or submissions, which makes me think that these rules were a serious source of discontent with the income tax system.22 It is also telling that the Carter Report recommended the family, including dependent children, as the tax unit, as opposed to the married couple. Making the family the tax unit removes the need for attribution rules to enforce restrictions on transfers between spouses, or between parents and children. The Carter Commission no doubt had principled reasons for advocating the family as an income tax unit but, it has to be said, it was very convenient that using the family as a tax unit eliminated one of the less popular aspects of the Canadian tax system, and a whole lot of administrative problems and opportunities for tax avoidance (Dulude also makes this point). After the recommendations of Louise Dulude,23 restrictions on transfers of income to a spouse working in a family business were lifted. However, this introduced a new type of perceived unfairness: self-employed individuals were able to shift income to a spouse; employed individuals were not. Much of the debate over taxation of the family in Canada in recent years can be thought of as being about eliminating this particular perceived unfairness. The Conservative Party of Canada would solve the problem by extending income splitting to all couples; the Liberal Party by restricting the use of income sprinkling by the self-employed. Neither has been successful. The basic issue comes down to the unwillingness, or the inability, of income tax authorities to differentiate real transfers, for example, payment for work actually done in a family basis, with notional transfers, for example, a claim that payment was made and work was done. The Carter Commission attempted to separate issues of asset ownership from the questions of tax design: “To remove any misconception, we would point out that our proposals do not involve any change in the ownership of assets of the members of the family unit or in their respective rights to income; our proposals relate simply to the treatment of income for tax purposes” (125). A number of tax researchers have seen this as a disadvantage of the Carter proposals: the income tax system can create powerful and effective incentives for a wealthier

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spouse to transfer real control over income and assets to a less wealthy spouse. For those writing from a perspective that sees gender equality as an important goal, this matters. Louise Dulude’s study prepared for the Canadian Advisory Council on the Status of Women set out a strong case against the Carter Commission’s recommendations. Joint taxation or income splitting proposals, such as the Krzepkowski-Mintz one, tax married couples as if all income and assets were shared jointly by the spouses. Yet they do not require any actual sharing of income or change marital property regimes. As McCaffery, writing about the US context, puts it: income splitting allowed couples to split income for tax purposes, “without the unpleasant pressure to actually split it, for non-tax purposes.”24 Dulude makes a similar point: “These systems do not encourage legislative changes towards more sharing by the spouses, they assume that spouses already share everything.”25 She was talking about the Carter/Hartle joint taxation proposal, but her comment applies equally to recent proposals for income splitting. In a recent authoritative compendium, Tax Policy in Canada, eminent tax experts Larry Chapman and Jack Mintz discuss the choice of taxation unit – family or individual – and end their discussion with this comment: “It has even been argued that family taxation is unfair to women, who bear the brunt of taxation if they decide to undertake paid employment.”26 They do not provide references, and the tone seems almost dismissive. Lisa Philipps, in a recent Canadian Tax Journal contribution, suggests that there are serious concerns with the rights of taxpayers – typically female taxpayers – under joint taxation systems. Philipps explores the difficulties that arise when people have tax liabilities for income received by other family members – the “innocent spouse” problem that arises under the US’s system of joint taxation.27 I noted in the introduction that advocates of income splitting or joint taxation tend to make fairness comparisons between differently situated families, whereas advocates of individually based taxation tend to make fairness comparisons between differently situated individuals. When the family is the basic unit of analysis, the issue of autonomy of individuals within the family, and control over assets by individual family members, completely disappears. Only when individuals are taken as the unit of analysis does autonomy become a key concern. Why do some analysts take a family-centred approach and some an individually centred approach? One can only speculate, but

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it seems pretty evident that those who have experienced lack of control of assets or income within the family, or identified with those who lack control, would see these issues as a greater matter of concern. conclusion

In Canadian policy debates, income splitting is touted by many as the answer. The issue is: what is the question? For the Carter Commission, the questions were “How do we make our tax system more competitive with that of the United States?” “How can we eliminate disparities on the tax rates of different types of income?” and “How can we address the anomalies created by attribution rules and other antiavoidance measures?” As far as answers to these questions go, joint taxation was not an entirely stupid one. The Carter Commission’s mandate – equity, employment, growth – is still the mandate of tax policy makers today. Yet today’s questions are somewhat different from the ones the Carter Commission was addressing. Today’s questions are “What can be done about increasing income inequality?” “How can people achieve a balance between work and family?” “How can people raise a family when faced with high housing prices, student loans and other debt, and disappointing employment prospects?” “What can be done to improve the economic situation of Canada’s new immigrants?” “What supports are available for the invisible unemployed: at-home parents who would rather be in the labour market?” Income splitting does, to some extent, answer many of these questions. But it’s not necessarily the best answer. Framing income splitting in terms of fairness is ultimately unhelpful, because people cannot even agree on a common framework for fairness. Acknowledging people’s interests and committing sociology – examining what actually happens within families, and the extent to which assumptions about sharing, autonomy, and household production are validated – is the way forward.

notes



I would like to thank Hugh Pemberton for assistance in locating 1965–66 UK rate schedules, Lindsay Tedds, and participants in the University of Toronto tax policy workshop for helpful comments and discussion.

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 1 Canada, Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966; cited as “Carter Commission” or by page number in subsequent text); Louise Dulude, Background Study on Women and the Personal Income Tax System (Ottawa: Canadian Advisory Council on the Status of Women, 1976).   2 Alexandre Laurin and Jonathan Rhys Kesselman, Income Splitting for Two-Parent Families: Who Gains, Who Doesn’t, and at What Cost? C.D. Howe Institute Commentary No. 335 (2011); Jonathan R. Kesselman, “Income Splitting and Joint Taxation of Couples: What’s Fair?” IRPP Choices 14, 1 (2008); Kevin Milligan, “Policy Forum: Editor’s Introduction – Income Splitting,” Canadian Tax Journal 61, 3 (2013): 677–9.   3 Conservative Party of Canada, Here for Canada: Stephen Harper’s Low-Tax Plan for Jobs and Economic Growth (Ottawa: C PC , 2011).   4 Matt Krzepkowski and Jack Mintz, No More Second-Class Taxpayers: How Income Splitting Can Bring Fairness to Canada’s Single-Income Families. S PP Research Paper (2013): 6–15.  5 Dulude, Background Study on Women, 29–30.   6 The Law Commission of Canada, Beyond Conjugality: Recognizing and Supporting Close Personal Adult Relationships (December 2001), 69.   7 Paula England, “The Separative Self: Androcentric Bias in Neoclassical Assumptions,” in Beyond Economic Man: Feminist Theory and Economics, ed. Marianne Ferber and Julie Nelson (Chicago: University of Chicago Press, 1993).   8 J.M. Pahl, Money and Marriage (London: Macmillan, 1989).   9 Conservative Party of Canada, Here for Canada. 10 Richard Bird, “Tax Policy: Past, Present and Future,” Canadian Tax Journal / Revue fiscale canadienne 45, 3 (1995): 1039. 11 “By marriage, the husband and wife are one person in law: that is, the very being or legal existence of the woman is suspended during the ­marriage, or at least is incorporated and consolidated into that of the ­husband.” William Blackstone, Commentaries on the Laws of England in Four Books (1771–72), vol 1. 12 James Meade, The Structure and Reform of Direct Taxation (London: Allen and Unwin, 1978), 387. 13 Accessed via FRED. 14 Edward J. McCaffery, Taxing Women (Chicago: University of Chicago Press, 1997), 40. 15 For economists who might be reading this, and scratching their heads ­trying to figure out how the Carter Report came up with this marginal

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tax rate schedule, the chart entitled “Illustration of Discretionary Income Principle” (4–1) in Douglas Hartle’s “Taxation and Married Women in Canada,” Report Prepared for the Royal Commission on the Status of Women (Ottawa: Information Canada, 1971) summarizes the assumptions behind the Carter Commission’s recommended tax rates. It shows tax as a constant fraction of discretionary income. 16 Richard Bird, “Tax Policy”; Hartle, “Taxation and Married Women in Canada,” lists the submissions on tax-related issues made to the Bird Commission. Of the submissions, six opposed the Carter Commission’s joint taxation recommendation while two supported it; nine supported the Carter Commission’s proposed exemption on transfers of wealth between husband and wife; thirty-one submissions argued for some form of tax relief for working women with dependents. 17 Kzrepkowski and Mintz, No More. 18 Dulude, Background Study on Women. 19 See Hal Varian’s work, for example: “Two Problems in the Theory of Fairness,” Journal of Public Economics 5, 3–4 (April–May 1976): 249–60. 20 Kzrepkowski and Mintz, No More, 11. 21 Green Party of Canada (2011). 22 This suspicion is confirmed by Hartle, “Taxation and Married Women in Canada,” which lists the briefs on tax-related issues put before the Royal Commission on the Status of Women (Bird Commission). Nine of the nineteen briefs falling under the general heading of “Implicit and Explicit Comments on the Proposals of the Royal Commission on Taxation” were to approve the proposed exemption of transfers of wealth between husband and wife. 23 Dulude, Background Study on Women. 24 McCaffrey, Taxing Women, 54. 25 Dulude, Background Study on Women, 31. 26 Larry Chapman, and Jack Mintz, “Personal Income Taxation,” in Tax Policy in Canada, ed. Heather Kerr, Ken McKenzie, and Jack Mintz (Toronto: Canadian Tax Foundation, 2012), 4: 27. 27 Lisa Philipps, “Policy Forum: Real versus Notional Income Splitting – What Canada Should Learn from the US Innocent Spouse Problem,” Canadian Tax Journal/Revue 61, 3 (2014): 709–21.

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10 Are Tax Loopholes Sexist? The Gender Distribution of Federal Tax Expenditures David Macdonald

Since the great recession, the tax and transfers system has come into increased focus as a potential solution to income inequality.1 Traditionally, the tax portion of the system is seen as a means of decreasing after-tax inequality compared to high market income inequality. The market, left to its own devices, can produce substantial income inequality; however, progressive income taxes can tax away a portion of that inequality. The proceeds of the tax system can, at least in part, be used as transfers to low-income families, further offsetting the inequality that exists in pre-tax incomes. However, there is a third pillar in the tax/transfer system that has also been gaining much-needed attention: tax expenditures. Tax expenditures act as a third force besides statutory tax rates and transfers. Tax expenditures act to reduce taxation in a variety of circumstances below the rates that would otherwise be paid under the standard income tax brackets. Broadly, tax expenditures include all deductions, tax credits, tax breaks, tax loopholes, and so on encompassing any claimable amount that legally lowers one’s taxes. They include, but go far beyond, the “boutique” tax credits that became fashionable among conservative policymakers in the late 2000s. However, tax expenditures only include explicitly legal means of lowering one’s taxes. So called “aggressive” tax planning using private corporations, trusts, or international tax havens aren’t tax expenditures, as they aren’t created explicitly by government. Instead they are created by the accounting and legal fields in transactions that are often in the

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grey zone between legal and illegal. Hiding money overseas through illegal tax evasion of the type exposed in the Panama Papers, for example, is also not a tax expenditure. Given their explicit nature, tax expenditures can be readily listed and consistently examined as standard parts of tax forms. The cost of tax expenditures is well understood, given the detailed costing guide produced by Finance Canada based on tax records.2 Tax expenditures exist for all three tax bases: personal income taxes, corporate income taxes, and the goods and services tax, although the focus of this paper is personal income tax expenditures. They exist at both the federal and provincial levels, with some federal ones having implications for provincial tax revenues, although in this paper only federal tax expenditures and revenue implications are examined. A growing body of research on federal tax expenditures has been conducted in recent years. Murphy et al.’s examination of tax expenditures through an income inequality lens reveals an incredible concentration of benefits, with the top 1% of earners receiving a surprisingly high proportion of certain tax expenditures.3 Across the entire income spectrum, the distribution of tax expenditures in general is heavily skewed towards the highest earners, much more so than is offset by federal transfers.4 Analyzing tax expenditures through the lens of inequality can have a potent public impact, as it did with the short-lived family income splitting.5 In that case, studies of the distribution of benefit for family income splitting played an important role in its initial capping and subsequent cancellation. Tax expenditures are a substantial drain on federal coffers, reducing taxes raised by over $100 billion annually for the federal government alone.6 The flip side of these expenditures is that they can act as a significant revenue-raising opportunity if cancelled. In fact, the cancellation of tax expenditures featured prominently in several party platforms from the 2015 federal election, including the cancellation of the particularly unequal employee stock-option deduction.7 The 2016 and 2017 federal budgets managed to close many of the “boutique” personal income tax credits created during the late 2000s under the previous Conservative government for things like child fitness and arts classes. However, Budget 2016 then proceeded to introduce a new boutique credit of its own for teachers in an unfortunate “two steps forward, one stop back” approach. The budget that year also initiated a comprehensive review of tax expenditures to be kicked off by an

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expert panel struck in the fall of 2016.8 Unfortunately, no public report was ever produced by this expert panel. The systemic analysis of tax expenditures need not be limited to income inequality. Tax expenditures can also be analyzed through the lens of gender equity. Given the federal government’s interest in the topic, it is worth asking “Are tax expenditures sexist?” The past two federal budgets contained extensive analysis of the gender implications of government policy and specific actions to remedy the issues identified. Budget 2017 explicitly examines one tax expenditure, the Canada caregiver credit, along gender lines, albeit briefly.9 Budget 2018 states: “A true commitment to equality and diversity requires an understanding of how all policy decisions affect different people differently. The Government fully embraced this principle in Budget 2018, where every single decision on expenditure and tax measures was informed by [Gender Based Analysis] GBA+.”10 Should such a public review of tax expenditures ever occur, and given the federal Liberals’ interest in the issue, it should include gender equity among other considerations like cost, original purpose, effectiveness, and income inequality. This report attempts just such a review of forty-five tax expenditures, building on similar studies by Kathleen Lahey, Isabella Bakker, and Lisa Philipps.11 In turn, each tax expenditure is “turned off” and the tax system adjusted appropriately to determine how much of the benefit of each expenditure goes to men versus women. The benefits are calculated using Statistics Canada’s Social Policy Simulation Database and Model (S P S D / M ) version 26.0 with “glass box” modifications.12 Not all federal tax expenditures could be included in this analysis. Of the 183 personal income tax expenditures outlined in the Report on Federal Tax Expenditures (2018), 64 could have been included in that they had estimated values over $10 million, they weren’t transfers, and they weren’t aggregates of other lines. Of those, 45 are included in this report. The full list of excluded items with reasons for their exclusion is also available upon request.13 As with any S P S D / M estimates, no behavioural adjustments are included. All values are projected for the 2018 tax year unless otherwise specified.14 It is important to point out that no tax expenditures have a specific gender requirement for their receipt. None specify that they should only go to women, for example, or to mothers. The only exception to this general rule is on the transfers side, where the Canada Child Benefit is explicitly paid to the mother, the only case of an explicit

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gender rule. In all other cases, the gender breakdown isn’t the result of any explicit gender stipulation. However, there are plenty of stipulations more generally about how tax expenditures are to be claimed, even if they aren’t gender-based. Two common stipulations do have important gender implications. Tax expenditures often stipulate the lower earner in a couple, likely a woman, should receive a credit. Secondly, there is the implicit stipulation that almost all tax expenditures are “non-refundable,” which is to say that one has to have taxable income to subtract them from. The lower one’s taxable income, the less useful non-refundable credits can be. A variety of societal differences between men and women result in tangible differences in benefits from tax expenditures, as the analysis below reveals. These include: 1 Women are more likely to be caregivers for children and aged parents; 2 Women are more likely to be single parents; 3 Women are more likely to earn less income; 4 Women are more likely to live longer; 5 Women over sixty-five have a higher poverty rate as a result of employment histories and other barriers; 6 Women are less likely to hold top positions in the corporate world. the findings

Table 10.1 outlines the federal personal income tax expenditures ranked by the percentage of benefits received by men. Of Canadians over eighteen years old, only 49% are men and, as such, if a tax expenditure delivered 49% of its benefits to men, that would be equivalent to their weight in the adult population and represent gender parity. The percentage benefit is based on the aggregate monetary benefit received by gender. Of the forty-five tax expenditures outlined in Table 10.1, only eight provide more benefit to women than men. In other words, only 19% of the tax expenditures are of more benefit to women than men. There are three tax expenditures that actually increase women’s personal incomes taxes, resulting in over 100% benefit for men. In these unusual cases, a tax break ends up being a tax increase for women.

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Table 10.1 Tax expenditure costs (mil) and proportion of benefits going to men (2018)

MEASURE Eligible Dependent Credit

Total cost $mil 2018

% benefit going to men

$960

22

$1,335

26

Non-taxation of social assistance benefits

$225

33

Non-taxation of GIS and Spousal Allowance

$210

40

Medical Expense Tax Credit

$1,715

41

Student Loan Interest Credit

$35

41

Childcare expense deduction

Refundable Medical Expense Supplement

$160

42

Pension Income Credit

$1,275

47

Age Credit

$3,620

50

$16,470

53

–$12,200

54

$4,270

51

$36,705

52

$1,070

52

Registered Pension Plan: Deduction of contributions Registered Pension Plan: Taxation of withdrawals Registered Pension Plan: Total Credit for the Basic Personal Amount Deduction of union and professional dues Caregiver Credit

$155

53

Tuition Tax Credit

$1,545

54

Canada Employment Credit

$2,380

55

Disability Tax Credit

$1,035

55

Deduction for clergy residence

$100

56

$1,280

57

$4,095

58

$95

59

$15

61

First-Time Home Buyers’ Tax Credit

$125

63

Labour-Sponsored Venture Capital Corporations Credit

$160

63

$5,110

66

$35

66

$115

67

$1,640

68

Tax treatment of Employment Insurance and Quebec Parental Insurance Plan premiums and benefits Tax treatment of Canada Pension Plan and Quebec Pension Plan contributions and benefits Non-capital loss carry-overs Volunteer Firefighters Tax Credit

Quebec Abatement Political Contribution Tax Credit Moving expense deduction Deduction of carrying charges incurred to earn income

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Dividend gross-up and tax credit

$4,870

68

Charitable Donation Tax Credit

$3,080

69

Non-taxation of workers’ compensation benefits Deduction of other employment expenses Deduction of allowable business investment losses Northern Residents Deductions Capital loss carry-overs

$675

71

$1,055

71

$40

72

$235

72

$640

72

$6,265

76

$15

77

$755

77

Foreign tax credit for individuals

$1,490

79

Spouse or Common-Law Partner Credit

$1,620

83

$110

83

$6,843

70

–$7,170

57

$1,635

114

$1,435

217

$80

304

Partial inclusion of capital gains Investment Tax Credits (SRED, Child Care, Atlantic Canada, Logging etc) Employee stock option deduction

Flow-through share deductions Registered Retirement Savings Plan: Deduction for contributions Registered Retirement Savings Plan: Taxation of withdrawals Registered Retirement Savings Plan: Total* Pension income splitting* Tax treatment of alimony and maintenance payments*

* Each of these tax expenditures has a negative benefit for women, which is to say they pay more taxes as a result, creating a benefit of over 100% for men. Source: SPSD/M, Report on Federal Tax Expenditures (2018) and author’s calculations

Two of the three involve transfers of income from men to women, thereby also transferring tax liability, although the net taxes paid by the couple is reduced because of the transfer. The R R S P system in 2018 was costing women more in taxes upon withdrawal than they were saving in R R S P contribution refunds. These cases are examined in more detail below. t o p f i v e l a r g e ta x e x p e n d i t u r e s f o r w o m e n

If we examine the largest tax expenditures that benefit women the most, we get Figure 10.1. It includes the top five tax expenditures that benefit women the most and cost more than half a billion dollars a year.

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Age Credit ($3,620 mil) Pension Income Credit ($1,275 mil) Medical Expense Tax Credit ($1,715 mil) Child care expense deduction ($1,335 mil) Eligible Dependent Credit ($960 mil) 0%

20% Men

40%

60%

80%

100%

Women

Figure 10.1  Top five large tax expenditures for women (2018) Source: SPS D/M, Report on Federal Tax Expenditures (2018) and author’s calculations.

The eligible dependent credit tops the list, with women receiving 78% of the $960 million spent on this credit. This credit allows a tax filer to claim the spousal credit for a child or other dependent if no spouse is present. The spousal credit itself allows a filer to claim the basic personal exemption for a spouse who doesn’t have enough taxable income for it to be beneficial as it is non-refundable. Single-parent families are the most common situation where the eligible dependent credit would be used, with 79% of the benefits flowing to such families.15 Single-parent families are overwhelming headed by women, thereby directing this tax expenditure to women. The second most beneficial tax expenditure is the childcare expense deduction that allocates 74% of its $1.34 billion a year to women. This deduction must be claimed by the lower earner in a family. Women tend to have lower incomes in a family. For those reasons, women are more likely to fall into the “lower earner” stipulation and therefore gain the most benefit from it. Also, if a family has only one parent it is overwhelmingly a woman, again increasing the odds that this child-related expense will benefit women more.

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The third large tax expenditure that benefits women is the medical expense tax credit. This credit is non-refundable and so is only useful to those with sufficient taxable income to be offset by it. From table 10.1, the refundable version of this credit is also among the most beneficial to women, although, costing only $160 million a year, it isn’t shown in Figure 10.1. These credits benefit those with expenses for things like medical devices but, more importantly, they include a portion of long-term care costs. Women’s longer life expectancy drives their higher benefit from this credit. While not forced, like the childcare expense deduction, the calculation of this credit often makes it more beneficial if claimed by the lower earner in a couple, which as noted above is, on average, a woman. The pension income credit is the fourth large tax expenditure that benefits women the most, although it just barely benefits women more than men. Women represent 51% of the adult population but gain 53% of the benefit from of the $1.275 billion spent on this credit, thus putting this slightly in their favour. This credit reduces one’s taxes by $300 based on the first $2,000 of pension income. This non-refundable credit can be transferred between spouses if not otherwise fully utilized. At first glance, it would seem counter-intuitive that women would benefit more than men. Men’s total pension income in 2015 was $55.3 billion and women’s was $40.6 billion16 as a result of men being paid more in their working years and taking less time off to care for children and aged parents. This would seem to suggest that men should benefit more from this credit. However, another tax expenditure, pension income splitting, significantly alters how pension income is taxed and how this credit in particular is used. Due to income splitting, women claimed $50.2 billion of pension income for tax purposes and men claimed only $45.6 billion in 2015, an inversion of the actual gender distribution of pension income.17 After splitting pension income, this credit resulted in marginally more benefit to women, although the aggregate effect of pension splitting on women was negative, as examined below. The age credit, the final item on the top five list, while fifth in ranked order is actually of more proportional benefit to men than women. Women receive 50% of the benefit but represent 51% of Canada’s population. In other words, one of the top five large tax breaks for women is actually of more benefit to men. The age credit provides a tax savings of up to $1,100 for those over sixty-five years old. It is non-refundable, meaning you need to have enough taxable income

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for it be useful, although it does completely phase out by $85,863 in income in 2018. While there are more seniors who are women, male seniors have more income and female seniors’ poverty rates are higher. The non-refundable nature of this credit means benefit is more likely to accrue to higher earners, although in this case that benefit is eliminated for very high earners. Women’s population advantage among seniors is roughly balanced out by men’s higher earnings, making this credit of roughly equal benefit to both sexes t o p f i v e l a r g e ta x e x p e n d i t u r e s f o r m e n

Turning now to the top five tax expenditures for men, again stipulating that the expenditure must be over $500 million a year, two of those top five provide a more than 100% benefit to men. Pension income splitting, costing the federal government $1.4 billion a year, creates a notional transfer within the family from the higher earner to the lower earner if they are in different tax brackets, thereby creating a net tax savings equal to the difference in the tax bracket rates multiplied by the amount transferred. While this is a tax savings from the family perspective, taxes actually increase for the lower earner. This is a tax break that makes the lower earner worse off as their taxes go up. The lower earner, on average, is a woman. Based on this paper’s metric, this creates a 100% benefit for men. The tax treatment of alimony has a similar distribution, although its smaller size excluded it from Figure 10.2. Alimony increases taxes for women for the same reason, although in this case the transfer is actual, not notional as with pension income splitting. Surprisingly, the Registered Retirement Savings Plan (RRSP) system doesn’t provide a net benefit for women. The RRS P system has three components: 1 R R SP contributions are not taxed, often resulting in a refund when income taxes are deducted at source; 2 Returns on R R SP investments aren’t taxed; and 3 R R SP/R R I F withdrawals in retirement are taxed as income. Unfortunately, it isn’t possible to determine the breakdown of which gender benefits most from the second part of the system, the nontaxation of returns within an R R S P . This would require knowledge of any differences in returns based on gender and the types of

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Employee stock option deduction ($755 mil) Foreign tax credit for individuals ($1,490 mil) Spouse or Common-Law Partner Credit ($1,620 mil) Registered Retirement Savings Plan: Total ($1,635 mil) Pension income splitting ($1,435 mil) 0%

20% Men

40%

60%

80%

100%

Women

Figure 10.2  Top five large tax expenditures for men (2018) Source: SPSD/M, Report on Federal Tax Expenditures (2018) and author’s calculations.

returns most likely by gender, for example capital gains versus interest income. Figure 10.3 disaggregates the two known R R S P components by gender and benefit. It shows that on a net basis, women pay $315 million more in taxes on R R SP withdrawals than they receive in benefit by saving the taxes on R R S P contributions. While a negative net benefit, it ignores the benefit of non-taxation within the RRSP, which will be positive, making this a net gain for women once included. Men, on the other hand, receive $2.6 billion more in savings from R R S P contributions than they pay in taxes on R R S P withdrawals. Their gain from this program will also increase when the non-taxation of R R SP investment income is included. The difference in net benefit is largely driven by men’s larger benefit from RRSP contributions. If examined separately, this portion provides men with 70% of the benefit. The larger benefit is likely the result of men’s higher earnings, which play a double role here. First, as one earns more one has a higher likelihood of having excess income to contribute to an RRSP. Second, as income is higher, one gains a larger

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Women

Men $6,000

$4,000

Net impact

$2,000

$0

$2,000

$4,000

Deduction for contributions

$6,000

$8,000

$Mil in benefit

Taxation of withdrawals

Figure 10.3  RRSP gender impact disaggregated (2018) Source: SPSD/M and author’s calculations.

benefit in taxes saved, given a progressive bracket system. Both of these processes work to provide a larger benefit to men. On the other hand, the taxes paid on RRS P withdrawals are more evenly shared, with 57% of their costs falling on men. Women’s longer life expectancy may mean R R S P s are transferred to them if their spouses die. Barring death, it may be more beneficial to have withdrawals from a spousal R R S P be to the lower earner to lower net family taxes. In other words, men may be putting money into RRS P s in their working years, but women, particularly those with less pension income, may be withdrawing it. With some speculative assumptions, a gender breakdown of the non-taxation or R R S P investment income can be calculated and the total R R SP system impact can be estimated. The total benefit of the non-taxation of R R S P investment income is known from the Review of Federal Tax Expenditure. Given several assumptions,18 we arrive at a 68% benefit for men of the non-taxation of RRSP returns. Combining this with the other two parts of the RRS P system where we do know the gender breakdown, we can estimate that 73% of RRSP benefit would go to men. This would kick RRSPs out of the top five and replace them with the partial inclusion rate on capital gains, which provides 76% of its benefit to men. The spouse or common-law partner credit provides 83% of its $1.6 billion expenditure a year to men. This credit allows the higher earner to claim some or all of the basic personal exemption of the lower earner if the lower earner can’t use it all because they have too little taxable income. As with other tax expenditures, the lower earner is likely to be a woman, making it more likely the man would use this credit to transfer her basic personal exemption to him.

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Next is the foreign tax credit, which provides 79% of its $1.49 billion annual cost to men. This credit allows Canadians to deduct income taxes paid in other countries from their Canadian taxes. Paying taxes in another country likely means having worked there. Given the immigration challenges of working in another country and paying taxes there, it is predominantly higher earners for whom companies facilitate these obstacles, skewing this credit towards men as a result. The final large tax expenditure benefiting men, the employee stockoption deduction, provides 77% of its benefit to men and costs the federal government $755 million a year. This deduction is a special case of the partial inclusion of capital gains, although in this case that capital gain is on a stock option that an employee receives as compensation. The award of the stock option itself is not taxed; it is only taxed when it is exercised to buy stock and only the profit on that transaction is taxed, but at half the rate it would have been taxed had it been employment income. Stock options are a common form of compensation, particularly for executives of public companies.19 In part, this can be attributed to men earning more than women, but it is also due to there being substantially fewer women at the top of large Canadian corporations where this type of compensation is most common. Of the 100 highest paid C E O s in Canada, only three are women.20 the overlap of gender and income inequality o f   ta x e x p e n d i t u r e s

Comparing previous income-inequality reviews to the present gender equality analysis provides for an interesting overlap, particularly at the extremes. As income, income inequality, and gender equity are intertwined, so are their tangible implications as expressed in the breakdown of who benefits from tax expenditures. The tax expenditures that are of most benefit to the bottom half of Canadian adults result in three that are also among the most skewed towards women: the non-taxation of the Guaranteed Income Supplement, the non-taxation of social assistance, and the refundable medical expense supplement.21 These tax expenditures sit at the top of Table 10.1, although due to their small relative cost, they weren’t included in the detailed top five analysis. The first two eliminate taxes on social benefits meant to help the poorest, so it’s no surprise that the majority of the benefits go to the lowest earners. Among seniors, women have a higher poverty rate and among social assistance

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recipients, women tend to receive the most, largely because they are receiving the component for children in single-parent families. The refundable medical expense is, by its nature, going to go to lower earners who don’t make enough to use the non-refundable version and women, given their longer lifespan, are the primary recipients of both the refundable and non-refundable versions. Of the top five most skewed tax expenditures based on income inequality, four overlap with highest male benefit: the partial inclusion of capital gains, the employee stock-option deduction, the foreign tax credit, and pension income splitting. The capital gains inclusion rate missed being in the top five large male-skewed tax expenditures by 1.4 percentage points. Although it missed by a hair on gender equity, it provides 87% of its benefits to the top 1% of Canadians, making it one of the most unequal in income inequality terms.22 The stockoption deduction is perhaps the most stunningly skewed with 100% of its benefits flowing to the top 1% of Canadian earners.23 The foreign tax credit provides 86% of its benefit to the top 10%. Pension income splitting, due to its notional transfer of income, provided a positive net benefit, particularly to the top 10%, with Canadians below the eighth decile paying higher taxes due to this tax break.24 gender equity in federal transfers

Federal transfers are an important way of reducing income inequality and, possibly by happenstance, they have ended up also improving gender equity. Several of the federal transfers are administered through the tax system, including the Canada Child Benefit (CCB), the GST credit, and the Working Income Tax Benefit/Canada Workers Benefit (W I T B /C W B ). These are sometimes considered tax expenditures, although they are grouped here with transfers. The seniors’ transfers such as Old Age Security (O A S ) and the Guaranteed Income Supplement (GIS) are not considered part of the tax system per se. Employment Insurance (EI) and the Canada Pension Plan (CPP) are nominally separate from the federal government as contributory programs, but are backed by the feds. In all cases these programs can result in cash transfers to Canadians and they are generally targeted so that lower-income families receive more than higher-income families. Figure 10.4 outlines the benefits by gender of federal transfer programs. EI provides more benefits to men than women. This is likely

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Employment Insurance ($19,078 mil) Canada Pension Plan ($61,761 mil) Working Income Tax Benefit ($1,165 mil) gst/hst Credit ($4,595 mil) Old Age Security ($42,739 mil) Guaranteed Income Supplement ($12,801 mil) Canada Child Benefit ($22,600 mil) 0%

20% Men

40%

60%

80%

100%

Women

Figure 10.4  Federal transfers benefit by gender (2018) Source: SPSD/M, Report on Federal Tax Expenditures (2018) and author’s calculations.

due to men earning more and therefore receiving higher benefits that are calculated as a proportion of earnings. The high number of hours required to be eligible for E I eliminates those who have less regular employment, again often women. Although women overwhelming use EI special benefits, particularly parental benefits, the lesser value of the special vs regular benefits isn’t enough to overcome the lower earner implications for women.25 The W I T B , GST credit, and C P P provide roughly the same benefit to men and women. In the case of the CP P , women make up a larger57,39 pt proportion of seniors, but this is offset by their lower earnings and therefore lower contributions in their working years. These two forces appear to offset each other, creating a roughly equal benefit between the genders O A S and G I S are seniors’ programs. More seniors are women and more senior women live in poverty, tipping the scales slightly in women’s favour. With G I S being specifically targeted to seniors with low incomes, it tends to benefit senior women more, given their

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higher poverty rates. O A S ’s less targeted nature means that women’s higher count as seniors, particularly living in poverty, isn’t as important as in the G I S case and this credit, while weighted to women, is less so than G I S . The CCB is the only tax expenditure or transfer that has an explicit gender stipulation – in this case, that it be paid to the mother in a couple. The results are clear, with 97% of the $22.6 billion in CCB cheques being paid to women. The aggregate gender benefits of transfers and tax expenditures are calculated in Figure 10.5. Adding up the individual gender impacts of tax expenditures can reveal who benefits systematically from them. However, the cancellation of tax expenditures will not necessarily increase federal revenues by the Department of Finance figures reported above, therefore it will not necessarily change gender equity by the amounts calculated. Tax expenditures can interact with each other and they can have a behavioural response which isn’t represented in the Department of Finance estimates. Cancelling one tax expenditure may change the value of another, and may also change utilization of a third with potentially unforeseen implications for amounts raised. In the aggregate, federal transfer programs provide 58% of their benefits to women, weighting transfers slightly towards women (who represent 51% of the adult population). The weighting towards women is due to the CCB, which is paid almost exclusively to women, and the GIS that is weighted towards senior poverty, which is disproportionately high among women. E I partially offsets the female weighting as it skews slightly towards men. The other transfer programs are roughly equal between the genders. Aggregating tax expenditures reveals that 62% of their benefits go to men, a heavier weighting than experienced towards women on the transfers side. No single tax expenditure is unduly driving the male weighting. The costliest tax expenditure by far is the basic personal deduction, but it is essentially split evenly between the genders. The next largest is the partial inclusion of capital gains, which doesn’t have quite enough male skew to make it to the top five. Following that, we find the Quebec abatement and the dividend gross up and credit, although these only represent approximately 5% of the total value of tax expenditures examined here. In general, individual tax expenditures benefit men more, thus driving the aggregate impact.

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Total tax expenditures ($87 bil) Total transfers ($163 bil) 0%

20% Men

40%

60%

80%

100%

Women

Figure 10.5  Total tax expenditures compared to total transfers (2018) Source: S PSD/M, Report on Federal Tax Expenditures (2018) and author’s calculations.

conclusion

Compared to federal government programs that are regularly reviewed, tax expenditures endure little regular review outside of their annual costing. As such, they remain a critically under-examined part of federal operations. Outside of the annual review of tax expenditures, their cost is not included in annual budgets or fiscal updates. Being relegated to a technical part of the tax system has serious implications for gender equity, as shown above, not to mention income inequality and revenue generation more broadly. Personal income tax expenditures act as a de facto transfer system in that they refund or don’t charge taxes otherwise owing. In that sense, being neither the basic tax system nor a transfer, they represent a third mechanism within the tax system that is largely hidden from view. The system of tax expenditures not only graphically reflects current inequities but also serves to double down, reproduce, and reinforce disadvantage. Given the size of tax expenditures, they play an important role in after-tax gender equity. A thorough review of tax expenditures is long overdue. It must include not only some investigation of the efficacy of these substantial expenditures, but also their equity implications both for income inequality and gender. For a federal government committed to genderbased analysis, this report can provide a starting point for gender analysis in the tax system. Although analysis of the problem is not going to be enough, concrete actions should be taken to close tax

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breaks that aren’t serving their purpose, are unequal, or aren’t promoting gender equity.

notes



The author would like to thank Brian Murphy and Katherine Scott for their comments on an earlier version of this paper.   1 Andrew Sharpe and Evan Capeluck, The Impact of Redistribution on Income Inequality in Canada and the Provinces, 1981–2010 (Ottawa: Canadian Centre for the Study of Living Standards, September 2012).   2 Department of Finance, Report on Federal Tax Expenditures: Concepts, Estimates, and Evaluations (Ottawa: Government of Canada, 2018), https://www.fin.gc.ca/purl/taxexp-eng.asp.   3 Brian Murphy, Mike Veall, and Michael Wolfson, “Top-End Progressivity and Federal Tax Preferences in Canada: Estimates from Personal Income Tax Data,” Canadian Tax Journal 63, 3 (2015): 661–88.   4 David Macdonald, Out of the Shadows: Shining a Light on Canada’s Unequal Distribution of Federal Tax Expenditures (Ottawa: Canadian Centre for Policy Alternatives, 2016).   5 Laura Payton, “Jim Flaherty Backs Away from Income-splitting Promise,” C B C News, 12 February 2014, https://www.cbc.ca/news/politics/ jim-flaherty-backs-away-from-income-splitting-promise-1.2533641.  6 Macdonald, Out of the Shadows.   7 New Democratic Party, Building the Country of Our Dreams: Tom Mulcair’s Plan to Bring Change to Ottawa (2015), 11; Liberal Party of Canada, A New Plan for a Strong Middle Class (2015), 80.   8 Finance Canada, Review of Federal Tax Expenditure, https://www.fin. gc.ca/access/tt-it/rfte-edff-eng.asp.   9 Budget 2017, 241. 10 Budget 2018, 245. 11 See table 6 of Kathleen A. Lahey, “Uncovering Women in Taxation: The Gender Impact of Detaxation, Tax Expenditures, and Joint Tax/Benefit Units,” Osgoode Hall Law Journal 52.2 (2015): 427–59; Isabella Bakker and Lisa Philipps, “Gendering the Analysis of Tax Expenditures: Bridging Two Solitudes in Canadian Fiscal Policy,” Tax Policy Colloquium, New York University (2018). 12 This analysis is based on Statistics Canada’s Social Policy Simulation Database and Model (S PS D/ M ). The assumptions and calculations underlying the simulation results were prepared by David Macdonald and the

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responsibility for their use and interpretation is entirely that of the author. Additional changes were made in S PS D/M “glass box.” Reconciliation between SPS D/ M and the Report on Federal Tax Expenditures (2018) was conducted and is available upon request. 13 The exemptions are largely similar to the excluded list in Appendix II of Macdonald, Out of the Shadows. The most important exclusions are the non-taxation of RRS P and RPP savings as well as the non-taxation of capital gains on principal residences, which were included in the 2016 report but aren’t in this version. These exemptions are not entered into income tax forms and as such aren’t available through SPSD/M. Estimates may be possible through the Survey of Financial Security but the aggregation of assets in the survey at the family and not the individual level make a gender disaggregation difficult. 14 S P S D /M 26.0 estimates for 2018 incorporates all tax rules applicable to that year. However, demographic inputs such as income distribution or growth in employment income are projections from the 2014 base year. 15 S P S D /M 26.0 tax year 2018 and author’s calculations. 16 Canadian Income Survey 2015, Public Use Microdata File. 17 Canadian Income Survey 2015, Public Use Microdata File. 18 This would require three important conditions to be true: 1. The gender proportion of contributions to RRS Ps in 2018 is equal the gender proportion of assets in RRS Ps in 2018; 2. The returns on R R SP assets are equal between genders; 3. The type of investment income generated in R R SPs is equal between genders, for instances capital gains, dividend, and interest income is the same between genders, as these have different tax implications. 19 See David Macdonald, Climbing Up and Kicking Down: Executive Pay in Canada (Ottawa: Canadian Centre for Policy Alternatives, 2018). 20 Ibid. 21 Macdonald, Out of the Shadows. 22 Murphy et al., “Top-End Progressivity,” 681. 23 Ibid., 678. 24 See Figure 2, Macdonald, Out of the Shadows. 25 Budget 2018 Chart 5.6, 248, provides an interesting gender overview of the various EI benefits.

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11 Gender Inequality and Canadian Fiscal Policy: From “Taxing for Growth” to “Taxing for Gender Equality” Kathleen A. Lahey

Canada is often seen as a champion of tax equity and gender equality. Credit for prioritizing equity is often attributed to the 1966 Carter Commission report on taxation, which did manage to bring capital gains taxation to Canada. In fact, this report was more concerned to identify equitable tax policies that could promote economic growth.1 And on that basis, the Commission went to considerable effort to demonstrate that taxing women as members of marital units rather than as individuals in their own right would itself promote tax equity – a recommendation with which the majority on the 1970 Royal Commission on the Status of Women agreed. Fortunately, gender equality advocates were able to persuade the government not to adopt joint taxation.2 In part due to the 1982 enactment of constitutional gender equality guarantees in the Canadian Charter of Rights and Freedoms, Canada was actually ranked #1 in the United Nations human development and gender equality indexes for four years beginning in 1995.3 However, half a century after the Carter Commission report was released, it is clear that early improvements in women’s economic status have been overtaken by the embrace of “taxing for economic growth” policies. The original balance between personal and corporate income and capital gains tax rates, devised when the Commission report was implemented, has been dismantled as all personal, corporate, and GST rates have been significantly reduced and both human

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development and gender equality in Canada have subsequently suffered as their ratings on the UN indexes began falling in 2000. This chapter outlines how Canadian political preferences for taxing for economic growth have undermined constitutional and international obligations to tax for gender equality. Women’s experiences with the realities of tax equity and gender equality as enacted in Canadian law are qualitatively similar to those experienced by women in other high-income countries. However, when compared with other countries, women in Canada have quantitatively paid extremely high prices for governments that have pursued economic growth at the expense of gender equality. It is not too late to remedy this set of policy errors, but it will take significant rethinking of fiscal policies to effect the substantive changes that are needed. 1 ta x i n g f o r e c o n o m i c g r o w t h v s ta x i n g f o r   e q u a l i t y

The history of taxation in Canada documents the search for capital accumulation and wealth by all available means – including through special treatment in tax and spending laws. Debates over the use of households and corporations as tax units have been an important part of that history, as they came to be conceptualized as re/productive associations capable of mediating both the ownership and taxation of incomes and capital in private hands. While it has long been agreed that tax rates should be based on ability to pay, even those agreeing that tax systems should mitigate income inequalities quickly point out that equality values should not impair motivation to work and accumulate capital.4 As modern income tax systems began to develop, legal doctrine concerning the legal personality of married women and corporations influenced the taxation of couples and corporations in quite distinctive ways. Married women’s property laws in the 1800s broke with English common law assigning ownership of women’s property and contract rights to husbands by giving women the right to work and own their own wages. When their wages were nonetheless taxed in England as if owned by their husbands, women’s demands that they be treated as separate legal persons for fiscal purposes were rejected on the basis that mere recognition of women’s civil rights did not entitle them to be taxed as individuals.5

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In contrast, legal recognition of the separate legal personality of corporations initially led to independent taxation of corporations.6 As a result, shareholders, who are legally the owners of corporations, increasingly faced “double taxation” of corporate incomes in the sense that corporate income taxes were paid by the entity, and then shareholders were assessed for personal income taxes on distributions to them of after-tax corporate earnings. This in turn opened the door to shareholders taking advantage of the separate legal status of corporations to keep incomes out of their own personal tax returns, while lobbying for policies to eliminate payment of both corporate and personal income taxes on corporate profits distributed to them as shareholders. When Canada enacted its first personal income tax law, it rejected the English concept of joint taxation of married individuals. The Carter Commission recommendation for full joint taxation of spouses was also rejected. However, over time, concepts of ability to pay and tax equity were increasingly invoked to justify a growing number of joint (couple) income-tested tax and benefit provisions in Canada. These provisions reinforce denial of women’s separate fiscal personality, but these tax provisions are valued by high-income sole breadwinner spouses. They are also valued by governments, because most joint benefits are scaled on the basis that “two can live more cheaply than one.” Nonetheless, joint fiscal policies reinforce the expectation and the reality of women’s economic dependence on spouses, and still reinforce the practice of paying women lower wages than men. The Carter Commission also recommended legal disregard of corporations for tax purposes in order to “integrate” their tax liabilities into the personal income tax liabilities of shareholders. This effectively turned the corporate income tax paid by companies into advance taxes due in the future by shareholders receiving dividends out of after-tax corporate profits. The decision to limit the taxation of capital gains beginning in 1972 to a maximum of 50% of the actual amounts of those gains, and the provision of small business tax credits and tax exemptions, further complicated this area of income taxation. Since the Carter report was released, these contradictory views of women and corporations have contributed to growing numbers of technical changes to tax laws that benefit the wealthy by overtaxing women’s incomes as compared with men, and by reducing taxes paid on corporate incomes and capital gains. Both sets of rules predominantly benefit male spouses/partners and shareholders to a much greater extent than women. And all of these policies are

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generally supported on the basis that these forms of “taxing for growth” are more “equitable.” The Commission had originally been formed in the hope of staving off intense political pressure to avoid tax competition with the US for human and financial capital by reforming the Canadian tax system. Laudably, it insisted in multiple volumes of carefully reasoned policy analysis that equity in the allocation of the total tax burden among members of the population is ultimately the most important policy outcome. But in the end, the Commission ultimately framed its appeal for equity on the basis that if all its recommendations were adopted as a whole, they would “improve the equity of the system without any reduction in the growth rate,” and, “indeed, would make a positive contribution to growth.”7 Shortly after many of the Carter report tax changes were implemented in 1972, the UK and US under the Thatcher and Reagan governments and then the Canadian government under Mulroney initiated long-term tax cut programs. By 2000, the Canadian government was openly advertising Canada’s “Tax Advantage” program, and the Organisation for Economic Co-operation and Development (OECD) had begun regular annual structural surveillance of the GDP growth of member countries that placed heavy emphasis on tax and expenditure policies calculated to contribute to increased economic growth.8 This “taxing for growth” formula continues in place today, although there is now more open discussion of the importance of gender equality. This formula calls for the following changes in descending order of priority: reduce high personal and corporate income tax rates, employer social security contributions, and tax benefits and expenditures; shift the revenue burden to consumption taxes featuring the Value Added Tax (V A T ), also known as the Goods and Services Tax (GST), and other consumption taxes; reduce social spending on health, income support, pensions, disability, and unemployment benefits (in both quantum and duration); and increase women’s paid work time by providing accessible childcare and reducing second-earner tax barriers. The OECD has applied this approach in every annual edition of Going for Growth,9 and it has been adopted in the EU and regionally, as well as by international development and financial institutions.10 Figures 11.1 and 11.2 illustrate the cumulative impact of these recommendations as tax competition took hold in countries at all levels of development between 1990 and 2014. In 1990, low- and medium-income countries – which by definition have higher levels of

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Percent of total revenue (average)

25.00

20.00

15.00

10.00

5.00

0.00 Low income countries

Medium income countries

High income countries

General goods and services tax revenue Individual income tax revenue Social contribution Corporate income tax revenue Figure 11.1  Personal, corporate, social contribution, and consumption tax revenue as percentage of total revenue in low-, medium-, and high-income countries, 1990 Source: International Monetary Fund, 2016, W oR L D Longitudinal Data, http://data. imf.org; data for low-income countries combine low-income (≤US$1,025 per capita gross national income (GNI)) and low-middle-income countries (US$1,026-$4,035); medium-income countries are those with US$4,036 to US$12,475; high-income countries are those ≥ US$12,475; values are unweighted averages of revenues by types.

poverty and below-subsistence incomes than high-income countries – derived little revenue from progressive personal income and earnings-based social contribution taxes, but did derive the largest shares of revenue from progressive corporate income taxes and almost equal shares from regressive flat-rated consumption and excise taxes. In contrast, high-income countries derived the largest share of revenue from personal income and social contribution taxes, significantly large

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Percent of total revenue (average)

25.00

20.00

15.00

10.00

5.00

0.00 Low income countries

Medium income countries

High income countries

General goods and services tax revenue Individual income tax revenue Social contribution Corporate income tax revenue Figure 11.2  Personal, corporate, social contribution, and consumption tax revenue as percentage of total revenue in low-, medium-, and high-income countries, 2014 Source: International Monetary Fund, 2016, W oR L D Longitudinal Data, http://data. imf.org; data for low-income countries combine low-income (≤US$1,025 per capita gross national income (GNI)) and low-middle-income countries (US$1,026-$4,035); medium-income countries are those with US$4,036 to US$12,475; high-income countries are those ≥ US$12,475; values are unweighted averages of revenues by types.

shares from regressive consumption taxes, but very little income from progressive corporate income taxes. By 2014, each of these profiles had changed significantly. Low- and medium-income countries had increased revenue shares from progressive personal income and social contribution taxes while maintaining about the same levels of corporate income tax revenues, but they had more than doubled the shares of total revenue from regressive

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flat-rated consumption taxes. This change in composition of revenues means that their overall tax systems had become more regressive in impact, taking proportionately more revenue from low-income taxpayers via flat-rated consumption taxes. High-income countries, taking OECD advice seriously, had radically cut progressive personal income tax revenue shares and significantly increased reliance on regressive flat-rated consumption taxes plus flat-rated social contribution taxes, while keeping corporate income taxes low. These changes also made these total tax systems more regressive in impact. Overall, these shifts moved the averages for countries at all levels of development away from progressive and redistributive taxes and further toward regressive allocations of tax burdens on those with the lowest incomes, particularly on those now having to pay high rates of V A T/G ST on personal consumption necessities. 2 the political economy of gender a n d “ ta x i n g f o r e q u a l i t y ”

Historically, women have not been considered to be entitled to economic equality – or even to economic security. Discrimination in unpaid work hours, incomes, and ownership of property remains the global norm. Unpaid work in particular is a serious problem, because women work more combined hours of paid and unpaid work per week than men everywhere, yet have, globally, between 10% to 50% lower earnings than men, as well as fragmented work lives, smaller entitlements to employment benefits, pensions, access to business capital, and opportunities. Gender discrimination is supported by deeply rooted stereotypes that assign high levels of unpaid work to women. Unpaid work takes many different forms, and includes not only childcare but other care work, food production, domestic maintenance, unpaid support of family members who are in paid work, and working as unpaid family members contributing to family businesses. Only one country (Norway) has taken steps to nearly fully socialize paid childcare costs so that women can engage in paid work as unhindered by that form of unpaid responsibilities as men, but even then, such programs do not fully free women to overcome other barriers to economic equality. Despite the prevalence of gender stereotypes in Canada, Canada had come to be recognized as a world leader in gender equality.

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Canada’s 1982 constitutional gender equality guarantees have been interpreted as calling for “substantive” gender equality, not for merely formal or facial equality.11 During the last half of the 1990s, Canada was consistently ranked as having the highest levels of human and gender development in the world.12 So influential has this Canadian body of constitutional gender equality jurisprudence been internationally that the United Nations C E D A W Committee, which monitors compliance with the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW),13 has interpreted that treaty as calling for substantive equality or equality of outcome.14 Unfortunately, women in Canada have not been able to reap the benefits of these early and influential commitments. Beginning in the mid-1990s, Canadian governments began to heed the call for “taxing for growth,” despite warnings that aggressive tax-cut regimes and consequent cuts to social spending would undercut current progress toward eradicating all forms of discrimination against women in Canada. Initially a world leader in implementing the 1995 Beijing Platform for Action, which provided detailed guides on how to eradicate economic and all other forms of inequality through gender mainstreaming and gender budgeting initiatives,15 Canada’s U N gender equality rankings fell rapidly and dramatically as governments failed to promote equality, including the enactment and enforcement of effective employment equality, pay equity, and childcare laws, and the repeal of discriminatory social benefit and tax laws. The call for “taxing for gender equality” arose from the intersection of gender equality laws, implementation of gender budgeting, and the growing recognition that economic equality is crucial to overcoming sex discrimination in day to day life. But in the 2000s, as “taxing for growth” produced increasingly austere budgets in Canada, conservative governments began cancelling gender equality programs, and the global financial crisis led to further tax and spending cuts. By 2008, in the wake of the global financial crisis, it had become increasingly obvious that tax cuts for growth were having pervasive negative effects on women’s economic status. Although the OECD and European Commission began to take note of the relationship between fiscal policies and economic inequality,16 the focus remained on activating women’s paid work. The OE CD and International Monetary Fund (IMF) began publishing reports on taxation and gender equality, searching for synergistic tax and fiscal policies to promote both equality and economic growth, and, as the Occupy movement protesting

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concentration of wealth in the hands of the rich grew, they also began publishing high-profile reports on income inequalities.17 At the same time, C E DA W and UN agencies began to include tax and fiscal issues in their gender work. In 2014, the U N Special Rapporteur on Extreme Poverty and Human Rights produced a detailed analysis of how countless features of tax and spending laws systemically intensify women’s economic disadvantages, perpetuate gender inequalities and poverty, and thus violate international human rights laws.18 In 2014 and 2015, CEDAW issued two ground-breaking Optional Protocol decisions that hold national governments accountable for failing their commitments to gender equality, poverty reduction, and fiscal equality in tax/expenditure policies. The 2014 Blok decision held that the Netherlands violated women’s maternity leave rights,19 and the 2015 Canada Inquiry decision held all levels of Canadian governments accountable for failing to lift Indigenous women and communities from the depths of longstanding poverty.20 In both decisions, the Committee found that signing and ratifying CEDAW bound states to implement it, and ordered each government to make restorative payments and establish curative programs. In 2016, taxing for gender equality became an acknowledged global policy priority as new transnational standards were adopted in relation to poverty, gender, economic, and environmental development goals,21 and in relation to revenue issues and financing for development.22 These documents all contain express commitments to mainstreaming gender equality and poverty reduction outcomes on a systemic basis, including specifically in relation to all revenue issues.23 These commitments apply to global members in relation to all their domestic laws, policies, and practices, as well as to all government acts involving transnational or international relations Strategies for “taxing for equality” include reducing taxes on low incomes, particularly those of second earners and the self-employed, and increasing income security, pension, and training supports for low-income and low-skill workers, single parents, and middle-income workers. Funding such measures should come from increasing graduated personal and corporate income tax rates, and should be accompanied by increasing care resources to equalise unpaid workloads associated with low-paid work levels, increasing wealth and inheritance taxes, reducing the use of tax expenditures and joint fiscal measures that have income and gender regressive effects, and reducing reliance on regressive flat-rate consumption and social contribution

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taxes, particularly when they render basic necessities unaffordable. Tackling inequalities also requires governments to increase regulation of labour markets, living wages, affordable education, and to increase the tax load on capital incomes while also increasing women’s access to business finance. Various studies have identified both tax and regulatory methods that can reduce exclusive focus on economic growth as the main development strategy. Such studies have also pinpointed new tax and transfer policies that can counteract poverty and reduce overall income inequalities that are increasingly recognised as impediments to durable economic growth.24 Unfortunately, women in Canada have not yet been able to benefit from these developments. At the present time, women in Canada perform on average 60% of all unpaid work hours, leaving them able to work only 42.2% of all paid work hours.25 In contrast, men work far fewer unpaid work hours, and thus work 57.8% of all paid work hours, earn at higher hourly rates, and have average annual incomes significantly higher than women’s. Women earn less than men per hour, work fewer paid work hours than men, and account for 75.8% of all part-time workers, who typically receive fewer and smaller employment benefits.26 As the result of all these factors, women are estimated to receive just 37.8% of all earned incomes in 2018.27 Clearly, women’s unequal shares of unpaid care work, including unpaid care work performed while engaged in other activities, is one of the reasons why women’s incomes still lag significantly behind men’s in Canada. 3 w h y ta x i n g f o r g e n d e r e q u a l i t y m at t e r s

Although policies aimed at “taxing for growth” gathered momentum during the same period in which gender equality has become increasingly accepted as a policy standard, the cumulative effects of the “taxing for growth” cuts in tax revenues and funding for gender equality programs in Canada appear to have undercut progress toward gender equality in two ways. First, tax cutting for growth that is done without regard for its gender impact appears to disproportionately enrich men as compared with women in the aggregate. Second, failure to design crucial tax provisions to optimize their gender impact in both after-tax and behavioural terms can perpetuate or even intensify gender inequalities. Like many other high-income countries, Canada started out in the mid-1960s with relatively low tax ratios (tax revenues as a share of

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total G DP ). Australia’s tax ratio was one of the lowest, at just under 20%, the UK, 29%, the US, 23.5%, and Canada, 25%. Tax ratios increased in most high-income countries up until the mid-1990s despite governmental political orientations, but then fell sometimes dramatically over the next twenty years.28 As Table 11.1 illustrates, women’s levels of human development in high-income countries appear to be vulnerable to the effects of falling tax ratios. All the countries in Table 11.1 started out with some of the very highest rankings on the UN Gender Development Index (GDI) for the 1995 year. Twenty years later, every one of those countries had lost ground on the G D I , and even more ground on the new Gender Inequality Index (GII), which was designed to measure gender equality specifically. Table 11.1 documents crucial facts about Canada: In 1995, it was the world leader in both human and gender development. In fact, it held that position from 1995 through 199829 – years during which Status of Women Canada was empowered and funded to work actively with other departments, particularly with Statistics Canada, as well as with provincial and territorial ministers, civil society organizations, and academic experts. However, radical tax cuts beginning in the late 1990s brought that era to an end. As Table 11.1 demonstrates, Canada was the biggest tax cutter among this group of countries, which had in 1995 been high-income countries at the top of both the human and gender development indices. As this data makes clear, Canada’s fall to #9 in the HDI by 2015 is dramatic – but its fall to #25 in the GII is astounding. Differences among these countries make it difficult to make many generalizations about just how this tax-cutting era had quite diverse effects on this group of high-income and, with the exception of Denmark in 1995, high gender equality countries. However, some points are worth noting. First, when Canada’s human development rankings fell, the impact on gender equality was much greater than the impact on human development overall: Canada did fall from #1 to #9 on the HDI – but it fell from #1 to #25 on the gender indices. In contrast, when Sweden’s HDI ranking fell from #10 to #14, it still managed to perform significantly better in terms of gender impact than on the H D I : It only fell from #3 on the GDI to #6 on the GII. Sweden was a heavy tax cutter, but it still outperformed Canada by nineteen ranks even while it remained weaker than Canada on overall development. In fact, Sweden

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Table 11.1 Human development, gender, and tax ratio indicators, selected countries, 1995 to 2015 Net change in tax % HDI GDI HDI GII Tax % Tax % from 1995 to 2015 1995 1995 2015 2015 1995 2015 Canada Norway US Finland Netherlands Sweden Denmark

1 3 4 6 7 10 18

1 2 6 5 12 3 10

9 1 8 24 5 14 4

25 9 55 11 7 6 4

34.8 40.0 26.5 44.5 37.7 45.6 46.5

32.0 38.3 26.2 43.9 37.4 43.3 45.9

(2.8) (1.7) (1.8) (0.6) (0.3) (2.3) (0.6)

Maximum change in period/year (4.5) in 2011 (1.7) in 2015 (3.5) in 2009 (3.7) in 2010 (2.5) in 2003 (3.1) in 2011 (1.7) in 2008

Note: In the UNHDR 2015, the GDI replaced numeric rankings with rankings from groups 1 through 5, with all but the Netherlands (group 3) assigned to group 1; the GII has been published since 2010 and measures loss of development due to gender inequalities. () indicates negative numbers. Sources: HDI 1995: United Nations, Human Development Report 1998 (New York: UNDP, 1998), 20, tb. 1.2, based on 1995 data; GDI 1995: ibid., 32, tb. 1.9; HDI 2015: United Nations, Human Development Report 2015 (New York: UNDP, 2015), 208, tb 1; ibid., 224, tb. 5; Tax ratios: OECD.Stat, Revenue Statistics: OECD Member Countries – Comparative Tables (2016), stats.oecd.org/Index.aspx?DataSetCode=REV (total tax revenues as % of GDP).

ended the period in 2015 at #6 on the G I I , second only to Denmark, which was #4 on the GI I , even though Denmark had not even made the top ten on the 1995 HDI . The Swedish and Danish changes demonstrate a very important point: Smaller tax cuts are less likely to impair human development, and it is possible to prioritize taxing and spending for gender equality even when making large tax cuts (Sweden, 2.3% of its tax ratio) or small ones (Denmark, 0.6% of its tax ratio). That is, the key question is not just how much revenue a country has – the key question is whether revenues are being used effectively for the purposes of promoting human development overall and gender equality specifically. Second, these figures demonstrate that the design of tax cut policies and spending programs will affect how tax cuts will affect human development and gender outcomes. Five of the eight countries in Table 11.1 were performing better or equally well on gender issues as compared with overall development issues in 1995. By 2015, all but two countries out of the eight – Denmark and Netherlands – had

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improved their gender rankings as compared with 1995 and were performing better, or equally well, on gender as compared with overall development. And even Finland, which had been performing slightly better on gender than on overall development in 1995, managed to significantly outperform on gender even as it fell dramatically on both indices. It is worth noting that all three of these countries had originally shown strong focus on improving gender outcomes in 1995, and had also made the smallest cuts to their tax revenues among the eight countries in Table 11.1. Having sufficient revenues to fund gender equality policies is crucial to improving overall human development and gender equality. But designing tax policies specifically to promote gender equality also matters. The many channels that connect macroeconomic indicators like tax ratios with the gender impact of specific tax policies are themselves shaped by existing “norms, practices, and social institutions governing gender inequality.”30 Economic development engages all institutional arrangements – from access to education or transportation, to access to finance capital – that may affect women’s opportunities and outcomes as levels of development change over time. These gender indices do usefully document the aggregate impact of all social, economic, and political dynamics on the status of women over time, but it is essential that they be used with individual countryspecific qualitative policy impact analysis and quantitative indicators to evaluate how the gender impact of key policies on their own and in context contribute to understanding how changes in the “broader picture” have come about.31 Identifying what “taxing for gender equality” might mean in relation to a specific country or region calls for multiple levels of analysis. On the macroeconomic level, analysing the composition of tax revenues can identify factors that promote or undercut gender equality. Thus any analysis of the gender impact of tax systems begins with large aggregates, but also has to examine the meso institutional such as businesses, households, and schools, and micro individual levels. At the individual level, gender effects are meaningful only to the extent that factors such as living conditions, earnings, assets, dependencies, education, geographic location, race, Aboriginal status, health, and age can be considered in the context of specific revenue and expenditure policies. This can only be done by unpacking the complexities of specific tax and benefit systems one country at a time.

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4 c o m p o s i t i o n a n d g e n d e r a l l o c at i o n s o f   c a n a d a ’ s ta x c u t s

The composition of a country’s tax revenues is always of concern. On a fundamental level, a country that collects the majority of its total tax revenues from tax laws that have graduated rates based on ability to pay will leave all or most after-tax income in the hands of those with low incomes, to ensure that taxes do not prevent anyone from being able to secure basic necessities. At the other extreme, graduated rates should be higher on those who have high incomes, can fund the cost of basic necessities with ease, and can save part of their after-tax incomes. Similarly, flat-rated sales, excise, and consumption taxes like the VAT/GST and social contribution taxes should exempt those who cannot otherwise obtain basic necessities, and scale tax rates to overall income levels as fully as possible. When these general principles are followed, tax laws will not intensify poverty, will collect revenues consistent with ability to pay, and thus will also tax those affected by gender, racialization, Aboriginal, and/or personal capabilities more fairly overall. Canada’s total tax system is moderately gender redistributive. In 2014, men received 62% of all market incomes, but their share of net after-tax consumable incomes was 4% less, leaving men with 58% of consumable incomes and women with 42%. Thus the total tax system can be described as being gender progressive in impact.32 However, when tax rate cuts are taking place, degrees of redistribution are reduced, and can even be reversed unless care is taken to design tax cuts to have progressive impact. Unfortunately, in Canada, the benefits of cuts to graduated or progressive tax rates are not allocated progressively – the higher the income, the larger the tax benefit from tax cuts. Thus in progressive tax systems, tax cuts will produce regressive distributions of net tax cut benefits. Cuts to each component of the total tax system, whether they are cuts to personal income taxes, corporate income taxes, or consumption taxes, will have a different impact in terms of both quantity of lost revenue and distributional effects. Table 11.2 summarizes the timing and magnitude of cuts made at the federal Canadian level in the tax years 1997 through 2016. If none of these cuts and related changes had ever been made, Canada would have had 41.4% more revenue in 2016 than it actually collected – an additional $94.4 billion in tax revenue. It is significant that over half

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Table 11.2 Revenue holes created by 1997–2005 and 2005–2016 federal income tax and GST cuts, 2016 Impact of all federal income tax and GST cuts made since 1997 on federal tax revenues in 2016 Personal income tax (PIT) cuts Corporate income tax (CIT) cuts Goods and Services Tax (GST) cuts Total all cuts – 2016 revenue holes Total federal PIT, CIT, and GST ­revenues forecast for 2016 year Total federal PIT, CIT, and GST ­revenue that would have been received in 2016 if no 1997-2005 cuts were made Size of 2016 federal revenue holes as % of all p i t , c i t , and g s t revenues forecast to be received in 2016

Impact of cuts made 1997– 2005 ($2016)

Impact of cuts made 2005– 2016 ($2016)

Impact of all 1997–2016 cuts ($2016)

$36.3 bill. $9.5 bill. $45.8 bill. $228.0 bill.

$16.0 bill. $19.6 bill. $13.0 bill. $48.6 bill. $228.0 bill.

$52.3 bill. $29.1 bill. $13.0 bill. $94.4 bill. $228.0 bill.

$273.8 bill.

$276.7 bill.

$322.4 bill.

20.1

21.3

41.4

–

Sources: PIT, GST: Statistics Canada SPSD/M v. 22 (2015); CIT: Canadian Manufacturers and Exporters, The Economic Impact of Corporate Tax Rate Reductions (2011), table 9, at 33; Parliamentary Budget Officer, Ready Reckoner (2014), http://www.readyreckoner.ca/; Total PIT, CIT, GST revenues forecast for 2016: Canada, Minister of Finance, Budget 2015 (2015), table 5.2.5, at 364.

of the revenue lost due to tax cuts has resulted from the cuts to the personal income tax rates, exemption rules, and other provisions. Structurally, this means that PIT cuts will benefit those with the highest incomes the most, while those with low or no incomes will receive virtually no significant benefits. These effects are of course completely separate from the distributional effects of cutting government programs by $94.4 billion in the year. Figure 11.3 helps put the impact of these cuts into context. This figure provides an overview of women’s and men’s average market incomes by age for the tax year 2016. Women’s age-specific income gaps are a legacy of longstanding discrimination in hiring, employment security, wages, unpaid work burdens, business finance, corporate ownership, and accumulation of capital, as well as the consequence of gender inequalities in unpaid work responsibilities between women and men. Even women graduating with prestigious M BA degrees in Canada still face significant salary gaps as they enter the workforce alongside the male students in their graduating classes – an average of $8,167 less per female graduate in 2013.33 Overall, women earn

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Figure 11.3  Average market income, by gender and age (estimated), Canada, 2016

less than equally educated men, and visible minority and Aboriginal women face even larger earnings gaps and other forms of economic discrimination than men.34 Table 11.3 demonstrates that because women do structurally and pervasively earn less than men at every stage in their lives, policies designed to spur economic growth through tax cuts will not benefit all members of society equally. The after-tax value of cuts to personal income tax rates and tax benefits will mean that women will receive less financial benefit from those tax cuts. That is because with lower incomes, women’s average tax bills are lower than men’s. And thus economic programs that cut taxes means that those with the highest incomes will gain the most from those cuts – and those with lower incomes will gain the least, or even nothing at all. Overall, women’s shares in 2016 of cumulative personal income tax cuts and changes enacted between 1997 and 2016 came to just 32.3% of the total $52.3 billion in tax cuts. Even though men form only half the population in Canada, they received 67.7% of those cuts – far more than their fair share, which, if distributed on a per capita basis, would only be 50%. Nor did individuals with different income levels receive fair shares. If the government had wanted to engage in this level of structural detaxation to such an extent,35 it could have allocated tax cuts completely fairly. It has chosen not to, year after year, since 1997.

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Table 11.3 Distribution of $52.3 billion in cumulative 1997–2016 personal income tax cuts, by decile and gender, 2016

Range of total family incomes in each decile

Actual decile share of total federal PIT changes ($millions)

  1 up to $19,700  2 $19,701–$29,100  3 $29,101–$39,500

216.3 815.7 1,269.2

0.4 1.6 3.4

51.9 46.4 50.7

48.1 53.4 49.3

2,287.2 3,224.8 4,345.8 5,621.8 7,198.9 9,404.2 17,871.7 52,255.7 27,275.9

4.4 6.7 8.3 10.8 13.8 18.0 34.2 100 52.2

57.3 59.6 68.0 67.4 70.4 70.2 70.3 67.7 70.3

42.7 40.4 32.0 32.6 29.6 29.8 29.7 32.3 29.7

 4 $39,501–$50,500  5 $50,501–$63,400  6 $63,401–$78,900  7 $78,901–$98,700  8 $98,701–$125,800  9 $125,801–$168,800 10 $168,801 and up All Top 20%

Total $ PIT tax cuts per decile (%)

Men’s shares of cuts within decile (%)

Women’s shares of cuts within decile (%)

Source: Statistics Canada SPSD/M v. 22; deciles and results have been rounded.

So long as these cumulative tax cuts remain in place, men as a class will continue to receive more than twice as much after-tax income due to this set of tax cuts, as compared with women. This will occur in each and every tax year during all women’s and men’s lives. And unfortunately, the personal and corporate income tax rules have been permanently changed to ensure that men’s incomes and rates of capital accumulation will increase throughout their working lives much faster than women’s can, simply because they have the advantage of unfairly huge tax reductions each year that women as a class cannot access equally.36 5 revenue costs and gender shares o f ta x e x p e n d i t u r e s

Permanent structural detaxation cuts that benefit men more than women in Canada every year are not the only sources of discrimination on the basis of gender in taxation. Each year, both federal and provincial/territorial tax laws provide hundreds of special tax exemptions, rate reductions, deferrals, and other benefits as the published tax rates are applied to taxable incomes. These types of special

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provisions are referred to as “tax expenditures” because they often give taxpayers after-tax benefits that could, if governments wanted, be distributed directly to taxpayers in the form of cash benefits or expenditures. And these benefits could be tied not to special tax rules but to taxpayer needs from social development perspectives. For example, at present, tax expenditures that provide special tax deductions or credits for money spent on care, medical, or employment costs will not give the same percentage of those costs back to all taxpayers. Those with low tax rates or no income will not necessarily receive the full benefit of most tax expenditures, while those with high incomes will get the maximum of all potential tax expenditures. This is not a trivial point. In 2016, 32.2% of all those who filed income tax returns had no tax liability at all, and 59.8% of those were women.37 Tax expenditures discriminate markedly on the basis of sex and against those with low incomes. Instead of using the tax system to produce such wildly diverse levels of benefits for basic needs, governments could increase the scope of non-taxable public care and medical services, and provide subsidies to those who need help with workrelated costs. That would simplify tax forms and treat men and women at all levels of incomes equally. In fact, the revenue and gender effects of structural detaxation on Canadian revenues are significantly smaller than the revenue and gender effects of tax expenditures. As demonstrated in Table 11.2 above, Canada would have collected $94.4 billion more in corporate, personal, and GST revenues if none of the 1997–2016 changes affecting 2016 tax returns had been made. But this figure is outstripped by the cost of tax expenditures: In 2015 alone, the federal government lost $117.9 billion in revenue due to large numbers of tax expenditure provisions that have been gradually built into the federal corporate, personal, and GST laws since 1972.38 The revenue lost to the federal government in 2016 from the combined effect of 1997–2016 structural tax cuts is estimated at $94.4 billion. It has not yet been possible to untangle how much of that $94.4 billion includes tax expenditures that are included in the 2015 estimate of $117.9 billion in total tax expenditures enacted since 1972. However, total tax revenues in 2015 from the three major components of the federal tax system – the corporate and income tax system and the consumption tax (GST ) system – only came to $195.2.39 Clearly, Canada walked away from $94.4 billion plus some component of the $117.9 billion in post-1972 tax expenditures as well. Even attributing

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a third of those post-1972 tax expenditures to the period 1997–2016 means that Canada could have had as much as $133.7 billion more revenues than it actually collected in 2016 if it had reverted to the 1997 tax system in 2016. For purposes of comparison, the net federal debt was $616.0 billion as of 31 March 2016.40 Tax expenditures are not only costly but are significantly skewed in favour of those with high incomes – predominantly male and nonracialized, nonindigenous persons. As Figure 11.3 demonstrates, women have lower average incomes than men, and thus women have less accumulated wealth as well. Women with low incomes will not get the same after-tax benefit from tax deductions or even of tax credits if their taxable incomes are not large enough to take advantage of those tax expenditures. Even women with high incomes have lower average incomes compared with men with top incomes. Thus even higher income women will also benefit less from tax expenditures designed to lower taxes on incomes and gains from capital assets. Table 11.4 provides details on how women’s deeply rooted economic inequality affects gender shares of nine large P I T expenditure items for the 2013 tax year. Men’s shares of those expenditures range from a low of 25.6% of the equivalent to married tax credit for single parents, who are predominantly women, to highs of 84.1% of the married tax credit for breadwinner spouses, who are predominantly men, and 220.4% of the pension income splitting tax benefit, which predominantly goes to men. The tax benefits of the single parent credit going mainly to women is tiny – $658.9 million. In contrast, the most valuable tax expenditures are quite substantial. The pension-income splitting rules alone cost the federal government $938.3 million in foregone revenue, and cost women themselves increased personal income taxes of $1,129.2 million in order to fund the $2,017.5 million in pension splitting tax expenditures received mainly by male taxpayers. Both of the tax expenditures for owners of capital in Table 11.4 arose from policy recommendations made by the Carter Commission as the government grappled with how to begin taxing capital gains in Canada for the first time, and how to coordinate capital gains tax rules with the taxation of corporate dividends received by shareholders. Wealthy Canadians tried to block the taxation of capital gains, which resulted in including a 50% capital gains exemption in the new 1972 personal and corporate income tax laws. Male taxpayers received

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Table 11.4 Allocation of selected personal income tax expenditure items, by gender, 2013

PIT tax expenditure items (TE s) Capital t e s Dividend tax credits for ­corporate shareholders Capital gains tax exemptions Employment t e s C PP/QPP contribution tax deductions EI contribution tax deductions Canada employment tax credit Family t e s Pension income splitting tax reduction Married tax credit for ­supporting spouse/partner Single parent tax credit for supporting child Family member tax credit for unpaid care

Total ­revenue cost of TE item ($millions)

Men’s share of TE item ($millions)

Men’s share of TE item (%)

Women’s share of TE item (%)

6,762.4

4,737.4

70.0

30.0

4,342.5

3,400.0

78.3

21.7

4,003.1

2,409.8

60.2

39.8

1,299.7 2,283.2

759.5 1,266.0

58.4 55.5

41.6 44.5

938.3

2,067.5

220.4

(120.3)

1,735.4

1,458.9

84.1

15.9

658.9

168.6

25.6

74.4

136.6

83.0

60.8

39.2

Sources: Statistics Canada, SPSD/M v. 21; deciles and results have been rounded.

78.3% of that $4.3 billion personal income tax expenditure in 2013; women received 21.7%. New tax burdens on corporate shareholders were further reduced by devising new dividend tax rules giving shareholders dividend tax credits for corporate income taxes already paid by corporations on their profits when those shareholders calculate their personal income taxes payable on dividend income. Male taxpayers received 70% of this $6.8 billion “corporate integration” personal income tax expenditure in 2013; women received 30%.41 Tax expenditures for employees are more equally shared between women and men. However, even though nearly equal numbers of women and men had employment incomes in 2013 – 49.4% were women, 50.6% were men – women receive significantly smaller shares of employee tax expenditures because the value of these tax benefits

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to each individual depends on how high their income is. Thus men received 60.2% and 58.4% of all CPP/QPP 42 and EI contribution tax deductions, respectively, and 55.5% of all Canada employment tax credits. And these are quite costly tax expenditures, ranging from $1.3 to $4 billion in that year alone. It is worth noting that these three employment tax expenditures are not as regressive or “upside down” as the capital gains exemption, for example. The amount of the Canada employment tax credit that can be claimed by individual taxpayers is theoretically the same for everyone with employment income.43 However, in reality, those earning less than $11,038 in employment income will not be able to claim any part of this tax benefit, because they would have no tax liability on such low incomes due to personal exemptions. The CPP/QPP and EI contribution income tax credits are less regressive because they credit flat-rate taxes. However, again, those who paid some C P P /Q P P and E I contributions but whose income is still less than the $11,038 personal exemption would still not get the full benefit of these tax credits. However, these two credits are structured to prevent the full-scale upside-down effect of exemptions and deductions that produce different tax expenditure amounts for those at different income levels. Family tax expenditures are some of the most regressive and upside down of all tax expenditures. They all reflect assumptions about gender roles that reflect stereotyped and conservative expectations about women’s roles. The equivalent to married credit for single parents is so small that it cannot possibly provide income security for singleparent families, and conveys the message that single parenting is not valued. Not surprisingly, this is the one tax expenditure in this list that goes predominantly to women. In contrast, the married credit for supporting a spouse/partner and the family member care tax credit tax expenditures predominantly benefit male taxpayers. At the other extreme, pension income splitting actually provides tax bonuses for high-income single-earner couples: It permits pension income to be split between spouses/partners, and doubles the amount of pension income that is tax exempt due to the $11,038 (2013) tax exempt zone from the personal credit as well as the amounts of pension income that is taxed at each of the graduated P I T rates. There is no top limit to this tax expenditure, and, by structuring this as a legitimate income splitting arrangement, the cost to the federal government of this $2.1 billion tax expenditure was only $0.9 billion (2013);

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this is because the other $1.2 billion came from taxes paid by spouse/ partners with whom the owner of the pension income split that income. The resulting benefit to pension owners (2013) is literally 220.4% more than the cost of this tax expenditure to the federal government, because 120.4% of the cost of that tax benefit is borne by the spouse/partner of the pension owner. 6 t h e c a n a d i a n ta x / t r a n s f e r s y s t e m : w o m e n ’ s pa i d w o r k d o e s n o t a lway s “ pay ”

Detailed examination of the gender impact of the hundreds of tax expenditures that sit inside Canadian federal, provincial, and territorial tax laws would very likely reveal that most of those tax provisions reflect or reinforce pre-existing economic gender inequalities in hiring and wages – and thus contribute in varying degrees to perpetuating gender inequalities in market incomes and accumulated wealth. Although many tax expenditures are actually social assistance payments (“transfers”) delivered in the form of tax credits, exemptions, or special rates, few of them can help reduce women’s fundamental economic inequality. It is possible, however, to examine how tax/transfer provisions in the aggregate interact with women’s economic realities to perpetuate two major barriers to women’s equality. The first barrier is that emphasizing tax and transfer subsidies for women’s unpaid work while ignoring women’s childcare and economic equality needs means that for the majority of women who do not earn significant incomes, paid work literally still does not “pay” in Canada. The second barrier is that the aggregate tax rules, tax expenditures, and direct transfer provisions that treat women as part of a marital or household unit divert substantial amounts of after-tax income from women to men, making it all the more difficult for women to be taxed fairly within the realm of household and family tax/transfer provisions. Specific tax/transfer provisions make it difficult for women’s paid work to “pay.” Consider for example the federal Working Income Tax Benefit (WI T B ), a deemed or refundable tax credit payable to those with low wages. This tax credit is designed to reduce the poverty of the working poor in the same way that a cash allowance given to those working on low incomes would assist them in meeting their household budgets. This tax credit works like a cash allowance because it is a “refundable” tax credit. But it is a special type of refundable tax credit;

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it is not paid because the taxpayer paid too much in taxes – it is refundable because the tax law states that it is deemed to be an overpayment like an ordinary tax refund. In 2016, a single individual could receive a refundable WI T B tax credit worth up to a maximum of $1,028 in after-tax funds and nontaxable funds. In the same year, a spouse/ partner or single parent could receive up to $1,868 in after-tax and nontaxed funds. These amounts are reduced as earnings increase, and the refundable credit is reduced to zero when single individual incomes reach $18,529 and married/partner and single-parent incomes reach $28,576.44 In 2016, there were 12.2% more women than men whose employment incomes fell into the low-income ranges qualifying for the WITB.45 Thus 57% or more of Canadians eligible for the WITB were women. But, during that period of time, women’s shares of W I T B actually fell from a high in 2013 of 52.7% to 49% in 2018.46 The fact that women have more low incomes than men but do not even receive half of all the W I T B payments is because the W I T B law imposes gender-specific barriers in receipt of these benefits. The maximum W I T B for single individuals is $1,028, but more women than men will have incomes that are either too low to qualify for the WI T B (minimum earnings of $3,000 are required), or cannot earn the $18,529 needed to obtain the maximum WITB payment. This means that on average, single individual women will receive less than half of all WI T B payments to single individuals, simply because they experience workplace wage and hour discrimination. Single parents, who are predominantly women, are not likely to be able to take maximum advantage of the W I T B unless they can find free or heavily subsidized childcare. This is because childcare is so expensive that wages of $18,529 plus the WITB of $1,868 is not likely to cover all living expenses plus childcare. Married/partnered women with children face a somewhat different barrier, because two partnered adults cannot each claim their own individual $1,028 W I T B benefit, but together can only receive the top family amount of $1,868 if one of them earns enough income to qualify. Men’s higher earning potential means that they can take full advantage of the W I T B with fewer hours of paid work, and that women can best contribute to the family budget by providing unpaid home and care work. Under these conditions, the aggregate impact of provisions that all work like the WI T B actually put pressure on women in low-income households to do their own unpaid work and try to find time for some paid work. But, if there is a choice between one spouse/partner being

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able to obtain an average male wage and the other only being able to obtain an average female wage, it will “pay” the couple (or a single parent) for the female or the single parent to contribute unpaid work in the household so that the higher earner can devote maximum time to WITB -supported paid work. Unfortunately, in Canada, the many different types of tax/transfer subsidies for women’s unpaid work dramatically outweigh those that support their paid work. Table 11.5 outlines the key federal tax/transfer provisions that have these effects. This collection of tax/transfer provisions is projected to cost the federal government $27.6 billion in 2018 – nearly 23% of the $117.9 billion in personal, corporate, and GST expenditures that were provided in 2016.47 Only one of the items in Table 11.5 provides financial support for women’s paid work, and it accounts for only 4.8% of all family tax/transfer funds spent on the items in this table. The largest subsidy for unpaid work in Table 11.5 is the Canada Child Benefit (C C B ). This is a nontaxable cash government transfer payment that gives parents annual allowances of $6,496 per child under six and $5,481 for those over six (2018).48 While parents have always been free to spend all these types of tax/transfer benefits however they might wish, this additional income makes it easier for coupled parents to live on one income while the other parent concentrates on unpaid care work instead of spending it on paid childcare while the second parent works. It also makes it easier for single parents to opt for doing their own full-time care work instead of paying for care while working for low wages. The longstanding criticism of these transfers is that they do not provide either single or second-earner parents – predominantly women – with childcare funding that enables them to choose between concentrating on paid vs unpaid work. This means that while governments declare that the purpose of the C C B is to help parents afford “afterschool care, tutoring, or a new pair of winter boots,”49 the reality is that full-time full-year childcare for two preschoolers costs an estimated $31,225 (Kingston, Ontario) to $33,577 (Toronto) in 2018.50 For single or partnered women who are eligible for the full CCB of $12,992, childcare fees are so high that even if they can also claim the childcare expense deduction, they will have to be able to obtain well paid work to be able to afford childcare plus tutoring or boots. It is difficult to predict exactly how each of the tax/transfer provisions in Table 11.5 above will affect women’s engagement in paid vs unpaid work given the diversity of women’s lives and resources.

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Table 11.5 Tax/transfer expenditures supporting women’s unpaid vs paid work, Canada, 2018

Tax/transfer expenditures (TTE s) supporting unpaid work Canada Child Benefit Dependent spouse/partner tax credit Spouse/partner tax credits transferred to supporting spouse Caregiver tax credit Family caregiver tax credit

Revenue costs of TTE items ($millions)

Men’s share of TTE item (%)

Women’s share of TTE item (%)

ttes

Total all t t e s supporting women’s unpaid work supporting paid work Child care expense tax deduction

22,600.0 1,621.9

 3 58

97 42

900.0

45

55

155.0 960.0

43 64

57 36

26,235 million

12.9

87.1

1,335.0 million 1,335 million

28 28

72 72

ttes

Total all t t e s supporting women’s paid work Total t t e s supporting all paid and unpaid work time ($) Share of total t t e s that support women’s paid work time (%)

27,570 million 4.8%

Sources: Statistics Canada, SPSD/M v. 21; results have been rounded.

Differing income levels, household composition, geographic location, and work hours will produce different net after-tax and after-childcare earnings for virtually every individual. However, Table 11.6 demonstrates that when standard assumptions are applied consistently across jurisdictions, it is possible to get some insight into how different types of tax/transfer family policy mixes can affect women’s economic choices between paid and unpaid work. All the countries in Table 11.6 were originally among the most gender-equal countries as of 1995 (except Korea, which was ranked 29th on the HDI and 37th on the GDI in that year). And, as Table 11.1 above demonstrated, all but the Netherlands, Denmark, and, added to the list here, Korea had fallen significantly in their gender equality rankings by 2015.

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Table 11.6 measures the costs of married/partnered and single parents’ paid work in terms of how well “paid work pays” after all relevant taxes and childcare costs are taken into consideration. Because the rules for married/partnered parents are different than those for single parents, each family type is analysed separately in light of all relevant tax/transfer rules in each country. The only uniform assumption in all calculations is that the two groups of parents earn annual incomes equal to 67% of average wages. This 67% figure roughly proxies women’s wage gaps in OE C D countries. The first point that can be seen in Table 11.6 is that single-parent earners pay much higher total taxes than married/partnered parent earners. Some of the differences are truly shocking. Korea only imposes a total tax burden of 11% on married parents who earn 67% of the average wage, but single parents with the same wages pay total taxes of 54.9%. This is a 43.9% tax rate gap between married vs single parents in paid work. Some of the northern European tax rate gaps are even bigger. In Norway, single mothers earning 67% of the average wage will pay 49.5% higher taxes than married mothers. Single mothers pay virtually no childcare fees, but even so, their total taxes plus childcare costs will take 77.1% of all their earnings. Supporting two children while working full-time to earn after-tax/after-childcare income of 22.9% of 67% of average wages is not likely to make paid work worth the time and effort involved. The most shocking figure in Table 11.6 is the cost of paid work for single mothers in Canada: Not only do single mothers pay 56.5% in taxes on modest incomes – 25.3% more in total taxes than married women with the same incomes – but women in Canada (Ontario 2015) will only keep 8.1% of their total earnings. Literally, single mothers’ paid work in Canada does not pay. Only single mothers who can command significantly more than 67% of the average wage can expect to be able to pay their taxes and their childcare expenses out of their earnings. The second point is that all the countries in Table 11.6 do make efforts to keep childcare costs for single mothers lower than for married/partnered mothers. The results vary. Some countries keep childcare costs markedly lower than the other countries in this group, but keep them even lower for single mothers (Norway, Sweden, and Denmark), or the same for both groups (Korea51). But despite the efforts to keep single-parent childcare costs low, when childcare costs are added to the relatively very high tax rates on single parents,

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75.3 36.7 74.1 66.6 57.6 29.9 60.9 19.3 56.4

31.2 26.7 29.3 30.6 19.7 22.2 45.2 11.0 30.4

Total tax paid if no childcare costs (%) 41.1 10.0 44.8 36.0 37.9  7.7 15.7  8.3 26.0

Total childcare costs (%) 91.9 77.1 83.6 83.3 71.8 62.0 83.9 63.2 73.9

Total tax paid plus childcare costs (%) 56.5 76.2 39.2 58.7 57.3 57.7 81.1 54.9 58.4

Total tax paid if no childcare costs (%)

Single-parent earners

35.4  0.9 44.4 24.6 14.5  4.3  2.8  8.3 16.5

Total childcare costs (%)

Source: OECD, “Measures of childcare costs and related work incentives,” 2015. OECD Tax-Benefit Models, www.oecd.org/els/benefits-and-wages-statistics. htm. TTP: Labour market participation tax rate for second-parent or single-parent earner, net of all taxes and income supports, as percentage of second- or single-parent earner’s own new income, assumed to be 67% of average country wage (first parent assumed to have income of 100% of average country wage); CC C: Childcare costs, net of all tax and transfer effects, as percentage of second- or single-parent earner’s own income; TTP plus CCC: Combined effect of both; CC C as percentage of pretax income: share of gross earnings taken up by second- or single-parent earner’s C C C costs alone; all cases assume two children under five, full-time childcare.

Canada Norway US Finland Netherlands Sweden Denmark Korea Av. OE C D

Total tax paid plus childcare costs (%)

Second-parent earners

Table 11.6 Total tax paid plus childcare costs as percentage of full-time earned income for second-parent and single-parent earners, selected OE C D countries, 2015



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single-parent earners are left with as little as 8.1% and at most 38% of their total earnings in after-tax/after-childcare consumable income. In comparison, married women do fare better. However, with the exceptions of Norway, Sweden, and Korea, married women only keep between 24.7% to 42.4% of earnings net of taxes and care costs. Canadian second-earner and single parents fare the worst: Single parents in Canada take home just 8.1% of their total earnings, and second-earner parents only take home 24.7%.52 7 ta x i n g f o r g e n d e r e q u a l i t y r e q u i r e s p r o g r e s s i v e a n d i n d i v i d u a l ta x at i o n

The traditional gendered paid and unpaid work practices that underpin the highly unequal results produced by family tax/transfer laws are culturally and thus economically self-perpetuating. Generations after generations of children and thus the whole of Canadian society are continually informed by rules assuming that women should put care work first and fit their paid work around it. The message defining male lives is that mainly male partners are expected to and should be helped to profit more from full-time full-year paid work. In this system, men begin earning higher incomes than women so early in life (as shown in Figure 11.2) that even if members of a couple decide to trade roles, it is not necessarily assured that they can step into each other’s economic positions at will. Although women’s economic status has gradually improved over time, three structural problems make it extremely difficult to change the status quo. The first is vividly illustrated in part 6 above: Canadian governments are reluctant to fully socialize (re)production to enable all women and men to participate on equal terms in economic production; their preferences continue to heavily subsidize and incentivize women’s unpaid work. Second, care-related policies still conceptualize women as part of marital, cohabitation, or household units instead of seeing them as fully independent individuals in their own legal and economic right who are entitled to expect to secure their own lifelong economic security. Third, policies that focus narrowly on increasing women’s paid work to boost economic growth rates without regard to women’s unpaid workloads and economic needs merely instrumentalize women’s paid work but, as narrowly framed, do not promote substantive gender equality as a matter of constitutional rights.53

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This chapter concludes by looking at two possible structural solutions to these problems: (a) how the design of personal income tax rate tables invisibly reinforces economic gender inequalities, and thus how more progressive tax rate schedules could improve after-tax gender equality, and (b) how pervasive use of joint tax and benefit mechanisms block after-tax/after-care costs gender equality, and thus should be repealed in order to remove those barriers to gender equality. These are examined here, because fundamental changes to tax rates and joint tax rules in Canada can help solve the three core structural problems posed by current subsidies to women’s unpaid work in the face of wage discrimination, lack of full recognition of women’s fiscal personality, and narrow reliance on women’s paid work to fuel economic growth. Increasing the progressivity of p i t rates would increase women’s after-tax incomes. The structure of personal income tax rate schedules alone can increase the progressivity of the overall tax/transfer system. The federal Canadian personal income tax system was at its most graduated or progressive as the result of changes made while the Carter Commission recommendations were being implemented. The lowest rate in the personal income tax rate table had started out at 17% in 1972. By 1976, it was reduced to 6%, and the rates in the rest of the schedule increased in fourteen very small increments to the top rate of 47%.54 At that time, men’s incomes were 230% higher than women’s,55 which means that this change was of much greater value to women than to men. This progressive rate structure was replaced in 1987 with a threerate tax table. The lowest rate was raised again to 17%, and the top rate had been cut to 29%. By this time, some progress toward pre-tax income equality had been made; men’s incomes were only 177% higher than women’s at that time. However, this massive shift in tax rates heavily penalized low-income women, who saw their tax rate go from 6% to 11%. At the same time, the cuts to the top rates gifted men generously by reducing top rates by 18% as compared with the earlier system. Overall, sixty percent of those facing the 11% increase in their lowest rate were women, while 77% of those benefiting from cutting the top rate to 29% were men.56 The 6% bottom rate has never been restored, although the 17% rate is now down to 15%, and a new top rate of 33% was added by the current government. However, even now, the federal rate structure is simply not as redistributive as had originally been planned.

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Table 11.7 illustrates how reducing the lowest PIT rates and increasing the top rates could increase after-tax gender equality in Canada. To illustrate this type of change, the Netherlands income tax rate table has been “swapped” for the federal Canadian rates for the 2016 tax year in order to simulate the gender impact of a more progressive rate structure that is in current use in another highly developed country. The Netherlands was chosen for this simulation because all its ratings on the UN development and gender equality indicators (Table 11.1) and OEC D second-earner/single-parent participation tax rates/childcare cost indicators (Table 11.6) are significantly higher than Canada’s, which suggests that Canada might expect similar improvements with a similar rate structure. The rates simulated for federal Canada (adjusted for the impact of Canadian provincial tax rates) are 8%, 7.6%, 33.1%, and 42%.57 This federal personal income tax rate “swap” demonstrates that adapting the Netherlands personal income tax rates to the federal Canadian income tax system would become markedly more gender equal as the result of three distributional changes. First, women are the clear beneficiaries of this rate table, with a total of $9.3 billion in additional after-tax income. Women in nine of the ten income deciles all benefit with higher net after-tax incomes, and, in the first six deciles, benefit equally or more than men. The average increase in after-tax income for women would be $640, and for men, $326. Second, the cost in terms of low revenue would be minimual. The total revenue foregone with this set of rates is only $4.8 billion. Third, all of the after-tax income increases in the first nine deciles would be paid for by the higher tax rates that affect the top income decile. Men in the tenth decile would bear 78.8% of the total costs of the new higher tax rates that produce the $23.6 billion that would then be redistributed to those with lower incomes. This would thus be a major step in the direction of reducing the concentration of increasing amounts of income and wealth in the hands of the richest. It should be noted, however, that from the individual perspective, P I T rate changes alone cannnot solve the complex problems that construct women’s after-tax income inequalities. The after-tax income increases in Table 11.7 are largest for those in deciles five through eight, while the increases in the bottom two deciles are markedly small. Because women account for 73% and 84% of all those in those two lowest income deciles in Canada, it is clear that just reducing the lowest P I T rates will not do enough to remove all the socioeconomic

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Table 11.7 Change in after-tax income with Netherlands federal income tax rates, Canada, by gender and decile, 2016 Change in aggregate after-tax income ($million)

Change in average i­ndividual after-tax income ($)

Change by ­gender (%)

Decile

Men

Women

Both

Men

Women

Both

Men

Women

 1  2  3  4  5  6  7  8  9 10 All

49.3 51.3 200.7 599.4 1,447.8 2,855.3 3,774.7 3,784.6 1,239.0 (18,572.8) (4,570.6)

133.1 279.1 374.5 854.9 1,902.4 2,723.2 3,738.0 3,320.1 1,012.8 (5,012.9) 9,325.1

182.4 330.4 575.2 3,454.3 3,350.2 5,578.5 7,512.7 7,104.7 2,251.8 (23,585.7) 4,754.5

40 49 179 514 1,153 1,985 2,679 2,465 70 (9,089) 326

82 155 216 505 1,186 1,921 2,581 2,511 916 (6,160) 640

64 116 202 509 1,172 1,953 2,629 2,486 788 (8,255) 166

27 16 35 41 43 51 50 53 55 79 (96)

73 84 65 59 57 49 50 47 45 21 196

Source: SPSD/M v. 24; totals may not add due to rounding; ( ) denotes negative numbers.

barriers to women’s income equality. Reducing the lowest P I T rates does reduce tax disincentives to women’s paid work, but it may not increase their after-tax incomes enough to pay for needed childcare services while in paid work, offset the effects of joint tax provisions like the WI T B , or significantly reduce the effects of living in poverty. Repealing all joint fiscal laws would significantly increase women’s net after-tax incomes. When Canada enacted its first income tax laws, it broke from the U K model of using the married couple as the basic tax unit, and instead adopted the individual as the tax unit. The ensuing debate over that choice has raged for more than a century, and the results have not benefitted women. Now most former colonies that did opt to use the individual as the tax unit have either replaced that rule with joint taxation of adult spouses/partners, or began building joint tax presumptions into specific tax/transfer provisions like the post–World War II family allowance now embedded in the Canada Child Benefit, as well as in post-1972 provisions like the Child Care Expense Deduction, family-home capital gains rules, education expense deductions, and over a hundred other specific provisions.58 Canada has been at the forefront of countries that have pursued this course.

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The inclusion of so many joint tax, tax expenditure, and direct expenditure provisions in Canadian fiscal law means that women are de facto taxed jointly with their spouses/partners or with dependent children. Some of these provisions do actually provide women with net after-tax benefits. However, in the aggregate, they massively disadvantage women as measured in terms of after-tax gender income distribution. They also disadvantage female same-sex couples to a greater extent than they disadvantage male same-sex couples, although these sexual orientation income gaps are smaller than gender income gaps.59 Complete individualization of all tax and expenditure policies is the one policy change that could actually ensure that paid work, education, property ownership, and social benefits can all contribute to women’s increased economic equality in Canada. In fact, it is the one policy change that makes the largest structural difference for women at all income levels, and an even bigger difference for women with low incomes and/or children. Full individualization is a simple change when compared with the complexities of the growing numbers of family-based and joint fiscal measures political parties feel compelled to offer voters – yet it would factually contribute much more to women’s gender equality than any existing policies, even the generous joint Canada Child Benefit. Table 11.8 demonstrates that if Canadian tax and benefit policies were all restructured as individual laws, with all joint and adult spouse/partner provisions removed, they would leave women with significantly larger after-tax incomes. This is because fully individualizing all tax, tax expenditure, and direct benefits would eliminate the fiscal barriers to women’s paid work that arise from subsidies for unpaid work and that limit benefits to women based on their spouse/ partner’s incomes. In addition, there is evidence that full fiscal individualization in Sweden and Finland also contributed to women’s higher rates of labour force participation, and, over time, smaller gender income gaps.60 The simulation used to produce the figures in Table 11.8 “unmarry” and “uncohabit” all couples in Canada for all fiscal purposes. This results in women remaining entitled on the basis of their own incomes to much larger total amounts of low-income tax and direct benefits, instead of having them “clawed back” when they live with another individual as a married or cohabiting couple whose combined incomes often disquality woman from claiming some benefits. The same rules apply to men with children.

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Table 11.8 Change in after-tax incomes of individualization of all tax/transfer provisions, Canada, by gender and decile, 2016 Individuals in decile

Change in aggregate aftertax income ($million)

Change by gender (%)

Decile

Men

Women

Men

Women

Both

Men

Women

Both

 1  2  3  4  5  6  7  8  9 10 All

40 36 38 44 49 52 51 55 65 74 50

60 64 62 56 51 48 49 45 35 26 50

392 781 823 (275) (341) (686) (1,184) (1,427) (1,699) (2,562) (6,177)

4,154 6,570 3,723 4,201 3,587 3,699 2,872 2,324 1,833 953 33,916

4,546 7,351 4,546 3,926 2,346 3,013 1,688 897 134 (1,609) 27,739

601 1,404 1,086 (332) (381) (791) (1,192) (1,323) (1,379) (1,819) (660)

3,292 5,067 3,316 4,056 3,842 4,137 3,336 3,025 2,961 2,158 3,678

2,376 3,984 2,417 2,109 1,777 1,630 910 486 72 (869) 1,493

Source: SPSD/M v. 20; totals may not add due to rounding; ( ) denotes negative numbers.

The sheer size of the increases in net after-tax incomes for women in each decile in Table 11.8 makes it clear that to date, the beneficiaries of Canada’s large array of joint tax and expenditure rules have been men – to the extent of $6.2 billion in 2016 – and federal and provincial governments – to the extent of spending cuts of $27.7 billion in 2016.61 These after-tax benefits to men and to governments are heavily subsidized by women, who pay for them by paying more than their fair individual shares of taxes. In the 2016 tax year alone, these joint tax/benefit fiscal rules meant that women paid $33.9 billion more in total taxes than they would have if they had been taxed on their incomes as single individuals. In a very real sense, these tax/transfer provisions have been designed to provide larger after-tax incomes to men who support women – so long as the women then concentrate their work time on performing disproportionately large shares of unpaid work, and fit their paid work around the edges of unpaid work responsibilities. Until these provisions are repealed, similar gender-based effects occur every year, and will continue to occur every year into the future. Repealing all joint tax/transfer federal and provincial fiscal rules and replacing them with individual tax rules would have left women

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in 2016 with $33.9 billion more net after-tax income in that one year alone.62 This change would come from a wide array of types of provisions, such as: caps on social transfers would not have artificially reduced women’s shares of family benefits, but would have reduced them only by reference to women’s incomes; pension incomes split with lower income spouses/partners would not have shifted nearly $13.2 billion out of men’s tax returns and into into women’s returns; and tax/transfer items like the WI T B would not have been been paid proportionately more often to both eligible spouses/partners subject to identical limits, but would have freed women to work to their own paid work caps to earn their own maximum W I T B.63 In addition, repealing all joint tax/benefit laws would increase women’s average after-tax/after-benefit incomes in every income decile. Instead of of having the pronounced “upside down” effect shown in Table 11.7, where the PIT rate swap would give women in the bottom two deciles the smallest increases in their after-tax incomes, the change in women’s and men’s individual after-tax incomes in Table 11.8 would be “right side up.” Women in the lowest income decile, where there are relatively fewer men with taxable incomes and and the tax benefits of income splitting and other joint provisions would be small or zero, would nonetheless still see an average increase in after-tax income of $3,292. And men in that decile would also see a modest increase of $601, because some men are in the same socioeconomic positions as women at low income levels. The biggest advantage of this particular policy change is illustrated by the fact that over the entire ten deciles, women would expect to receive substantial average increases in after-tax income in every income decile on the order of $3,000 to $4,000 per woman. The two exceptions are decile two, in which women’s increase is over $5,000, and decile ten, where it is just slightly over $2,000. On average, each partnered woman would gain additional after-tax income of $3,678. The other advantage of this policy change is that men’s after-tax incomes would also increase in low-income deciles one through three, although to a more limited extent. And, in the other six deciles, the amount of after-tax income that men would lose due to this policy change would gradually increase, but, with the exception of the top income decile, individually no one would lose more than than $1,400. Overall, the average cost to male taxpayers of abolishing joint taxation completely is only $660 (2016). That must be well worth seeing women’s average after-tax incomes go up by $3,678 each.

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The biggest loser in this policy scenario is federal and provincial/ territorial governments. The reason for this is simple: Canadian governments in 2016 gained an additional $27.7 billion in revenues by using joint tax/transfer rules to limit the cost of family tax/transfer provisions. The large gains that women would receive for abolishing this system reflect, in the end, the extent to which governments have used women’s traditionally lower incomes and higher levels of unpaid work as a way to justify joint fiscal provisions that cut government program expenditures. Instead of using revenues to fund services and programs to promote women’s economic equality, governments in Canada have preferred to spend $6.2 billion (2016) to fund joint fiscal provisions that have reduced men’s tax bills at the same time that those tax rules have incentivized women’s unpaid and low paid work. The sheer aggregate scale of the fiscal impact of individualizing Canadian tax/benefit systems suggests that this policy change (Table 11.8) would do much more to promote gender equality than would increasing the progressivity of personal income tax tables (Table 11.7). However, these two policy options are not mutually exclusive alternatives. In fact, they would be mutually beneficial: The effect of freeing women’s paid and unpaid work from the influence of the total Canadian joint tax/transfer system would leave women with more of their “own” incomes before and after taxes/transfers. And if that effect could then be combined with reducing tax rates on women’s lowest and moderate incomes at the same time as increasing tax rates on the highest incomes, which are predominantly men’s incomes, the net effect of making both changes at once would leave all women at every income level with even more and even larger shares of after-tax incomes than shown in Table 11.8 above. And it would benefit women in the lowest incomes deciles to the greatest extent. Finally, reducing transnational tax avoidance would remove another way to increase the progressivity of the total tax system in Canada, and reduce after-tax gender inequality. Unfortunately, the government’s capacity to calibrate the extent to which international tax avoidance affects total revenues is limited. The Canada Revenue Agency (CRA) was able to determine that the combined tax gap domestically from the G ST and P I T came to approximately $14.6 billion for the 2014 tax year, or 8.3% of corresponding revenues.64 However, despite the fact that Canadian governments have themselves helped set up Caribbean offshore tax-shelter facilities, the CRA has only been able to estimate revenues lost of $0.8 to $3 billion for 2015.65

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There is every reason to expect that transnational tax avoidance benefits those with high incomes more than others, simply because the costs and risks of offshore tax avoidance are so high. In addition, men’s much larger shares of incomes and wealth than women’s mean that they are more likely to be the beneficiaries of these types of tax avoidance plans. The corporate sector in Canada continues to be dominated by men to a great extent, as shareholders, lenders, corporate executives, employees, and wealth owners, and avoiding the reach of family property and inheritance laws, which protect women’s interests in family incomes and assets, is often cited as a goal of offshore tax avoidance.66 Thus effective revision of domestic tax laws and tax treaties to end offshore accumulation of untaxed or lightly taxed profits would no doubt increase taxes paid in Canada by men to a greater extent than by women. 8 ta x i n g f o r g e n d e r e q u a l i t y i s u r g e n t

Decades of “taxing for growth” have left Canada unable to deliver on its constitutional, human rights, and international obligations to eradicate all forms of gender inequality, including economic gender inequalities. Recently, Canada has come to be seen once again as a country that is committed to gender equality. As yet, however, the cumulative effects of decades of reduced revenues and permanent budgetary austerities continue to exacerbate women’s economic gender inequalities. This condition is well documented in the U N Human Development Reports, which quantified Canada’s fall from its ranking as first in the world on both human and gender development indicators for four years in the late 1990s, to its fall to ninth in the human development index and twenty-fifth in the gender inequality index in 2015 (Table 11.1). Each view of the tax policy regimes documented in this chapter have contributed to this decline in both human development and gender equality in Canada. They all affect different aspects of federal budgets; some compare Canada with other countries, and some include the impact of provincial budgets. Some are strictly tax cut measures, while others are solely spending measures or combine tax and spending features as tax expenditures that deliver government benefits via tax laws. Cumulative 1997–2016 federal tax cut regimes reduced federal personal, corporate, and GST tax rates and at the same time modified

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numerous tax expenditures and direct transfers cumulatively over several governments. In 2016, the federal government collected an estimated $94.4 billion less than it would have if the 1995 federal tax system had remained unchanged. As measured against estimated 2016 revenues, those cuts left a 41.4% revenue hole in the federal budget (Table 11.2). The financial benefits of the 1997–2016 tax cuts disproportionately go to men. Women comprise half the population in Canada, but because virtually all these cuts were linked to income levels, women received only 32.3% of the $52.3 billion of the after-tax income benefit in 2016 of these cumulative personal income tax cuts, and their shares in future years will be more or less the same. With much higher average incomes, men’s shares of the benefits of those same cuts in 2016 was 67.7%. The distribution of these cuts in 2016 was upside-down by both gender and incomes: The highest-income men were able to claim 70% of the $17.9 billion in tax cut benefits going to the top income decile. In contrast, women’s shares of those cuts in all but one decile fell between just 29.6% and 49.3% of the total cuts received by those in those deciles (Table 11.3). Federal tax expenditures cost 52% of total p i t , c i t , and g s t revenues annually. Tax expenditures include all the special tax deductions, subrates, credits, and income splitting options embedded in tax laws, and had the same 52% impact in 1991 as they did in 2015. Their total 2015 cost was $117.9 billion. The details of how various types of tax/ transfer expenditures affect women as compared with men differently reveal that they overwhelmingly benefit men (Tables 11.4, 11.5, 11.6, and 11.8). Table 11.4 outlines the gender distributions of large investment, employment, and family tax expenditures. Men received as much as 220.4% to 84.1% of the largest of these tax expenditures, while women’s shares are between negative 120.3% (because women paid taxes on incomes attributed to them by their spouses/partners but did not legally own those incomes) and 15.9%. The only tax expenditure that went predominantly to women is also one of the very smallest in this group, the single parent “equivalent to married” tax credit. Table 11.5 reports on tax/transfer expenditures supporting women’s unpaid vs paid work. This set of provisions disproportionately subsidize women’s unpaid work while providing very little support for women’s paid work. The 2018 revenue lost to of unpaid work subsidies – especially for unpaid care work – is $26.2 billion. In the same

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year, the federal government is spending only $1.3 billion for tax credits that partially reimburse limited childcare costs incurred by women in paid work. The total revenue lost to these two sets of tax expenditures comes to $27.6 billion for the year – nearly 23% of the $117.9 billion in total federal tax expenditures that were provided in 2015. On that measure, the cost to the government for the childcare tax credit is just 4.8% of that total. Table 11.6 compares women’s earnings net of taxes and childcare costs in Canada as compared with women in other high-income countries. The shocking reality is that paid work for women in Canada, who earn 67% of the average national wage, does not “pay.” Secondearner parents spend 75.3% of their gross earnings on taxes and childcare costs, leaving them just 24.7% of their earnings to live on. Single-parent earners’ tax plus care costs come to 91.9% of their gross earnings, leaving them only 8.1% of gross earnings to live on. One of the many implications of these figures is that spouses/partners earning at this level cannot afford paid work unless they have access to free childcare, and single parents without access to free care may have no option but social assistance. Compared with all the other countries in this table and the OECD average, this dynamic places extreme pressure on Canadian women to prioritize unpaid care work over paid work when they can only obtain modest wages. Four fiscal policy changes could substantially increase women’s after-tax/childcare incomes: Restore a greater degree of redistributive progressivity to personal income tax rates; increase C R A efforts to recover revenues lost through offshore tax avoidance mechanisms; replace all federal and provincial joint tax, tax expenditure, and direct spending laws with individual provisions; and provide affordable accessible childcare at costs that do not prevent women from earning after-tax/ after-childcare wages capable of providing economic security over their lives (Tables 11.6, 11.2, 11.7, and 11.8). Table 11.7 demonstrates that federal Canadian income tax rates can be made more gender equal at a relatively low cost to government revenues. The net revenue foregone with rates modelled on the Netherlands is $4.8 billion, but women are the clear beneficiaries of this rate table, with a total of $9.3 billion additional after-tax income. Table 11.2 shows where additional revenues from income taxes can be obtained to offset the rest of childcare and individualization costs. Canada can further increase revenues by $0.8 to $3.0 billion or more by blocking transnational tax avoidance.

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Table 11.8 summarizes how federal and provincial joint tax/transfer laws reinforce women’s economic dependency. This large group of tax/transfer expenditures includes all forms of joint measures, including those supporting women’s unpaid vs paid work. It includes joint investment, GST, and other types of tax provisions, all of which reduce supporting spouse/partner taxes while penalizing the paid work of women partners. If all women had been taxed as single individuals in 2016, they would have had $33.9 billion more net after-tax income. At the same time, losing the benefits of these joint fiscal laws would only impose an additional $6.2 billion in taxes on their supporting partners. However, these changes would cause government revenues to fall by $27.7 billion, because most of these provisions are designed to reduce government costs of social transfer programs. Universally affordable childcare for all parents is an essential corequisite to taxing women as individuals free from government-enforced social pressure to provide the bulk of unpaid care and domestic work. The Childcare Task Force estimated in 1986 that such a system could cost $11.3 billion by 2001. In 2018 terms, that is now $15.5 billion. Considering the revenue benefits of eliminating the many discriminatory tax/transfer provisions discussed in this chapter, that is an entirely affordable amount, particularly when shared with the provinces and territories.

notes



All simulation analysis is based on Statistics Canada’s Social Policy Simulation Database and Model, versions 22.2 through 26.0. The assumptions and calculations underlying the simulation results were prepared by Kathleen Lahey, Andrew Mitchell, and Val Kulkov and the responsibility for the use and interpretation of these data is entirely that of the author. After-tax income is consumable income, which will be further reduced by GS T /H S T and sales taxes; ( ) indicates negative numbers.   1 Government of Canada, “Fiscal Policy for Growth,” Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966), vol. 2, ch. 4, 117–82, 173, 182, par. 34 [Carter Commission].   2 Note, however, that even the Royal Commission on the Status of Women agreed with the Carter Commission joint taxation recommendations. It was really only the strong separate statement filed by Commissioner Elsie MacGill and strong advocacy within federal policy circles that prevented

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that recommendation from being adopted. Report of the Royal Commission on the Status of Women (Ottawa: Queen’s Printer, 1970), 429. For details, see Kathleen A. Lahey, “The Politics of Income Splitting, Sex Equality, and Sex Role Stereotypes in Comparative Perspectives,” in Caring for Children: Social Movements and Public Policy in Canada, ed. Rachel Langford, Susan Prentice, and Patrizia Albanese (Vancouver: University of British Columbia Press, 2017), 37–72, 44–5.   3 United Nations, Human Development Report 1998 (New York: UNDP 1998), 20, Table 1.2 (HDI ); 32, Table 1.9 (GDI) (based on 1995 data) [UN H D R 1998].   4 John Stuart Mill, Principles of Political Economy (London: George Routledge, 1848), 510.   5 Parliament of Great Britain, Royal Commission on the Income Tax (London: Her Majesty’s Stationery Office, 1919), 2, par. 6.   6 Solomon v. Solomon, House of Lords (1896).   7 Royal Commission on Taxation in Canada, 1966, vol. 2 chapter 4, page 182, par. 34.   8 Organisation for Economic Co-operation and Development (OEC D), Economic Policy Reforms 2005: Going for Growth (Paris: OEC D Publishing, 2005), http://www.oecd.org/eco/labour/economicpolicy​ reformsgoingforgrowth2005.htm.   9 See, for example, OECD, Economic Policy Reforms 2007: Going for Growth (Paris: OECD Publishing, 2007), 17–19, www.oecd.org/eco/ growth/economicpolicyreformsgoingforgrowth2007.htm. 10 See, for example, Santiago Acosta-Ormaechea and Jiae Yoo, Tax Composition and Growth: A Broad Cross-Country Perspective (Washington, DC: I M F, 2010). 11 Charter of Rights, ss. 15, 15(1), 28, and Constitution Act 1982, s. 35(4). 12 UN H D R 1998, 20, Table 1.2 (HDI ); 32, Table 1.9 (GDI) (based on 1995 data). See U N HDR 1999 and 2000 for subsequent rankings. 13 United Nations, Convention on the Elimination of All Forms of Discrimination against Women, U N G A res. 34/10, 18 December 1979. 14 C E D A W, General Recommendation 28, 4, par. 16, C EDA W/C/2010/47/ GC .2 (19 October 2010). Also see Sandra Fredman and Beth Goldblatt, Gender Equality and Human Rights (N Y : UN Women, 2015). 15 UN, Report of the Fourth World Conference on Women (NY : United Nations, 1995), www.un.org/womenwatch/confer/beijing/reports/plateng. htm. Gender budgeting methods first developed in Australia in the 1980s are now carried out in well over 100 countries and have opened the door to systemic examination of the gender impact of virtually all forms of

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government action. For the history and details of this development, see Rhonda Sharp and Ray Broomhill, A Case Study of Gender Responsive Budgeting in Australia (London: Commonwealth Secretariat, 2013); Deborah Budlender, Review of Gender Budget Initiatives (London: Commonwealth Secretariat, 2001). 16 See, e.g., O ECD 2008. 17 O E C D , Gender and Taxation: Why Care about Taxation and Gender Equality? (Paris: OECD Publishing, 2010); OEC D, Divided We Stand: Why Inequality Keeps Rising (Paris: OECD Publishing, 2011); Isabelle Joumard, Mauro Pisu, and Debbie Bloch, “Less Income Inequality and More Growth – Are They Compatible?” Income Redistribution via Taxes and Transfers across OECD Countries, Part 3, OEC D Economic Department Working Papers No. 926 (Paris: OEC D Publishing, 2012), http://dx.doi.org/10.1787/5k9h296b1zjf-en. 18 Magdalena Sepulveda Carmona, Report of the Special Rapporteur on Extreme Poverty and Human Rights. Mission to Mozambique, 4 June 2014, http://ssrn.com/abstract=2502982, especially sections I and II. 19 C E D A W, Blok v. Netherlands, Communication No. 36/2012, UN Doc. C E D A W/C/57/D/36/ 2012 (2014). 20 C E D A W, Report of the Inquiry Concerning Canada, C EDA W/C/OP.8/ C A N/1, 30 March (2015). U N 2015. 21 UN, Critical Milestones toward Coherent, Efficient and Inclusive Follow-up and Review at the Global Level, Seventieth session, agenda items 15 and 16, A/70/684, 15 January 2016; UN, Paris Agreement, Twenty-first sess., Framework Convention on Climate Change, C N.63/2016; Treaties XXVII.7.d, open for signature April 2016. 22 UN, Addis Ababa Action Agenda, Third International Conference on Financing for Development, endorsed by the United Nations General Assembly, Res. 69/313, 27 July 2015, Addis Ababa, Ethiopia. 23 UN, Economic and Social Council, Review and Appraisal of the Implementation of the Beijing Declaration, Commission on the Status of Women, Fifty-ninth sess., E/CN.6/2015/3, 9 March 2015. 24 Michael Förster, Ana Llena-Nozal, and Vahé Nafilyan, Trends in Top Incomes and Their Taxation in OECD Countries, OEC D SEM Working Paper No. 59 (Paris: OECD Publishing, 2014), www.oecd-ilibrary.org/ social-issues-migration-health/trends-in-top-incomes-and-their-taxationin-oecd-countries_5jz43jhlz87f-en;jsessionid=a0hk2m56476s.x-oecdlive-02, D O I : doi.org/10.1787/5jz43jhlz87f-en. 25 Statistics Canada, Daily Average Time Spent in Hours on Various Activities by Age Group and Sex, Table 45-10-0014-01, https://www150.

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statcan.gc.ca/t1/tbl1/en/cv.action?pid=4510001401 (2015 data for employment and self-employment incomes). 26 Melissa Moyser, “Women and Paid Work,” in Women in Canada: A GenderBased Statistical Report (Ottawa: Statistics Canada, 2017), 16, https:// www150.statcan.gc.ca/n1/en/pub/89-503-x/2015001/article/14694-eng. pdf?st=eTkfT1nt (2015 data). 27 S P S D /M, simulated 2018 data. 28 O E C D .Stat, Revenue Statistics: OECD Member Countries – Comparative Tables (Paris: OECD, 2016), stats.oecd.org/Index.aspx?DataSetCode=REV. OECD. 29 Time lags in data reporting vary, but the 1998 UNHDR first ranked Canada #1 on both the HDI and the G D I based on 1995 data. Thus Canada factually attained that rank in 1995, but that rank was not identified until 1998. The 1999 and 2000 HDR s ranked Canada #1 on both indices based on 1997 and then on 1998 data. It is inferred that Canada was also factually #1 in 1996, although no HDR report used that data year due to shortened time lags between data collection and use in the H D R . The 2001 HDR ranked Canada #3 on both indices on the basis of 1999 data. Copies of HDRs for 1990 through 2016 can be obtained at http://hdr.undp.org/en/global-reports. 30 Janet Stotsky, Gender and Its Relevance to Macroeconomic Policy: A Survey, I M F Working Papers (Washington, DC : IMF, 2006), 18. 31 Janet Stotsky, Sakina Shibuya, Lisa Kolovich, and Suhaib Kebhaj, Trends in Gender Equality and Women’s Advancement (Washington, DC : IMF, 2016), 42–3; Christian Gonzales, Sonali Jain-Chandra, Kalpana Kochhar, Monique Newiak, and Tlek Zeinullayev, Catalyst for Change: Empowering Women and Tackling Income Inequality, IMF Staff Discussion Note (Washington, DC: I M F, 2015), http://www.imf.org/­ external/pubs/ft/sdn/2015/sdn1520. pdf. 32 Kathleen A. Lahey, The Alberta Disadvantage: Gender, Taxation, and Inequality (Edmonton, AB: Parkland Institute, 2015), 39, Table 9. 33 Anna Beninger, High-Potential Employees in the Pipeline: Maximizing the Talent Pool in Canadian Organizations (New York: Catalyst, 2013), 2. 34 Catalyst, Visible Minorities in Canada, 9 April 2018, http://www.catalyst. org/knowledge/visible-minorities-canada. 35 For detailed discussion of the nature of structural detaxation, see Kathleen A. Lahey, “Uncovering Women in Taxation: The Gender Impact of Detaxation, Tax Expenditures, and Joint Tax/Benefit Units,” Osgoode Hall Law Journal 52, 2 (2015): 429–61.

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36 It is true that addition of a new 33% top marginal tax rate to federal legislation in 2017 will restore some of the progressivity of the PIT system. However, that is a very small change relative to the cumulative impact of the nearly two decades of tax cuts preceding that change. 37 Canada Revenue Agency, “All Returns by Age and Sex,” Preliminary Table 4 for all Canada, Income Statistics 2018 (2016 tax year), 1, https://www. canada.ca/content/dam/cra-arc/prog-policy/stats/t1-prelim/2016-tax-year/ tbl04-en.pdf. 38 Department of Finance Canada, Report on Federal Tax Expenditures 2017 (Ottawa: Canada, 2017), chart 1, 288. This is the most recent tax expenditure report. Many other tax instruments also deliver tax expenditures. Those are ignored in order to measure the impact of structural tax cuts and of tax expenditures for just the three main tax instruments used by the federal government, the CI T, PI T, and GST. 39 Department of Finance Canada, “Composition of Expenses for 2016–17,” Annual Financial Report of the Government of Canada, Fiscal Year 2016– 2017 (Ottawa: Canada, 2017), https://www.fin.gc.ca/afr-rfa/2017/reportrapport-eng.asp#_Toc492557457. 40 Department of Finance Canada, “Federal Debt,” Table 4, Annual Financial Report of the Government of Canada, Fiscal Year 2015–2016 (Ottawa: Canada, 2016), https://www.fin.gc.ca/afr-rfa/2016/report-rapport-eng.asp. 41 These dividend tax credits were originally designed to produce the same after-tax effect on income arising from corporate shares, regardless of whether that income was realized by selling the shares or by claiming ­dividend tax credits on distributions. As soon as corporate and personal tax rates began to diverge, however, this no longer worked, with the result that up to $50,000 in dividends can be received tax free in some parts of Canada. 42 For details of the computation of the CPP/QPP contributions, see Government of Canada, CPP Contribution Rates, Maximums, and Exemptions (Ottawa: Canada, 2018), https://www.canada.ca/en/revenueagency/services/tax/businesses/topics/payroll/payroll-deductions-­ contributions/canada-pension-plan-cpp/ cpp-contribution-rates-maximums-exemptions.html. 43 For 2013, that would have been 15% (the lowest federal PIT tax rate) multiplied by the deemed employment expense amount ($1,117), ­producing a maximum tax credit of $167.55 no matter how high the total income. 44 These figures have been increased somewhat since 2016.

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45 Statistics Canada, “Distribution of employment income of individuals by sex and work activity, Canada,” Table 11-10-0240-01, https://www150. statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110024001&pickMembers[0]=1.1 &pickMembers[1]=2.2&pickMembers[2]=3.1. 46 These figures are derived from simulations using the SPSD/M for a range of years. 47 No comparable total figures for 2018 revenues foregone via tax expenditures is likely to be available until 2021. 48 The C C B is the most recent version of nontaxable cash transfers originally given to mothers to compensate them for loss of earned incomes as men reclaimed their jobs at the end of World War II. Over time, this transfer payment took on various forms (refundable child credits, nonrefundable child credits, and special allowances). The current C C B directly replaced the refundable Canada Child Tax Benefit, the refundable National Child Benefit supplement, the taxable Universal Child Care Benefit, and the ­nonrefundable Child Tax Credit in 2016, and was increased in 2018. 49 Department of Finance Canada, Backgrounder: Strengthening the Canada Child Benefit (Ottawa: Canada, 2018), https://www.fin.gc.ca/n18/data/ 18-008_4-eng.asp. 50 “How Much Does Childcare Cost?” Care.com calculator, https://www. care.com/en-ca/babysitting-rates. This estimate is for forty-five hours per week to include commuting time, fifty weeks per year. This number of care hours per week would enable women to spend the same amount of time per week in paid work and travel time as men. 51 It is worth noting that in 2012, second- and single-parent earners incurred net childcare costs of zero in Korea, and the tax cost of paid work for ­second earners was only 10.4% (but 60% for single parents). 52 Canada is not however the very worst country in the entire OEC D on these issues. It is the eighth worst regarding single parents, and tenth worst regarding second-earner parents. 53 See, for example, European Commission, Europe 2020 Strategy: A Strategy for Smart, Sustainable, and Inclusive Growth (Brussels: EC , 2010), 3.3.2010 COM (2010) 2020, 17–19. 54 I T A 1972, as amended, s. 117(5)(a)-(m). 55 Statistics Canada, CAN S I M table 202-0407. 56 Kathleen Lahey, Evidence, Standing Committee on the Status of Women, Canada, 39th Parl., 2nd session, no. 005 (28 November 2007), http://www. ourcommons.ca/DocumentViewer/en/39-2/FEWO/meeting-5/evidence. 57 To account for the fact that the Netherlands is a unified federal tax system, the average basic provincial tax rate as a percentage of taxable

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income was subtracted to arrive at a comparable federal rate for Canada. The second low rate produced via this adjustment reflects the impact of Canadian provincial personal income tax rates. 58 In the 1960s, Canada began suffering from US joint-filing envy in the wake of the Carter Commission report. In the 1990s, conservative parties began active efforts to implement comprehensive joint taxation. For detailed discussion of this process, see Kathleen A. Lahey, “Tax Units in Canada and Gender: Ability to Pay, Equity, or Keeping Women in their Place?” in Income Tax at 100 Years: Reflections on the Income War Tax Act, eds. Jinyan Li, Brian Wilkie, and Larry Chapman (Toronto: Canadian Tax Foundation, 2017), 5.1–5.24. 59 Kathleen A Lahey, The Impact of Relationship Recognition on Lesbian Women in Canada: Still Separate and Only Somewhat “Equivalent” (Ottawa: Status of Women Canada, 2001). 60 Francesca Bettio and Alina Verashchagina, Fiscal System and Female Employment in Europe (Rome: Fondazione G. Brodolini, 2009), 82–3. 61 At last count, there were at least 127 separate joint tax measures in the federal tax system, including the corporate tax and GST systems. 62 Due to the structure of the S PS D/ M , territorial tax systems are not included in these aggregate figures. However, similar results for those in territories would be produced to the extent of the use of joint fiscal measures in those jurisdictions. 63 Roughly two-thirds of most tax effects in this analysis come from ­applicable provincial rates, although that differs for each item in these calculations. 64 Canada Revenue Agency (CRA), Tax Gap: A Brief Overview (Ottawa: Canada, 2018), https://www.canada.ca/en/revenue-agency/programs/ about-canada-revenue-agency-cra/corporate-reports-information/tax-gapoverview.html. 65 C R A , International Tax Gap and Compliance Results for the Federal Personal Income Tax System (Ottawa: Canada, 2018), 4, https://www.­ canada.ca/content/dam/cra-arc/corp-info/aboutcra/tax-compliance/ intrntltxcmplnc-en.pdf. 66 For an example of how such legal documents are drafted, see the legal opinion letter written by a Canadian lawyer to the client suggesting how an offshore company might be legitimated in the Isle of Man. Fraser Milner, 25 October 1999, 13–14, par. 15.4–15.6, https://www.document​ cloud.org/documents/2852900-1999-10-25-Letter-of-Legal-Opinion.html.

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the making of t h e m o d e r n ta x pay e r

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12 Tax Fairness and the Party System: A History David Tough

Despite the centrality of questions of tax fairness in modern notions of citizenship and politics, most people don’t encounter them headon. We encounter them through the party system and its schematization, left to right, of competing visions of the best way to apportion the benefits and burdens of the public treasury. The parties reflect, by their position on the political spectrum, a more or less redistributive agenda; voters understand that, should a given party win power, they will raise or lower taxes, replace progressive taxes with regressive taxes or vice versa, and thereby increase or lower the tax burdens on various income groups while making less or more revenue available for spending on social programs that benefit low income people. While taxes are popularly understood as administrative rather than political, that is, the politics of taxation is reflected in the party system and in the way we make sense of it, by mapping it on a left-right spectrum. We express what we as citizens think of as a fair arrangement of tax burdens when we vote for a party whose left-right positioning best aligns with our own. This way of understanding politics, as a contest between different visions of tax fairness, mapped on a left-right spectrum, in which the citizen makes an informed decision as to which party best reflects their own vision, is wired so deeply into modern political thought that we struggle to conceive of it having a history.1 But it does. It is the result of a revolutionary change in political language in the first decades of the twentieth century, in which a previous understanding of the relationship between political parties, voters, and the treasury was maligned and caricatured as old and dishonest, and a new relationship

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emerged as an alternative. People whose visions of tax fairness had no clear place in the previous party system revolted against the fiscal arrangement of relative burdens and benefits and also the political schema through which tax fairness could be contested. The result of that revolt was a powerful income tax that could, if the electorate thought it was fair, significantly redistribute incomes, and a party system that hinged on that power, with the various parties mapped left to right on the basis of their eagerness to use it. When we vote for political parties as an expression of our idea of the way that taxes should mete out the burdens and benefits fairly, perhaps without knowing that’s what we’re doing, we do so as heirs to that movement of modernization. The left-right schematization is simple, and in representing the range of possible approaches to the questions of tax fairness, it simplifies the tax system; that is its benefit but also, from the perspective of tax literacy, its curse. It cannot begin to make sense of the many types of taxation enacted by various municipal and provincial governments in addition to the federal government at various times, and the often complex ways in which they affect different kinds of resources. Beyond this, “left” and “right” do a poor job of reflecting the many differences between Canadians and Canadian political parties that are not primarily fiscal, such as the decision to go to war, to change national symbols to reflect changing ideas of ethnic belonging, or to change laws affecting abortion and same-sex relationships, all of which have, at various times, been key partisan concerns. An electoral system premised on the redistributive uses of income taxation also tends to presume a productive capitalist economy that produces wages and profits that can be taxed, taking for granted precisely what the Indigenous nationhood movement and much of the environmental movement, not to mention both the far left and the far right, seek to contest. All these differences, and others, have complicated the application of “left” and “right” to Canadian politics historically and will continue to do so, but the left-right spectrum remains the bedrock of our party system because the question of tax fairness is hardwired into our understanding of politics. *** The destruction of the two-party system effectively began in the prairie west shortly after Alberta and Saskatchewan were granted full provincial status in 1909, with a farmers’ movement that sought to

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illuminate the link between the unfairness of the tax system and the dishonesty of the party system, and ended with the passage of the Income War Tax during the debate on conscription for the First World War. In the pages of the Grain Growers Guide, editorials and letters shared a critique of the tariff, a tax on imports that farmers declared to be exploitative and inefficient. Demanding the opportunity to democratically register their opposition to the tariff, western farmers were momentarily obliged by the Liberals, who ran on a policy of trade reciprocity with the United States in the 1911 election, and lost to the Conservatives, who soon found themselves governing a war economy. More profoundly, the Guide’s presentation of the case against the tariff, and for a direct tax to replace it, set the terms for a campaign that not only demanded a fairer form of taxation but also an end to a party system that made it almost impossible to vote against the tariff. The problem with the party system began in the 1890s, the farmers asserted, when the Liberals abandoned their previous opposition to the tariff in favour of lowering it, muddying what had been until then a clear instance of partisan differences. Although the parties continued to campaign with fervour on the difference between a (high) protectionist tariff that ostensibly had as its object the exclusion of imported goods from Canada and a (low) revenue tariff that ostensibly aimed only to fund basic government functions, these were mere differences of degree for critics for whom the tariff’s nationalist and partisan resonances distracted from its most salient fact, which was that it was grossly unfair. Farmers and their advocates writing in the Guide gave detailed accounts of farm economics, tallying the amounts westerners spent on imported goods versus on goods manufactured in the east, arguing that under the Liberals’ ostensibly non-protectionist revenue tariff, they were paying significantly more of their income to Canadian manufacturers than they were to the public treasury. The Guide’s indictment of the tariff was therefore also an indictment of the party system that claimed to provide voters with different answers to how the burdens and benefits of the public treasury would be allocated, but instead offered two different justifications for what was effectively the same exploitative fiscal strategy. The Guide’s rhetoric was a simple Manichean opposition between the corrupt forces of protection (which included eastern industrialists and politicians as well as imperialist propagandists who fawned over the British connection and warned of the dangers of trade with

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Americans) and the solitary western farmer, a hard-working and sensible everyman. A simple insulting symbolism prevailed in the Guide’s cartoons: rich people were fat and wore three-piece suits, and propagandists were foppish and overemotional and displayed Union Jacks denoting a showy, maudlin patriotism that was a weak cover for the exploitative tariff, which was either represented as a machine that extracted money from farmers or as outright theft, with a rich man pilfering money directly from a farmer’s back pocket. Few actual industrialists and financiers were depicted, but the Guide caricatured both federal party leaders. The tenor of the images echoed that of the articles and letters: that the tariff was exploitative, and that both parties were in on the fraud, but that western farmers understood how it worked and would not be fooled out of advocating for their own interests. By making the case that party differences were a ruse to mask an unfair tax, the Guide was effectively demanding that the Liberals, the party that claimed to want lower tariffs, make their policy more explicit. The farmers made a strong case through 1909 and 1910 that there would be significant electoral gains in the west for any party that took a clear stand against the tariff. The federal Liberals took the farmers at their word in 1911, negotiating a trade agreement that would eliminate parts of the tariff, and then confidently calling an election on the issue. Both the federal Liberals and their western critics underestimated the force of public opinion in favour of the tariff, which was buttressed by the spectre of a loss of economic sovereignty to the United States and with it an undermining of Canada’s British identity. The election, that is, served for farmers as the ultimate illustration of the Guide’s argument that the tariff was too tied up in questions of national identity to be discussed intelligently. Thus 1911 was also the year that those who wanted relief from the burdens of the tariff, who had previously hoped for a reformed Liberal party to be their champion, gave up both on that party and on the system as a whole, seeing the parties’ “Tweedledum and Tweedledee” positions on the tariff as part of the problem rather than its solution.2 The linkage between the tariff as an unfair tax and the tariff as the basis of an unconvincing opposition between the Liberals and Conservatives was magnified by the First World War, and by the political and fiscal changes it entailed. Having been elected in 1911 on a wave of nationalist sentiment in support of a protectionist tariff, the Conservatives intended in 1914 for the war to be fought without

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significant changes to their fiscal strategy, and ignored calls to impose direct taxation, opting instead to encourage investment in the war by wealthy Canadians. Because the tariff fell hardest on lower-income taxpayers, this had the effect, critics said, of transferring income from poor people to the rich, increasing the exploitativeness of the tariff. Rising cost of living, increased direct taxes, and a general perception that wealthy Canadians were benefitting financially from the war fed into rhetoric calling for direct taxation of business income and the rich. While many Liberals expressed this rhetoric in parliament and in the press, the demand for direct taxation was a popular movement that emerged from outside parliament and operated independently of the parties.3 Calls for direct taxation increased in intensity and effectiveness after the government announced it would introduce conscription. “Conscription of Wealth” became the slogan of those who believed that, if the human costs of the war were to be imposed more equally by government fiat, then the material sacrifice had to be meted out the same way. Although it was expressed most comfortably by farmers and organized labour, and parroted in the commons by Liberals, “conscription of wealth” was politically promiscuous, because it blended an appeal to fairness with an appeal to shared patriotic sacrifice, a core belief of reactionary nationalists who had been most ardent in support of both the tariff and the British connection in 1911. At the same time, “conscription of wealth” scared and offended many responsible people, suggesting as it did a threat to nationalize industry and seize capital, not simply tax incomes. An editorial in the Ottawa Journal in the summer of 1917 calling it “the cheap clap-trap one expects only from the loose minded,” reflected the exasperation of partisan Conservative feeling about the phrase.4 Within a few weeks the government bowed to the pressure, held its nose, and introduced the “income war tax,” a tax it hoped would be re-examined when cooler heads prevailed after the war. Many of those who had been badgering the government to introduce direct taxation were disappointed in the income war tax, but with its introduction the phrase “conscription of wealth” was swiftly retired from the political lexicon. The electorate had other things on its hands in 1917. A controversial set of changes to voting laws meant an electorate heavily skewed towards support for the Conservative policy of conscription, but the party leadership took no chances and formed a somewhat awkward alliance with pro-conscription Liberals, calling the new bloc the Union

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government. By splitting the Liberals over the issue of conscription, the Union government mocked the basic premise of the pre-war twoparty system, that the Liberals and Conservatives were fundamentally opposed to one another and represented together the full breadth of political opinion in the country. For voters who opposed the war or the Union government’s unfair financing of it, the 1917 election completed a process of disengagement that had begun in the west in 1911: a rapidly growing scepticism about the party system as a whole. Strikes pitted workers and employers against one another across the country at the war’s end – the greatest and most iconic of them being the Winnipeg General Strike in 1919; these struggles were so immediate and clear that the gentlemanly sparring between the old parties seemed ridiculous in comparison. Strikes, like calls for “conscription of wealth,” were expressions of popular revolt, expressions that made vivid claims about what was fair and unfair. If the opposition between the Liberals and Conservatives didn’t allow voters to express similar claims, and if the parties would simply abandon all pretence of opposition to govern as one in a crisis, what use was the two-party system? *** Between the end of the First World War and the start of the Second, the party system lost its polar quality and became much more difficult to make sense of. The governing party at the federal level was never anything other than Union, Conservative, or Liberal, but third parties, most with roots in farmer or labour movements, became a reality of governing and campaigning, shoring up minority governments and even taking power in several provinces. Traditional party appeals rang hollow everywhere, but the new parties and new approaches to voting were a challenge to conceptualize. In Canada, as elsewhere where people spoke English, usages like “left-leaning” and “right-leaning” were gaining currency in the interwar period but, while some parties were clearly left or right, applying the terminology to Canadian party politics was still a challenge. How were the parties different from one another? Slowly, and with increasing regularity as the 1920s turned into the 1930s and 1940s, the answer seemed to lie in the potential uses of the power of income taxation. Whereas the revolt against the party system began in the prairies, the establishment of fairness in taxation as a principle for organizing the party system began in the Maritimes, shortly after the end of the First World War. Hard times hit the region well before they did the

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rest of the country, and inspired a coordinated effort to enlist the federal government to help out provinces and municipalities struggling to fund social programs. Ottawa having introduced income taxation, which provinces were also allowed to do though no Maritime provinces had done so, in 1917, newspaper editorials, politicians, and social reformers argued that the federal treasury needed to compensate the provinces for the lost revenue by funding provincial social programs. This movement, which called itself “Maritime Rights,” was following a familiar pattern of asking Ottawa to share its tax revenue with provinces, but with the modern twist that the money, collected through a graduated income tax on a nation-wide basis, was to be put towards developing social programs in the poorest provinces, so the transfers would in principle be redistributive, taking money from rich people to give to poor people – an arrangement Maritimers reeling from a post-war regional recession felt was fair.5 The party system was somewhat exceptional in the Maritime provinces in the 1920s, in that third parties didn’t have much success. Most voters were still choosing between Liberals and Conservatives, even after widespread alienation set in. However, the way people voted Liberal or Conservative changed. The parties’ electoral support shifted unpredictably from election to election, as Maritimers laboured to get the attention of party leaders in Ottawa. It was an explicit regional strategy to use the parties to send messages to Ottawa, rather than taking their partisan messaging seriously. Rather than aligning with one of the two parties, that is, Maritimers, like farmers in 1911 and organized labour in 1917, saw both parties as implicated in the same exploitative and outdated fiscal strategy and, without taking them seriously, used them to advance the goals of the region. They reserved their true political allegiance for Maritime Rights, which conveyed for them a fairer vision of the shared burdens of taxation and benefits of public spending.6 Like the wartime campaign for “conscription of wealth,” the demand for federal funding for provincial social programs was tied to an inflammatory slogan: “fiscal need.” The terminology was strictly correct: the Maritime provinces were not in a position to fund effective social programs from their own tax bases, so they were in need of fiscal support from a wealthier level of government. The problem was that “fiscal need” violated the basic principle of responsible government, which is that legislatures are elected to give or deny consent to tax within their territorial jurisdiction. If the federal government

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agreed to fund any shortfall in a province’s spending, there would be a clear incentive for provinces to introduce lavish programs, knowing that another government would cover the difference; this would effectively allow legislatures to tax people they did not represent, critics of Maritime Rights asserted, without any possible political recourse. “Fiscal need” was “an invidious doctrine,” Ottawa’s lawyers insisted, and had no basis in the constitution or political theory. The Maritime Rights movement succeeded in getting short-term financial help, but not in making the fiscal innovation it sought. A few years later, when the fiscal problems that had hit the Maritimes in the 1920s had extended into municipalities and provinces across the country, the idea of using the federal taxing power to fund provincial spending again emerged as a solution. The federal government itself was keen on the idea, turning to a Royal Commission on Dominion-Provincial Relations that recommended a much more powerful federal income tax as the solution to the then-patchwork fiscal landscape, where some jurisdictions were capable of supporting social programs and others weren’t, and jurisdictions had a clear incentive to let others take the lead, drawing the poor and unemployed away and easing the tax burden on their citizens. The Commission’s report even hinted that a single income tax at the federal level would make the party system clearer by allowing voters to see more clearly how the governing party’s ideology was expressed through taxation. Although several provinces refused to agree to a powerful federal income tax, the plan was carried out unilaterally by Ottawa when it dramatically increased the rates of taxation under the Income War Tax in the early 1940s, under the pretext of paying for the war. What made the income tax so different in 1942 from 1917 was not simply its scale, but its breadth: a lot of people who would have aggressively supported “conscription of wealth” in the First World War as a way to make the rich pay found themselves, at the start of the Second World War, paying part of their wages more directly to the treasury than had occurred earlier. Whether this was fair or not, it was definitely novel, and significant energies were invested in the first years of the 1940s in making sense of what income taxation meant when almost everyone paid it. This process was streamlined, shortly after the increases to the Income Tax Act, by the introduction of “Family Allowances,” an expensive social program funded by federal tax money. While the war provided an unimpeachable justification for raising taxes, family allowances, while popular, were permanent and

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therefore a more definitive illustration of the uses of increased tax revenue. As was suggested by the Commission on Dominion-Provincial Relations, the epoch-making link between a powerful, universal income tax and an expensive universal social program set the tone for a new way of defining the differences between the parties: on the basis of their eagerness to tax income progressively to pay for redistributive social programs. As clear as the idea was, the process was messy, even if it was helped by the slow and steady attrition of third-party experiments. While the governing Liberals had the advantage of being able to set the timeline, the agrarian socialist Cooperative Commonwealth Federation had the advantage of being most closely aligned with the prevailing wartime sentiment, which favoured redistributive taxing and spending, and thus leaned left. When the Liberals introduced family allowances, the new Progressive Conservatives (the product of a merger of sorts between the Conservative Party and a leader borrowed from the 1920s-era Progressive party) stumbled a bit, offering tepid opposition before voting unanimously in favour.7 It would be several years before a Progressive Conservative party would explicitly campaign against the principle of the tax-funded welfare state, but the party quickly settled into position to the right of the Liberals, though not without some trepidation that it was consigning itself to oblivion or, by dividing the non-socialist vote, effectively handing power to the CCF .8 By the middle 1940s, the idea that Canadian political parties could be understood as existing along a left-right spectrum on the basis of their eagerness to use the treasury to redistribute tax revenue in the form of social programs was widely understood. The process by which this understanding emerged was then almost immediately forgotten. *** Elections are about power, who has it and how we expect them to wield it, but they’re also about fairness. When we run as candidates, when we canvass or call potential supporters, when we argue at all candidates meetings and, of course, when we vote, we are implicitly engaged in answering the question of how we think the burden of paying for public spending should be allocated, and who that public spending should benefit. There are other ways to engage in questions of taxation and public spending, and for people who are deeply ­connected, whether as taxpayers or as political activists, the idea that elections are an opportunity to talk about taxes and fairness might

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seem hopelessly naïve, or even misleading. But the way we think about political parties, the way we determine our sympathies and allegiances, often with very limited information, is suffused with questions of fairness. If we believe that parties calling for steeply graduated tax increases and increases in social spending are irresponsibly and unfairly taking resources from people who have earned it, we are on the right, and would support a conservative fiscal strategy aimed at keeping taxes and spending low; if we believe parties that cut taxes and introduce leaner social programs that exclude people who previously benefited from them are cruelly and unfairly denying support to vulnerable people for the benefit of the wealthy, we are on the left. Even if we think very little about these questions of relative fairness, voting instead on the basis of other imperatives, our understanding of politics as democracy is defined by them. But competing notions of fairness, mapped left to right, aren’t just structural to democracy as we know it; they also arose democratically, out of collective struggles over how to allocate resources fairly. Opponents of the tariff-based two-party system that saw it selfdestruct at the end of the First World War and proponents of the income tax-based left-right spectrum that saw it become dominant in the 1940s often didn’t distinguish between reform of the party system and reform of the fiscal basis of the party system. Both were equally exploitative, in the sense of taking money and political power from the great mass of people, or liberatory, in the sense of giving money and power to the great mass of people. To reform one was to reform the other. To engage in the process of making political change outside the party system was already to have taken a radical, modern step; when the process was finished, the party system itself was an effective instrument of competing claims of fairness – was in fact about competing claims of fairness, mapped left to right. Even if we often don’t enjoy a wide range of options, such as in the immediate post-war period when explicitly right-wing positions on taxation and the welfare state were effectively off the agenda or in the 1990s when no party dared advocate reversing or halting deficit-inspired austerity cuts, we still schematize the party system we encounter on a left-right basis; even if we vote primarily as feminists or environmentalists, we still organize our relationship to friendly and unfriendly candidates and parties on a left-right basis, and vote for the candidate whose vision of the fair allocation of burdens and benefits matches our own. We still vote, that is, as moderns.9

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The fact that this fundamental reorientation of politics came about not because great minds thought it was necessary but because angry people were incensed at the function of political power deserves special reflection. When the Grain Growers Guide began publishing, it was a minor enterprise, and the things it took on, the Liberal party, the Conservative party, and the manufacturing lobby of central Canada, were very powerful. The same can be said for organized labour during the First World War, or for Maritime Rights advocates in the 1920s: they were not without power, but the dominant political institutions did not include them or care much about them. They were marginal. This awareness of the weakness of their position – fiscally and politically – partially explains their eagerness to express their calls for fairness in terms of disdain and resentment. They had no experience of being listened to, and there was no mechanism in civil society that supported discussions of abstract principles that touched on their case, or none, at any rate, that they had access to. They had no sympathetic ear. But they could get attention, negative or positive, by scrawling “conscription of wealth” across the letters pages. And so they did. The people whose rhetoric is most responsible for the transformation of politics in the mid-twentieth century, who instigated a fiscal revolution of which we are the social and political beneficiaries, didn’t talk like experts. They were farmers and workers, and they understood politics in terms of their position, their observations, and their frustration at what they understood, in highly subjective ways, to be an exploitative and dishonest system of political economy. They were motivated not by dispassionate ideas informed by extensive reading and professional training in politics or economics, but by an intellectual engagement constrained by the demands of paid work and by the limitations of their formal education, fired in the kiln of their anger and resentment, and expressed harshly, as anger and resentment often are. They were not reformers in the technocratic sense, and they had no ambitions to remake politics from top to bottom. That politics and political economy in Canada were more grossly unfair before the introduction of income taxation than after is undeniable, and I don’t doubt that the farmers and workers who started us off would be pleased, all things considered. Like a lot of people up against an exploitative regime, they demanded a lot more than their fair share and they got a lot less, and their success leaves us with important lessons about history, about rhetoric and ideas, and about democracy.

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  1 The history of left and right is discussed in David Tough’s The Terrific Engine: Income Taxation and the Modernization of the Canadian Political Imaginary (Vancouver: University of British Columbia Press, 2018), 9–12. Very briefly, while the terminology has ancient roots, with “right” associated with authority and tradition and “left” associated with chaos and anarchy, the modern usage as a way of schematizing political differences comes from the French Revolution. The modern usage spread quickly to other continental European countries but was adopted slowly in Englishspeaking countries; differences of political opinion were less broad where parliamentary representation was already distinguished between liberals and conservatives.   2 The phrase “Tweedledum and Tweedledee” as applied to Liberals and Conservatives in the aftermath of the 1911 election comes from O.D. Skelton, “Canada’s Rejection of Reciprocity,” Journal of Political Economy 19, 1 (1911), 731.   3 The argument that political elites calling for “conscription of wealth” were being driven by pressures from outside their ranks – that parliamentary discussion “limp[ed] in the wake of popular movements,” to quote Stephen Leacock – is drawn in detail in Tough, The Terrific Engine, 62–82. Richard Krever has also argued that the entire parliamentary debate on the Income War Tax was about establishing common ground between Conservatives and pro-conscription Liberals in order to form the Union government. See Richard Krever, “The Origin of Federal Income Taxation in Canada.” Canadian Taxation 3, 2 (1981), 170–88.  4 Ottawa Journal, re-printed in the Ottawa Citizen, 25 August 1917, 12.   5 The discussion of Maritime Rights in this chapter draws heavily on E.R. Forbes’s The Maritime Rights Movement, 1919–1927 (Montreal and Kingston: McGill-Queen’s University Press, 1979) as well as his chapter “The Origins of the Maritime Rights Movement” in Challenging the Regional Stereotype: Essays on the 20th Century Maritimes (Fredericton: Acadiensis Press 1989).   6 See Forbes, Maritime Rights and Tough, The Terrific Engine, 100.   7 Raymond B. Blake, From Rights to Needs: A History of Family Allowances in Canada (Vancouver: University of British Columbia Press, 2009), 89–124.   8 See Tough, The Terrific Engine, 131–3. See also J.L. Granatstein, The Politics of Survival: The Conservative Party of Canada, 1939–1945 (Toronto: University of Toronto Press, 1967).

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  9 The relationship of modern political categories to current (postmodern?) political struggles, such as the use of “progressive” in politics by people who fundamentally reject the idea of progress philosophically, is an extremely complex one that is outside the scope of this chapter. Wendy Brown’s Politics Out of History (Princeton: Princeton University Press, 2001) is an excellent source on this subject.

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13 Knowledge and Attitudes regarding Taxation Antoine Genest-Grégoire, Luc Godbout, and Jean-Herman Guay

Most of the research on taxation focuses on the architecture of the tax system and on how workers and businesses respond to it. Much less often does research examine how taxation is perceived. Aside from constituting a voluminous legislative and regulatory corpus, taxation is also a lived social experience in regard to which citizens form opinions and develop knowledge. This chapter delves into two of the more subjective and personal aspects of taxation: the knowledge that citizens have of taxation and their perception of their position on the income ladder, a key element in how the tax system works. It is based on two studies carried out by the Research Chair in Taxation and Public Finances at the University of Sherbrooke in Quebec, Canada. For the past ten years or so, the Chair has pursued one research agenda based on Quebec public opinion polls and another centred on the middle class. This chapter derives from work that has been conducted within the framework of these two agendas that affords an interesting viewpoint on the knowledge and attitudes Quebecers have regarding taxation. The first study aimed to measure the tax knowledge and skills of Quebecers (tax literacy) and the second examined their self-assessed class status. Quebec is Canada’s most social-­democratic province, with its extensive public child-care system, significant state involvement in industrial policy, and a strong union presence. Consequently, it has lower levels of inequality but higher taxes than the rest of the country. This “European” model makes Quebec an interesting lab to study the interaction between taxes, social class, and public opinion.

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shared methodology

The two studies were based on data collected from Quebec adults by Crop, a Montreal-based polling and market research firm. Data collection took place in October 2015 in the case of tax literacy and in November 2016 in the case of the middle class. In all, 1,000 questionnaires were completed by a web panel (only 900 were used in the study regarding the middle class on account of missing data on family income). The results were weighted to reflect the distribution of the Quebec adult population by gender, age, region of residence, mother tongue, and academic attainment. Moreover, a series of questions from the Panorama study of values that Crop conducts every year was added to the questionnaire. This allowed weighting of the sample according to the personal values of the respondents based on a probability sample. The margin of error for a probability sample of this size is 3%. ta x l i t e r a c y

The economic crisis of 2008 forced governments to address issues related to savings, finance, and retirement planning. This led them to develop a keen interest in the notion of financial literacy. In Canada, these concerns prompted Jim Flaherty, minister of finance at the time, to create the Task Force on Financial Literacy. The group’s mandate was to investigate the knowledge and skill levels of Canadians in the area of personal finance and to make recommendations to the government in this regard. The Task Force defined the complex concept of financial literacy as having the knowledge, skills and confidence to make responsible financial decisions.1 Quebec, for its part, set up the Financial Education Advisory Committee, whose work informed the Quebec financial education strategy published in 2015.2 The subject of financial literacy has drawn the attention of many academic researchers as well. Through their policies respecting income, taxation, and insurance, governments themselves play a major role in people’s financial decisions. Tax literacy can be seen as the component of financial literacy that specifically concerns personal taxation. By analogy, then, the objective of our work is to seek to identify the knowledge, skill, and confidence levels of Quebec citizens in the area of taxation and to understand the decisions they make in relation to the tax system. Along this line, tax literacy could be defined as having the knowledge, skills

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and confidence required to make responsible financial decisions from a taxation point of view. instrument of measurement

An objective measure of tax knowledge was developed based on an objective measure of the components of financial literacy, a matter largely covered by researchers in this domain.3 The underlying logic is that there are a series of facts about the way the tax system works that are required for citizens to be able to make decisions that are to their advantage, depending on the situation. Failing to possess this knowledge, they may make work, saving, or consumption decisions that are contrary to their own financial objectives. As within the field of financial literacy, we identified five areas of tax knowledge: • • • • •

Consumption taxes: what is covered and at what rate; Income tax: what is covered; The concept of income tax progressivity; Preferential tax measures: how they work; The personalization of income tax.

Based on these five areas, and always in keeping with past research on financial literacy, a set of quiz-type questions were put to the survey respondents. As is the case with instruments for measuring financial literacy, many of the components of tax literacy relate implicitly to basic math skills, but many others are predicated on general knowledge. We deliberately chose to exclude certain aspects of taxation, such as those that concern business owners, because we wanted to produce universal indicators applicable to the vast majority of taxpayers. Some of our questions nevertheless touched on the issue of retirement planning, an aspect of taxation in which interest could vary according to age. A strong correlation between correctly answering the questions in this regard and respondent age would support the intuitive hypothesis to the effect that taxpayers primarily develop knowledge and skills directly related to their situation. r e s u lt s

The results regarding a few of the eighteen questions on the quiz are illustrated below.

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Withdrawal from a Registered Retirement Savings Plan (r r s p )

Correct answer (Taxable) 69%

Wrong answer 20% Doesn’t know 11%

Withdrawal from a Tax-Free Savings Account (t f s a )

Correct answer (Non-Taxable) 75%

Wrong answer 13% Doesn’t know 12%

Figure 13.1  In your opinion, which of these income sources are taxable or non-taxable?

As we can see in Figure 13.1, more than two-thirds (69% to 75%) of the respondents correctly distinguished between an R R S P and a TFSA as far as the tax treatment of a withdrawal from these vehicles was concerned. A relatively lower percentage of the respondents were able to correctly answer the questions regarding consumption taxes presented here. While a high percentage of the respondents did answer correctly when the item in question was a very common consumer product (91% for sweater), the percentage fell sharply when the item presented was less common (only 21% for mystery novel) or when asked to state the rate of each of the two value-added taxes (44% for the G S T and 39% for the Q ST ). The results were relatively weak also when we sought to determine whether the respondents could distinguish a tax deduction from a tax credit in terms of impact (45% answered correctly). To synthesize these results, we tallied the number of correct answers per respondent and grouped the answers into three major knowledge

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Correct answer (both taxes) 91%

Wrong answer 2% Doesn’t know 7%

Mystery novel Doesn’t know 13%

Wrong answer 66%

Correct answer (gs t only) 21%

Figure 13.2  Based on the following list of products and services, state whether the Quebec sales tax (QS T ), the goods and services tax (GST), or both taxes are applicable.

Deduction vs credit

Wrong answer 28%

Doesn’t know 27%

Correct answer (false) 45% Figure 13.3  When you contribute $1,000 to a Registered Retirement Savings Plan, the tax refund that you get is about the same regardless of your level of income.

sections. Accordingly, the table below gives a percent score for each of these three sections, as well as a global score. The average global score for the total population was 55%, which translated into almost ten correct answers out of eighteen. It needs to be pointed out that 72% of the respondents scored 50% or more.

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Table 13.1 Average scores for the different knowledge sections (%)   Gender Men Women Age 18 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65 and over Family income Less than $20,000 $20,000 to $39,999 $40,000 to $59,999 $60,000 to $79,999 $80,000 to $99,999 $100,000 to $149,999 $150,000 or more Academic attainment High school CEGEP 1 or professional University Total population 

Income tax score

Consumption tax score

Progressivity score

Global score

62 59

55 56

53 46

57 54

38 52 58 64 68 71

33 52 57 56 63 63

42 47 47 50 52 53

37 51 55 57 62 63

38 60 63 69 67 70 71

42 53 57 62 59 66 57

41 45 49 54 57 60 64

40 53 57 62 61 66 64

54 64 65 60

49 60 61 56

41 54 57 49

49 60 61 55

1. CEGEP is specific to Québec’s education system. It designates intermediate training at a college between secondary school (which lasts five years) and undergraduate university studies (which last three years). It lasts two years for students who go on to undergraduate studies or three for students who enroll in professional training for professions such as police officers, nurses, or engineering technicians.

However, only 11% of the respondents scored 80% or more. Scores improved with age, going from a lowly 37% for the 18–24 age group to 63% for the respondents 65+. At first glance, the results did not improve quite as clearly with family income. That said, the average score for respondents with a family income of less than $20,000 was below 50%, whereas it exceeded 60% for taxpayers with family income of $60,000 or more. In addition, no respondent with family income less than $20,000

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scored 80% or above, compared with 26% of the respondents with a family income of $150,000 or more. Academic attainment proved to have an effect on global score: Respondents with a high school diploma or less scored 49% on average, compared with 60% for those with a c e g e p or professional diploma and 61% for university graduates. A slight difference emerged between men and women in terms of average income tax score (62% vs 59%), as did a steep increase in this score with age (from 38% to 71%) and with family income (also from 38% to 71%). Results regarding consumption taxes were practically the same for men and women (55% and 56%, respectively) but rose sharply with age (from 33% for the youngest age group to 63% for the oldest). It should be noted that a much larger difference was observed between men and women on the subject of progressivity (53% vs 46%) and that age (42% vs 53%), family income (41% vs 64%), and academic attainment (41% vs 57%) influenced this score.4 measured vs self-assessed knowledge level

To complete our analysis of the knowledge and skill levels measured by our objective test, we compared the average global scores obtained on the quiz with the self-assessed knowledge level indicated by respondents prior to completing the quiz. Self-assessed knowledge level proved highly consistent with quiz scores. Respondents who asserted being somewhat or very familiar with tax measures performed above average on the quiz, be it in terms of global score (66% and 62%, respectively, against an average of 57%) or in terms of proportion of respondents to reach a cut-off score (79% and 82% scored above 50% against an average of 72%, and 29% and 12% scored 80% or more against an average of 11% for the population as a whole). We ran a regression analysis on global score and on each of the section scores in order to confirm the existence of the relationships between the respondent’s characteristics and knowledge levels illustrated in the tables above. The coefficients given here represent the relationship between tax literacy and each characteristic, all other things remaining stationary, which is to say when relationships with the other variables are controlled for. For example, several of the tables above show a relationship between age and knowledge level and between family income and knowledge level. If the regression yielded

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a significant positive coefficient for each of these two variables, it could then be asserted that age was related to knowledge level regardless of the fact that older persons tend to have a higher family income, and that family income is related to knowledge level regardless of the fact that family income tends to increase with age. On the contrary, if only one of the two variables proved significant, this would mean that the relationship between the other variable and knowledge level was spurious. The variables we selected were age, family income,5 gender,6 and academic attainment. Other variables potentially related to knowledge level were also included, given that some aspects of taxation are of greater importance for certain groups of people. These variables included being a homeowner, being self-employed, and having dependent children. A variable regarding the level of information seeking was also added.7 A solid relationship was observed between tax literacy and, respectively, age and family income. Gender, for its part, was not significantly associated with stronger or weaker literacy. Having dependent children was associated with a lower knowledge level, whereas being a homeowner was associated with a higher knowledge level. Both relationships were statistically significant. Being self-employed had no significant effect, but academic attainment and level of information-seeking were both strongly and positively related to global knowledge level. The fact that knowledge levels rose with family income was consistent with the growing importance that taxation acquires as family income increases. The fact that knowledge levels rose with age also seemed logical given that more and more knowledge is amassed over the lifespan. The lower knowledge levels documented in the literature among women where financial literacy is concerned was not observed to the same degree regarding taxation literacy. Having dependent children was associated with lower results across the board. Unfortunately, there is nothing in the existing literature about the reasons that might explain such an effect. Also, the strong association between being a homeowner and tax knowledge and the absence of a connection between being self-employed and such knowledge raises certain questions. Indeed, one might reasonably expect these two situations to generate a greater need for tax knowledge, given the heavier obligations that the two groups face in this regard. Yet, in our study, only homeowners – and not the self-employed

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–0.15

–0.10

–0.05

0.00 Significant

0.05

0.10

0.15

0.20

0.25

Non-significant

Figure 13.4  Weighted effects of personal characteristics on global score Note: The chart gives the normalized coefficients associated with each of the explanatory variables. Bar length indicates the number of standard deviations of variability in the dependent variable (global score) for each standard deviation of variability in the explanatory variable (e.g., gender, age, family income) in question, all other things remaining stationary. This method of presenting allows appreciating the relative importance of the different personal characteristics. The colours allow distinguishing the variables whose effect was not statistically significant (at 95%, two-tailed): There is no telling for sure whether or not the relationship between these variables and the variable to be explained is the product of chance alone.

– demonstrated a higher knowledge of taxation. The association between academic attainment and information-seeking, respectively, and tax knowledge was consistent with the literature from the viewpoint of human capital acquisition. The general level of tax knowledge is relatively low, at 55% on average. What is interesting is that people performed their best on matters of income and consumption taxes, which are the most salient, and they performed worse on progressivity questions. The fact that many of our respondents don’t know that books are tax-exempt under the QST should put into question our choice to use that policy lever to favour reading and culture. Failure to understand the progressivity of taxes can be seen as more of a political rather than financial

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problem. If citizens don’t understand how progressive their tax system already is, their demands for more, or less, progressivity in the tax system could be biased, as the next section will explore. Our questions on progressivity mostly concerned the way tax brackets work, and this also has very clear financial consequences. Tax brackets are marginal: a taxpayer whose income rises pays a bigger share in taxes on her earnings above the tax threshold that she crosses, not on her whole income. Workers who don’t understand that mechanism, and our data suggests there are many of them, can miss opportunities to earn more by working more hours or changing positions, for fear of losing out due to a bracket change. m i d d l e - c l a s s i d e n t i f i c at i o n

Social class is a notion frequently mentioned in the media, by public authorities, and among ordinary citizens. Canadian prime minister Justin Trudeau employs the expression “middle class” on a regular basis to identify the social group that he claims to champion. For example, the 2016 federal budget was entitled “Growing the Middle Class.” Further left on the political spectrum, the phrase “underprivileged classes” is commonly evoked in the context of wanting to defend and improve social programs or the Canadian social safety net. Finally, implicitly or explicitly, we often use the terms “the rich” or “the privileged class” in a negative light. For many civil society activists, “making the rich pay” seems to be the solution to maintaining or increasing public spending in healthcare and education without raising taxes for the “middle class,” which often considers itself the big loser in the scheme of things. One way or another, the notion of social class is at the heart of the public discourse and, more broadly, of social issues, none the more so when it comes to the distribution of wealth. However, it is pretty clear that the term does not mean the same thing to everyone. Against this background, we wished to understand whether Quebecers had the right perception of the middle class. Are they right in saying that they belong to it? Do they tend to believe that they are a part of it, though they may in actual fact be too poor or too rich to be members? In order to shed light on the matter, we thought it would be interesting to see how people self-sorted themselves by class – what we called their “subjective class” – and to compare the results of this classification

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against another based on reported income and household configuration (single person or couple, with or without children) and broken down by more factual criteria – what we referred to as their “objective class.” Our investigation also sought to understand people’s perception of the tax burden on the different classes. To their eyes, does the middle class shoulder an overly large share of the tax burden? definition applied and instrument of measurement

There exists an ample body of literature on the issue of middle-class identification. The most popular theory in this regard is the “reference group theory,”8 which postulates that people tend to consider themselves middle class more so than they are in actual fact and that this is because they do not know how the population, on the whole, is actually distributed by income level, which is to say, by social class. As a result, people tend to believe that they are middle class because, statistically, they have a strong chance of being “average” within their close social circle. Because people tend to have relatively homogenous social circles, they tend to underestimate income or class differences in society as a whole and, in turn, to hold a distorted view of their own relative position within it. Not everyone agrees with this theory,9 which is why we felt it would be interesting to test how well it fits the situation in Quebec. The objective definition we used was based on the median family income adjusted for household size. The rule most commonly used for this sort of adjustment, including by Statistics Canada when determining disposable income, is to reduce income by a factor equal to the square root of the household size. Such a factor implies that it costs less to live with other people than it does to live alone, but that the economies of scale decrease as the number of household members increases. Under this adjustment, a household of four requires twice the income of a person living alone in order to enjoy the same purchasing power. The lower and upper bounds of the middle class were set at 75% and 150%, respectively, of the median total household income, after adjusting for size. This range is widely used in international comparisons and allows, among other things, capturing households with income in the middle part of the distribution. The data on household income used here to establish the bounds were drawn from Statistics Canada’s 2011 Survey of Labour and Income Dynamics,

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adjusted according to the consumer price index in order to correspond to approximate price levels observed in Quebec in 2015.10 In accordance with how the Crop survey questions were formulated, all our analyses were conducted on the basis of total family income; this corresponded to market income after public financial transfers but before income tax and other deductions. In addition to the questions on family income and household size, we also asked respondents to self-assess their class membership and to indicate the share of the tax burden that they perceived was shouldered and that they felt should be shouldered by the middle class and by those whose income placed them above and below the middle class in the income distribution. r e s u lt s

Once the bounds were set, we examined and compared the subjective and objective classification of the survey respondents. From the angle of academic attainment, a majority of the respondents with a high-school diploma or less were below middle class (52%) based on income, whereas the respondents with a c e g e p, professional, or university diploma were the ones most strongly represented in the middle class. As might be expected, compared with holders of a c e g e p or professional diploma, proportionally fewer university graduates were low-income earners and proportionally more were high-income earners. Finally, regarding family income, none of the respondents who reported less than $20,000 and none of those who reported $150,000 or more fell into the middle class. Instead, nearly three-quarters of the respondents with a family income of $40,000 to $79,999 were middle class.11 So what happened when we asked the respondents to self-sort themselves by class? To their eyes, were they middle class or were they above or below middle class? This is what is referred to as one’s “subjective class” or, sometimes, as “self-classification.” The profile to emerge here was very different from the one above. Biases evidently translated into distortions. Indeed, we noted a strong under-reporting of the wealthy class, the one above middle class. Whereas nearly one-quarter of the population fell into this class according to our objective classification, less than one out of ten respondents claimed to belong to it. Though our data did not allow us to explain this under-representation, we might reasonably think that the phenomenon is linked to a sense of embarrassment or

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Middle class 42%

High income 23%

Low income 35%

Figure 13.5  Objective classification

Middle class 57%

High income 6% Doesn’t know 3% Low income 34%

Figure 13.6  Subjective classification

a certain reluctance at being associated with this social class, that is, with “the rich.” Under this subjective classification, the size of the middle class swelled to 57% compared with 42% under the objective classification, and high-income earners amounted to only 6% of households subjectively against 23% objectively. Where low-income earners were concerned, their proportion was practically the same in both cases (35% objective vs 34% subjective). From the viewpoint of academic attainment, the inclusion rate in the middle class varied from 49% for high school graduates to 69% for university graduates. Finally, where family income is concerned, 82% of the respondents who reported $60,000 to $79,999 considered themselves middle class. Among the respondents who reported $100,000 to $149,999, 73% still considered themselves middle class. Finally, nearly half (49%) of the respondents who reported family income of $150,000 or more identified themselves as middle class. To estimate the extent of the sense of wealth embarrassment among respondents, we crossed the subjective classification with the objective

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100 21% Correctly Self-Assessed

90 80 70 71% Correctly Self-Assessed

60 50 40 30

68% Correctly Self-Assessed

20 10 0 Low-income Low-income

Middle-class Middle-class

High-income

High-income Doesn’t know

Figure 13.7  Self-assessment errors

classification. We noted that approximately two-thirds (68%) of the low-income earners actually considered themselves to be below middle class. For the people in the middle class, nearly three-quarters (71%) self-sorted themselves appropriately. For the high-income earners, however, only a little more than one-fifth (21%) assessed themselves correctly as being above middle class, that is, as being part of the most privileged! This perception of social class is not unrelated to the perception of the tax burden on the different classes. In this regard, we asked the respondents whether they thought the three classes paid an appropriate rate of income tax. Predictably, a large portion of the respondents felt that high-income earners, “the rich,” did not pay enough income tax. It should be noted that income tax is the most progressive part of our tax system, or at the very least the part where progressivity is the most explicit. It’s also the part that is the easiest to put in relation

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100 90 41

80 70 60

66

73

64

73

66

50

27

40 30 20 10 0

23 10 Misplaced low-income

20

28

20

8

7 7 Self-aware Misplaced Self-aware low-income middle-class middle-class Too much Enough

24

33

10 Misplaced high-income Too little

Self-aware high-income

Figure 13.8  Opinion on tax burden of high-income earners

to income. Assessing the share of consumption taxes, social contributions, or corporate income taxes paid by different classes of citizen is a very complicated task, and we don’t think non-expert respondents would have been able to give an insightful response to questions about these parts of the tax system. It is particularly noteworthy that the opinion of the high-income earners who believed they were middle class or even below middle class (misplaced high-income earners) was very similar to that of the respondents who rightly belonged to these groups. Practically twothirds of the high-income earners believed the amount of taxes paid by the rich to be too low, even though they were talking about themselves. Among the few high-income earners who were self-aware of their class status, opinions were much more varied regarding their tax burden: 33% believed it was too high, 26% enough, and 41% too low. discussion

The data on tax literacy presented here constitute a first attempt at measuring this characteristic among citizens adapted to today’s reality from a financial and taxation point of view. They reveal similarities with analogous data on financial literacy, such as the

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relationship between this literacy and, respectively, age, income, and human capital acquisition. However, our data present certain differences worth exploring, most particularly the absence of gender differences, which, instead, have often been reported in studies concerning financial literacy. As with financial literacy, the concept of tax literacy becomes relevant only if a link is established between this personal characteristic and the more or less appropriate behaviours that persons exhibit. Taxation knowledge influences how citizens complete their annual tax returns, to be sure, but it also affects the decisions people make regarding savings, work, and consumption. The economic literature has, in fact, long documented the effects of the income tax structure on choices regarding the type of work one does and when one does it, not to mention the effects on one’s consumer choices by way of the consumption taxes that might apply. Our results regarding tax knowledge underscore the importance of scrutinizing not only the parameters of the tax system but also the understanding that people have of them, this understanding being an intermediate factor that influences the behaviours that ultimately stem from those parameters. For example, measures such as tax credits for children’s physical activity can be effective in encouraging physical activity only to the extent that citizens are familiar with the measure’s parameters, know how to qualify for the measures, and indeed decide to take advantage of the measures.12 Our data regarding self-assessed middle-class status, for their part, shed light on the pre-tax income distribution and, especially, on the perception of this distribution. The most popular theory regarding self-assessed middle-class status – the reference group theory – was not validated by our results. Indeed, they revealed instead a sense of embarrassment with respect to wealth, as evidenced by the fact that a majority of high-income earners wrongly considered themselves middle class. Had there been a reference group effect, we would have expected the misclassification phenomenon to be rather more symmetrical between low-income earners and high-income earners, that is, those respondents whose family income was either too high or too low to place them in the middle class. We saw similar results when asking our respondents where they thought the bounds of the middle class are, in terms of income. The upper bound generally moved with the level of income of the respondent, as if their definition of the middle-class would “stretch” to keep them inside.

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We don’t have any specific answer as to why such a desire not to appear rich, or richer than the middle-class, exists. It showed reliably for all high earners in our sample, gender, language, or educational attainment having no discernable effect. It should be noted that there is a large difference between our richer-than-middle class population and the top 1% about which we talk a lot in the context of rising inequality in Western countries. This group is very hard to reach with a general survey such as ours and it would be surprising to find that people who make millions of dollars still consider themselves as middleclass. It wouldn’t be surprising to find that our “rich” respondents are actually more similar to middle-class Quebecers than they are to the “ultra-rich.” This group of “not-ultra rich” has been the object of some research, by Richard Reeves of the Brookings Institution for example. His book, Dream Hoarders,13 looks at how a part of American inequality stems from the intergenerational transfer of opportunity these well-paid professionals give to their children. Quebec’s situation is very different from the United States, but worries about the extent of educational inequalities are starting to show there too.14 Resentment toward mounting inequalities in the Western world, whether real or perceived, affords another potential explanation for the reluctance to declare one’s membership in a wealthier or more privileged class, a phenomenon that obviously is not specific to Quebec. In this regard, our data on the subject of income tax progressivity are telling: Only among high-income earners self-aware of their class status was the belief that high-income earners do not pay enough taxes not shared by the majority. Our results thus confirm the idea that the redistribution of wealth within a society depends more on the perception of inequalities than on the actual inequalities present there.15 conclusion

From the look of things, citizens have an imperfect perception not only of how the tax system works but also of their relative position with respect to its wealth-redistribution components. At a time when the issue of social inequalities occupies a large part of the public sphere, it is of particular relevance to ascertain whether citizens understand how income is distributed across the population and how taxation tends to flatten this distribution. Quebec has made choices that are very different from those of neighbouring states and provinces with regards to the size of its state and the extent of its redistributive policy. International

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competition and accelerated population aging force debates about Quebec’s particular socioeconomic model. Such a debate is very contentious, and it is certainly not made any easier if actors don’t even appreciate what that system has produced in terms of wealth distribution and redistribution. For example, previous work from our colleagues16 has shown that the effect of Quebec’s generous social transfers has essentially protected the province against the reduction of the size of its middle-class. The hollowing-out of the income distribution is frequently cited as one of the explanations for higher social tensions and the rise of populist politicians. If Quebecers don’t realize their luck in that regard, they risk throwing away part of the successful system they built to respond to a crisis that doesn’t really affect them. One avenue to consider to better understand that gap in knowledge about the extent of redistribution would be to examine how citizens perceive and understand public services. Income and consumption taxes are never perceived without a purpose and the wealth redistribution operated by the state rests on other means besides these charges. To understand the opinions held by citizens regarding the state’s income redistribution efforts, it is important not only to assess their perception of the inequalities that these efforts are intended to address but also their perception of the income redistribution already taking place, considering all of its components. These include not only income tax but also the government transfers and services that income tax serves to support. It will be important also to further our knowledge of the mechanisms that link mastery of the tax system with its social objectives other than wealth redistribution, such as retirement planning and employment incentivization. To this end, it will be necessary to compare multiple jurisdictions in this regard, and individual jurisdictions over time. Beyond the numbers and the regulatory texts, taxation is a vital public policy that serves to define societies and shape their future. Understanding how citizens perceive taxation and how they see themselves in relation to it allows us to appreciate the solidity, or fragility, of our social ties.

notes

  1 Task Force on Financial Literacy, Canadians and Their Money: Building a Brighter Financial Future (Ottawa, 2010), 105.

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  2 Autorité des marchés financiers, Québec Financial Education Strategy (Quebec, 2015), 18.   3 See, in particular, A. Lusardi and O.S. Mitchell, “Financial Literacy around the World: An Overview,” Journal of Pension Economics and Finance 10, 4 (2011): 497–508.   4 These results are robust even when scores are compiled using other methods. For example, results would be comparable even if a greater weight were given to the open-ended questions or to the true-or-false questions, and they would still be valid if a fraction of a point were attributed to respondents who indicated not knowing an answer rather than giving a wrong answer.   5 It should be noted that respondents who declined to report their family income were assigned a family income based on their other personal ­characteristics using the regression imputation method. This method helps avoid a bias in the results that would otherwise occur if the family income of these respondents was systematically high or low and they were excluded from the sample.   6 This variable captures the effect of being a woman.   7 We assigned a rating of 1 to 3 reflecting the level of utilization (never, sometimes, regularly) of each of the following four potential sources of taxation information: TV or radio shows devoted to economic or financial issues; columns in the mass media concerning the economy or finance; blogs, pages, or profiles in social media concerning the economy or finance; and official government publications concerning the economy or taxation. We then tallied these ratings to obtain an indicator with a ­potential score range of 4 to 12.   8 See, in particular, J. Kelley and M.D.R. Evans, “Class and Class Conflict in Six Western Nations,” American Sociological Review 60, 2 (1995): 157, as well as M.D.R. Evans and J. Kelley, “Subjective Social Location: Data from 21 Nations,” International Journal of Public Opinion Research 16, 1 (2004): 3–38.   9 For a critique, see J. Curtis, “Middle Class Identity in the Modern World: How Politics and Economics Matter,” Canadian Review of Sociology 50, 2 (2013): 203–26. 10 Respondents were asked to give their annual income for the previous year because the survey was conducted one month before the end of 2016. 11 Age and gender differences were not significant. 12 See, for example, K.L. Fisher, A. Mawani, et al., “Awareness and Use of Canada’s Children’s Fitness Tax Credit,” Canadian Tax Journal 61, 3 (2013): 599–632.

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13 R. Reeves, Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do about It (Washington, DC: Brookings Institution Press, 2017), 240. 14 Conseil supérieur de l’éducation, “Rapport sur l’État et les Besoins de l’Éducation 2014–2016,” (Quebec City, 2016). 15 K. Gründler and S. Köllner, “Determinants of Governmental Redistribution: Income Distribution, Development Levels, and the Role of Perceptions,” Journal of Comparative Economics 45, 4 (December 2016): 930–62. 16 S. St-Cerny and F. Delorme, “La classe moyenne au Québec s’érode-t-elle vraiment? Contour et évolution,” Working Paper No. (2014–04). Université de Sherbrooke, Research Chair on Taxation and Public Finance (2014).

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14 Exposing the Political Chameleon: Insights into Canadian Taxpayers’ Perceptions of Tax Fairness Jonathan Farrar, Dawn Massey, and Linda Thorne

1 introduction

What is tax fairness? Tax fairness is a perception arising from comparisons within the tax system. Taxpayers respond to perceptions of tax fairness by being cooperative and compliant with the tax authority if they are satisfied with their comparison, or by being uncooperative and non-compliant if they are unsatisfied with their comparison.1 For this reason, tax authorities care about people’s perceptions of tax fairness.2 In principle, most people believe that “tax fairness” is a noble policy objective, yet the concept is not clearly defined. Further, while we know that fairness perceptions differ according to context and an individual’s circumstances,3 we do not know: (1) to whom taxpayers compare themselves; and (2) in what circumstances they make comparisons. These ambiguities inherent in the concept of “tax fairness” enable the government to shape conceptions of fairness for its own ends. Indeed, the government often tries to sell the “fairness” of its tax policies through press releases and other communications, including the federal budget. As shown in Table 14.1, over the last ten years, the federal government has evoked the principle in every federal budget. Notice in Table 14.1 the many ways the government has used the term “fairness” in its budgets by including a variety of comparison groups such as:

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Table 14.1 Usage of “tax fairness” in Canadian federal budgets, 2009–2018 Budget year 2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

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Example of “tax fairness” language That’s why our first substantial piece of legislation was to restore fairness to Canada’s tax system, by raising taxes on the wealthiest one per cent, so that we could cut taxes for the middle class. To have an economy that works for everyone, we need a tax system that is fair, and we need all Canadians to pay their fair share. Fairness is essential to ensuring Canadians have confidence in their tax ­system. The commitment to fairness is what drives the Government to close loopholes and to ensure that no taxpayer is able to get a tax advantage at the expense of those who pay their fair share. Fairness is also what drives the government to ensure that the C R A has the resources to enforce tax laws, and it motives the Government to actively ­participate in global efforts that combat international tax evasion and avoidance. As a matter of fairness for all taxpayers, it is important to prevent underground economic activity, tax evasion and aggressive tax planning. This involves ­providing the Canada Revenue Agency (C R A ) with sufficient resources to ­administer and enforce tax laws effectively. Improving business tax fairness and competitiveness has been a central ­element of the Government’s approach to fostering an environment in which businesses can thrive and compete in a global economy. Canada’s international tax rules are constantly reviewed as part of the Government’s ongoing efforts to protect the Canadian tax base and ensure tax fairness. Budget 2013 proposes a number of measures to strengthen the capacity of the Canada Revenue Agency (CRA) to combat international tax evasion and to address international aggressive tax avoidance. These additional tools will improve the CRA’s ability to protect the Government’s revenue base and are ­consistent with the Government’s commitment to tax fairness. The CRA is also updating publications related to tax fairness and developing new content and new types of content, such as webinars on redress mechanisms. Economic Action Plan 2012 proposes new measures to close tax loopholes in order to improve the fairness and integrity of the tax system and to help keep tax rates low. Budget 2011 follows through on the Government’s commitment in the 2010 Speech from the Throne to improve the integrity and fairness of the tax ­system by closing loopholes that allow a few businesses and individuals to avoid paying their fair share of tax. By closing loopholes in the tax system, these initiatives will help ensure that all taxpayers pay their fair share of tax on income earned in Canada and abroad. Tax Fairness Plan – Introduction of the Working Income Tax Benefit, Child Tax Credit, pension income splitting

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•

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Oneself after claiming a new tax credit or reporting pension income on the tax return of a spouse (Budget 2009); Other taxpayers trying to avoid paying taxes by using the underground economy or international tax structures (Budgets 2010 through 2017); and High-income taxpayers (Budget 2018).

One view of these comparisons is to applaud the government for the scope of its efforts to adjust the tax system to equalize it for Canadians and Canadian businesses, both domestically and internationally. On the other hand, a cynical view of the use of the term “tax fairness” might see a political chameleon, meant to persuade, soothe, and reassure taxpayers of the rightness of the government’s actions in order to increase their voluntary compliance. The flexible and feel-good nature of tax fairness makes it a convenient concept for governments to evoke to promote its policies. However, although the government recognizes that perceptions of fairness matter to Canadians, what taxpayers perceive as “fair” is unclear. To provide clarity about this principle, we decided to conduct a survey of Canadians and report the results. Identifying what taxpayers perceive as “fair” regarding income taxes helps us better understand whether they are (or are not) willing to cooperate and pay their “fair share” of tax. In turn, knowledge of what makes taxes “fair” helps to conceptualize ways to promote tax compliance. 2 e v o l u t i o n o f t h e c o n c e p t o f ta x fa i r n e s s

In this section, we document how the concept of tax fairness has evolved in the academic literature. This review helps us identify items to include in our survey, such as the comparisons on which taxpayers base their perceptions of fairness. We begin by highlighting how, historically, tax fairness has been understood and measured. Income tax originated in England in 1799, but the importance of the psychological aspects of tax fairness was not recognized until the 1950s, following the Holocaust, in which Jewish taxpayers were taxed punitively relative to their Gentile counterparts.4 In the 1950s, German economist Günter Schmölders established the “Cologne school of tax psychology” and investigated taxation through an integration of psychological and economic perspectives.5 His research was an effort

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“to analyze the direct resistance to direct taxation of individuals and nations according to their general ‘tax mentality.’”6 By the mid-1960s, Burkhard Strümpel, a colleague of Schmölders, developed a model of tax compliance incorporating taxpayers’ perceptions of the equity (fairness) of the tax system.7 His model suggested that taxpayers’ perceptions of fairness influence their willingness to pay taxes. However, the notion of “fairness” in Strümpel’s work was broad and did not specify exactly what factors were included. Michael Spicer, a graduate student of Strümpel, was the first person to undertake tax fairness research in North America, but his conception of tax fairness was likewise broad.8 Monica Gerbing investigated more specifically what tax fairness meant to taxpayers. She identified four factors: • •

•

•

General fairness – whether the tax system is fair, overall; Exchange equity – whether the benefits taxpayers received from their tax dollars are matched by the amount of taxes they paid; Attitude towards taxation of the wealthy – whether wealthy taxpayers should pay a greater share of taxes than other taxpayers; and Preferred tax rate structure – whether there should be tiered or differential tax rates depending on income thresholds.9

A subsequent study by Christensen et al. identified five factors that influence perceptions of tax fairness.10 Three of the factors were the same as those identified by Gerbing: general fairness, exchange equity, and tax rate structure. The other two were new: •

•

Personal payment level – whether the magnitude or amount of taxes paid was fair; and Fairness of special provisions – whether tax rules should apply in unique situations.

More recent studies conducted by Maroney et al. (2003) and Trivedi et al. (2003) identify the importance of three factors of fairness linked to the justice and organizational fairness literatures.11 The first is exchange equity. The other two reflect aspects of how a tax burden is allocated amongst taxpayers, i.e., how a taxpayer’s share of income

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taxes is apportioned compared to other taxpayers. The two aspects of perceptions of fairness of the allocation of the tax burden are: •

•

Horizontal equity – whether similar taxpayers should pay a similar amount in taxes; and Vertical equity – whether dissimilar taxpayers should pay different amounts in income taxes (for instance, whether the wealthy should pay a greater share of taxes than those less wealthy).

These studies demonstrate that there is no scholarly consensus as to the key attributes of tax fairness. These studies also show that the basis for taxpayers’ comparisons in determining tax fairness is unclear. To illustrate this lack of clarity further, first consider the following examples, shown in Table 14.2, involving a comparison between two taxpayers, Anna and Michael, who have different incomes. Example 1 is set in a flat tax regime, in which all income is taxed at the same rate. Example 2 is set in a progressive tax regime, in which tax rates increase as income increases. These examples are meant to illustrate the complexity and nuances associated with tax fairness perceptions, as there are many different comparisons that can be made between taxpayers regarding the amount of taxes each is required to pay. In Example 1, if Anna earns $100,000 and is taxed at a rate of 15%, and Michael earns $30,000 and is taxed at a rate of 15%, Anna has paid more in taxes than Michael ($15,000 versus $4,500). As a result, Anna may perceive her $15,000 outcome as fair or unfair as compared to Michael. And Michael may perceive his $4,500 outcome as fair or unfair as compared to Anna. In Example 2, if Anna is taxed at 15% on the first $30,000 of her income, and 25% on the rest ($70,000), she has paid more in taxes than Michael ($22,000 versus $4,500). Moreover, the tax rate structure is now different for Anna than it is for Michael. As a result, Anna not only pays more in total taxes than Michael; she also pays a greater share of income tax than Michael (since she pays an average of 22% of her income in taxes, whereas Michael only pays 15% of his income in taxes). Anna and Michael have more to consider in Example 2 than Example 1 when making their comparisons. Specifically, is it only that Anna pays more in taxes than Michael that is perceived as fair or unfair? Or, is it the differential in tax rates on a portion of higher

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Table 14.2 Important comparisons in the tax context Example 1

Example 2

Wealthier taxpayer (Anna)

$100,000 income: 15% tax rate on all income

Less wealthy taxpayer (Michael)

Total tax = $15,000 $30,000 income: 15% tax rate on all income

$100,000 income: 15% tax rate on the first $30,000 of income 25% tax rate on income > $30,000 Total tax = $22,000 $30,000 income: 15% tax rate on the first $30,000 of income 25% tax rate on income > $30,000 Total tax = $4,500

Total tax = $4,500

income that is perceived as fair or unfair? These comparisons may also be evaluated differently by Anna and Michael. That is, what may be perceived as fair (unfair) by Anna may be perceived as unfair (fair) by Michael. Taxpayers can also make comparisons with themselves. For example, what if Anna previously was in a flat tax regime, but now is in a progressive tax regime? She could compare her present circumstances to her previous circumstances, thereby generating a perception of fairness or unfairness. These examples can also illustrate the possibility that tax fairness factors can overlap. Consider the “vertical equity” factor identified by Maroney et al. and Trivedi et al. versus the “tax rate structure” factor identified by Gerbing and by Christensen et al.12 Vertical equity (whether dissimilar taxpayers pay different amounts in income taxes) may overlap with preferred tax rate structure (whether there should be tiered or differential tax rates depending on income thresholds), or they may be perceived as distinct from each other. In Example 1, Anna has paid more in taxes than Michael, which is a vertical equity issue. In Example 2, Anna has paid more in taxes than Michael (still a vertical equity issue) and also has paid a greater share of taxes than Michael because of the progressive tax rate structure. Thus, in both situations, vertical equity is present; but only in one situation do the tax rates differ among taxpayers. As such, it is unclear whether vertical equity also encompasses the fairness of a progressive tax rate structure. In other words, vertical equity may just capture the notion of whether taxpayers with higher incomes should pay more in income tax than taxpayers with lower incomes, regardless of a

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progressive tax structure. In sum, tax scholars need to determine the most relevant reference points for comparisons when investigating how taxpayers perceive fairness. The Importance of Taxpayer Interactions with the Tax Authority We know from organizational research investigating employee perceptions of fairness that in addition to economic comparisons, employee perceptions of fairness also include: 1) procedural fairness; 2) informational fairness; and 3) interpersonal fairness.13 Procedural fairness has to do with the fairness of work procedures and policies. Informational fairness involves receiving adequate explanations from superiors, and interpersonal fairness refers to the quality of the treatment one receives when interacting with others, including superiors. As applied to the tax context, these concepts would be as follows: • •

•

•

Distributive fairness – fairness of economic comparisons; Procedural fairness – whether the tax authority’s policies and procedures are even-handed; Informational fairness – whether the tax authority’s explanations are clear; and Interpersonal fairness – whether the tax authority’s treatment of taxpayers is respectful.

There is some research that gives some insight into these non-economic aspects of comparisons in the tax context. Findings show that taxpayers’ perceptions of fairness are influenced by their interactions with the tax authority.14 What this research does not provide, however, is a thorough understanding of how interactions with a tax authority influence Canadians’ perceptions of tax fairness. For instance, taxpayers may imagine how their situation should be handled, and then match their expectation with what occurs. They also might judge the fairness of their interaction with a tax authority based on a personal experience, or after hearing an anecdote from another individual. In short, while tax fairness research in this area has begun, much more work remains to be done. To develop a more comprehensive understanding of Canadian taxpayers’ perception of “tax fairness,” we felt the need to conduct a formal study using items that previous literatures – both tax and

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organizational fairness – identify as important. The next section describes how we created the survey and presents the tax fairness framework that we derived from responses to it. 3 s t e p s t o u n d e r s ta n d i n g ta x pay e r s ’ p e r c e p t i o n s o f ta x fa i r n e s s

This section of the chapter identifies the steps we took in surveying Canadian taxpayers and identifying the important factors that influence their perceptions of tax fairness. Step 1: Create a Survey from a List of Items Constituting Taxpayers’ Perceptions of Tax Fairness As a basis for our survey we initially developed a comprehensive list of items that might constitute taxpayers’ perceptions of fairness. We started by examining prior surveys and studies and identifying all articles and items used to measures tax fairness. Using two databases, we searched for articles that contained a variant of the term “tax fairness.”15 The period covered by our review begins in 1976, which is when the first tax fairness-tax compliance paper was published,16 and ends in 2015. Our search identified fifty-one studies in accounting, tax, economics, sociology, law, and ethics journals. Each article examined the association between some aspect of tax fairness and tax compliance. Of the fifty-one studies, we determined that eight failed to provide any identifiable measure of fairness; thus, we excluded the eight, leaving us with forty-three studies. For completeness, we also generated items from the broader literature that investigated fairness in other contexts. After finding these items, we modified the language used so that they made sense for the tax context. For example, an item used in De Boer et al. is “At this company, employees’ complaints are taken seriously.”17 We adapted this item for the tax context by stating, “At the CRA, taxpayers’ complaints are taken seriously.” We also included items from two doctoral dissertations on tax fairness.18 We then obtained input from an expert panel to make sure our list of items was clear, complete, and non-redundant. Following the academic review, our list contained twenty-seven items that attempted to include all aspects of tax fairness applicable to individual taxpayers.

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Step 2: Construct Framework for Canadian Taxpayers’ Perceptions of Tax Fairness Our survey was given to a large sample of Canadian taxpayers. As shown in Table 14.3, empirical analysis of the survey data suggested there are two primary factors involved in Canadians perceptions of tax fairness: Fairness of the Amount of Taxes Owing; and Fairness of the Tax Process.19 The Fairness of the Amount of Taxes Owing is perceived fairness of the amount of income tax a taxpayer is obligated to pay. The Fairness of the Tax Process is the perceived fairness of the procedures by which income tax rules are administered. Each primary factor has corresponding sub-factors. For the first factor, Fairness of the Amount of Taxes Owing, there are two subfactors: Taxes owing compared to similar taxpayers (also known as Horizontal Equity), and Taxes owing compared to dissimilar taxpayers (also known as Vertical Equity). That is, taxpayers make several comparisons when considering the fairness of the amount they owe: taxpayers compare the amount of taxes they pay relative to taxpayers like themselves (who earn similar amounts of income) and taxpayers compare the taxes they pay relative to taxpayers different from themselves (who have higher or lower income). Further, each sub-factor is supported by a set of items drawn from statements in our survey. For Taxes owing compared to similar taxpayers, we have three items that correspond to Horizontal Equity. They are: (1) It is fair that I pay a similar share of income tax compared with other taxpayers earning an equivalent amount of income; (2) It is fair for taxpayers with similar amounts of income to pay a similar amount of income tax; and (3) Two taxpayers who earn the same income should pay the same amount of income tax. There are another three items that support Taxes owing compared to dissimilar taxpayers, that is, Vertical Equity. They are: (1) It is fair that high-income earners are subject to a higher tax rate than middleincome earners; (2) It is fair that middle-income earners are taxed at a lower rate than high-income earners; and (3) High-income earners should pay a greater share of income tax than low-income earners. For the second factor, Fairness of the Tax Process, there are three subfactors: Openness to taxpayer complaints, Adequacy of explanations from the tax authority, and Respectful treatment from tax authorities. Openness to taxpayer complaints relates to the fairness of procedures. Two items captured this sub-factor, namely: (1) The CRA offers

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Table 14.3 Framework for Canadian taxpayers’ perceptions of tax fairness Primary factors Fairness of the Amount of Taxes Owing

Sub-factors Taxes owing compared to similar taxpayers (Horizontal Equity)

Taxes owing compared to dissimilar taxpayers (Vertical Equity)

Fairness of the Tax Process

Openness to taxpayer complaints

Adequacy of explanations from the tax authority (Informational Fairness)

Respectful treatment from the tax authority (Interpersonal Fairness)

Items corresponding to the sub-factors It is fair that I pay a similar share of income tax compared with other taxpayers earning an equivalent amount of income. It is fair for taxpayers with similar amounts of income to pay a similar amount of income tax. Two taxpayers who earn the same income should pay the same amount of income tax. It is fair that high-income earners are subject to a higher tax rate than middle-income earners. It is fair that middle-income earners are taxed at a lower rate than high‑income earners. High-income earners should pay a greater share of income tax than low-income earners. The C R A offers taxpayers ways to express their grievances and complaints. At the C R A , taxpayers’ complaints are taken seriously. The C R A communicates details in a timely manner. C R A correspondence is concise. C R A correspondence is easy to understand. The C R A answers taxpayers’ ­questions carefully. The C R A expresses regret for p ­ ossible negative effects on taxpayers. The C R A treats taxpayers with courtesy.

taxpayers ways to express their grievances and complaints; and (2) At the C R A , taxpayers’ complaints are taken seriously. Adequacy of explanations from the tax authority relates to the quality of information received from the tax authority. There are four items

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to capture informational fairness: (1) The CRA communicates details in a timely manner; (2) CRA correspondence is concise; (3) CRA correspondence is easy to understand; and (4) The CRA answers taxpayers’ questions carefully. Each of these items relates to the quality of the information that the tax authority communicates to taxpayers. Respectful treatment from the tax authority relates to tax authority’s interpersonal treatment of individual taxpayers. There are two items to capture interpersonal fairness: (1) The C R A expresses regret for possible negative effects on taxpayers; and (2) the CRA treats taxpayers with courtesy. 4 i m p l i c at i o n s f o r ta x pay e r s a n d ta x a u t h o r i t i e s

A vague understanding of perceptions of tax fairness has allowed the Canadian federal government (and other governments) to use “tax fairness” as a political chameleon – that is, to suit its political objectives. Ironically, without knowing what constitutes tax fairness, governments have no means of determining whether they are being effective in encouraging taxpayers’ compliance. Given that perceptions of fairness matter to Canadians, we hope that developing an understanding of taxpayers’ fairness perception will help tax authorities, such as the CRA, to more efficiently and fairly assess and collect taxes. Our survey findings highlight the importance of psychology in tax fairness, as it supports the importance of comparisons that go beyond economic factors in influencing perceptions of tax fairness. By directly asking taxpayers what constitutes tax fairness, we reveal that there are two primary aspects: 1) Fairness of the Amount of Taxes Owing, and 2) Fairness of the Tax Process. Thus, we find that tax fairness perceptions extend beyond economic comparisons about the amount of taxes paid to also include encounters with the tax authority. In the case of the former, taxpayers’ economic comparisons reflect both real and imagined comparisons relative to taxpayers like themselves (Horizontal Equity) and taxpayers unlike themselves (Vertical Equity). In the case of the latter, taxpayers’ procedural comparisons reflect what they imagine or expect should happen when they interact with the tax authority. Better understanding how taxpayers make comparative judgments allows us to better understand when tax fairness perceptions are likely to be triggered. In turn, knowing when tax fairness matters to

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Canadians may allow the tax authority to promote or address initiatives intended to increase the likelihood that taxpayers are compliant. Improving compliance is an important objective in a country like Canada where, because some forms of income and some deductions are not subject to third-party verification, an “honour system” underlies tax compliance. As well, improving compliance using audits and penalties that directly apply only to select taxpayers is time-consuming and expensive. By contrast, a fairness-based approach to improving compliance is more universally applicable and, as such, is more efficient and cost-effective. A comparison of our framework with the tax fairness initiatives the Canadian government touted in past federal budgets suggests the government lacks an understanding of tax fairness. The federal government appears to be using fairness in a way that may not matter to Canadians. For instance, a major theme in recent federal budgets is restoring fairness for taxpayers who do not use international tax structures vis-à-vis taxpayers who do. Our survey results suggest that this comparison is so unusual and uncommon as to be irrelevant. If government mouthpieces represent the government’s stance on fairness in a manner incongruent with taxpayer needs, taxpayers may lose trust in the government or fail to recognize the government as a legitimate authority,20 which may undermine their compliance. We encourage the federal government to use tax fairness authentically, focusing on relevant reference points. For a typical Canadian taxpayer, relevant reference points we identify are similar and dissimilar taxpayers (in terms of annual income), as well as the taxpayer’s “customer service” experience when interacting with the tax authority. We also hope to encourage the government to develop policies that taxpayers perceive as fair, rather than policies that the government thinks taxpayers may perceive as fair. Consistent with our survey results, two broad-based tax initiatives the Canadian government recently introduced may increase taxpayers’ perceptions of fairness and, in turn, their compliance. In February 2008, the Office of the Taxpayers’ Ombudsman (O T O ) was established. This Office works with taxpayers to resolve service-related issues with the C R A , which is consistent with our identification that fair procedures are important to perceptions of fairness. Our model suggests that taxpayers’ ability to resolve complaints, be treated fairly, and receive adequate explanations about their tax situation are all very important, which accords with the mission of the O T O .

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As well, in 2007, the Canadian government officially introduced the “Taxpayer Bill of Rights.” Currently there are sixteen “rights” that govern taxpayers’ relationship with the C R A and confirm that the CRA is committed to serve taxpayers with “fairness.” Of these rights, several are supported by our study, such as taxpayers’ rights to: lodge a service complaint without fear of reprisal; receive an explanation of the CRA’s findings after lodging a service complaint; receive courteous and fair treatment; and receive complete and accurate information. These rights also dovetail with the sub-factors of Fairness of the Tax Process, and, to the extent that they may increase taxpayers’ perceptions of fairness, they, in turn, may increase taxpayers’ tendency to comply with the tax authority. In conclusion, the government’s malleable use of “tax fairness” not only makes it susceptible to politicization, but also renders it ineffective in improving taxpayers’ compliance. By revealing to taxpayers and the tax authority what constitutes “tax fairness” for a typical Canadian taxpayer, we hope we have provided the government with insights it can use to encourage citizens’ voluntary tax compliance. In particular, given our results, the government would be wise to elicit citizens’ tax fairness perceptions in the context of relevant reference points or comparator groups.

notes

  1 K. Van den Bos, S. Peters, D. Bobocel, and J. Ybema, “On Preferences and Doing the Right Thing: Satisfaction with Advantageous Inequity when Cognitive Processing Is Limited,” Journal of Experimental Social Psychology 42, 3 (2006): 273–89; R. Folger and R. Cropanzano, “Fairness Theory: Justice as Accountability,” in Advances in Organizational Justice, ed. J. Greenberg and R. Cropanzano (Stanford: Stanford University Press, 2001): 1–55; E. Reuben and F. Van Winden, “Fairness Perceptions and Prosocial Emotions in the Power to Take,” Journal of Economic Psychology, 31, 6 (2010): 908–22.   2 M. Schweitzer and D. Gibson, “Fairness, Feelings, and Ethical DecisionMaking: Consequences of Violating Community Standards of Fairness,” Journal of Business Ethics 77, 3 (2008): 287–301; V. Braithwaite, “A New Approach to Tax Compliance,” in Taxing Democracy: Understanding Tax Avoidance and Evasion, ed. V. Braithwaite (Aldershot: Ashgate, 2003): 1–11; J. Slemrod, “Cheating Ourselves: The Economics of Tax Evasion,”

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The Journal of Economic Perspectives 21, 1 (2007): 25–48; J. Olsen, M. Kang, and E. Kirchler, “Tax Psychology,” in The Cambridge Handbook of Psychology and Economic Behaviour, ed. A. Lewis (Cambridge: Cambridge University Press, 2018; 2nd ed.): 405–29.   3 J. Colquitt and J. Shaw, “How Should Organizational Justice Be Measured?” in Handbook of Organizational Justice, ed. J. Greenberg and J. Colquitt. (Mahwah, N J: Erlbaum Associates, 2005): 113–52; J. Konow, “Fair and Square: The Four Sides of Distributive Justice,” Journal of Economic Behavior & Organization 46, 2 (2001): 137–64.   4 G. Aly, Hitler’s Beneficiaries: Plunder, Racial War, and the Nazi Welfare State (New York: Henry Holt and Company, 2008).   5 B. Torgler, Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis (Cheltenham: Edward Elgar Publishing, 2007), 4.   6 G. Schmölders, “Fiscal Psychology: A New Branch of Public Finance,” National Tax Journal 12, 4 (1959), 341.   7 B. Strümpel, “The Contribution of Survey Research to Public Finance,” in Quantitative Analysis in Public Finance, ed. A. Peacock (New York: Praeger, 1969): 29–32.   8 M. Spicer and S. Lundstedt, “Understanding Tax Evasion,” Public Finance 31, 2 (1976): 295–305.   9 M.D. Gerbing, “An Empirical Study of Taxpayer Perceptions of Fairness” (PhD dissertation, The University of Texas at Austin, 1988). 10 A. Christensen, S. Weihrich, and M.D.G. Newman, “The Impact of Education on Perceptions of Tax Fairness,” Advances in Taxation 6 (1994): 63–94. 11 J. Maroney, T. Rupert, and M. Wartick, “The Perceived Fairness of Taxing Social Security Benefits: The Effect of Explanations Based on Different Dimensions of Tax Equity,” The Journal of the American Taxation Association 24, 2 (2002): 79–92; V. Trivedi, M. Shehata, and B. Lynn, “Impact of Personal and Situational Factors on Taxpayer Compliance: An Experimental Analysis,” Journal of Business Ethics 47, 3 (2003): 175–197. 12 Maroney et al, “Perceived Fairness”; Trivedi et al., “Impact of Personal and Situational Factors”; Gerbing, “Empirical Study”; Christensen et al., “Impact of Education.” 13 Greenberg and Colquitt, Handbook of Organizational Justice. 14 M. Van Dijke and P. Verboon, “Trust in Authorities as a Boundary Condition to Procedural Fairness: Effects on Tax Compliance,” Journal of Economic Psychology 31, 1 (2010): 80–91; P. Verboon and M. Van Dijke, “When Do Severe Sanctions Enhance Compliance? The Role of Procedural Fairness,” Journal of Economic Psychology 32, 1 (2011): 120–30.

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15 Besides “tax fairness,” we also search for synonyms such as “tax equity” and “tax justice.” As well, we searched for “tax compliance” and “tax ­evasion.” (We included the terms “tax compliance” and “tax evasion” because we wanted to isolate studies that have measured tax fairness. Practical research about the influence of tax fairness on tax compliance or tax evasion is likely to contain a measure of tax fairness.) 16 Spicer and Lundsted, “Understanding Tax Evasion.” 17 E. De Boer, A. Bakker, J. Syroit, and W. Schaufeli, “Unfairness at Work as a Predictor of Absenteeism,” Journal of Organizational Behavior 23, 2 (2002), 187. 18 Gerbing, “An Empirical Study,” and J. Farrar, “The Impact of Tax Fairness Dimensions on Tax Compliance: Canadian Evidence” (PhD dissertation, York University, 2011). 19 The analysis was done using exploratory factor analysis and structural equations modeling. 20 E. Kirchler, E. Hoelzl, and I. Wahl, “Enforced versus Voluntary Compliance: The Slippery Slope Framework,” Journal of Economic Psychology 29, 2 (2008): 210–55.

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o b s ta c l e s t o d e m o c r at i c ta x   a c c o u n ta b i l i t y

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15 The Rock Is a Hard Place: Redistributing Wealth in Twenty-First-Century Newfoundland Robert C.H. Sweeny

For the fifty years after Confederation with Canada in 1949, Newfoundland was the poorest province in the country. In 2006, the provincial government set the ambitious target of becoming the province with the lowest poverty rates within a decade. To that end, a Poverty Reduction Strategy (P R S) was introduced and by 2018 $1.8 billion, or just over 2% of total provincial expenditures, had been invested in a broad range of initiatives.1 Briefly, by at least one measure,2 the province did appear to have achieved this lofty goal, but it soon slipped back into third place overall among Canadian provinces. The most reliable recent indicator, the 2016 census reporting complete data for 2015, had fewer than one in seven Newfoundlanders living in poverty, compared with one in eight in Saskatchewan and one in eleven in Alberta, while nationally the figure stood at one in six.3 More disturbing was the number of children living in poverty. Almost one in five Newfoundlanders under the age of six live in poverty, a rate very similar to Saskatchewan’s, but considerably higher than the national average of one in six and well behind both Alberta and Quebec where it was one in seven. Although the promise was not kept and the known patterns reveal deeply gendered cleavages,4 nonetheless there has been a truly remarkable change in fortunes. When we recall that one in four people lived in poverty in the late twentieth century and still one in five as recently as 2000, it is clear that the province has turned the page on a long and dark chapter in its history.

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This paper examines the extent to which fiscal policy aided or thwarted this goal of building a more equitable society. It does so from the perspective that we should not be trying simply to reduce poverty, but to eradicate it. Poverty is a form of social exclusion and so, just as with racism and sexism, the only appropriate public policy is zero tolerance. Sadly, this paper will argue that as a direct result of provincial fiscal policies that most benefit the wealthy, the goal of eradicating poverty is now more difficult to achieve than ever. c h a n g i n g f o rt u n e s

Between 2001 and 2008, transnational oil companies pumped out half of Newfoundland’s known oil reserves. In conjunction with a major expansion in the mining of iron ore and the high grading of the Voisey Bay nickel, silver, and cobalt deposit, both in the province’s mainland colony of Labrador, this extractivism fuelled soaring corporate profits. Figure 15.1 shows just how exceptional these profits were. In advanced capitalist countries, corporate profits normally account for roughly 15% of GDP, while wages and salaries account for 45%, or about three times the share of net profits. Newfoundland’s boom in oil production quickly led to a completely different relationship. Net profits rose to surpass all wages and salaries paid in the province by 2005. During the boom, net profits in excess of the Canadian average totalled $78 billion, or approximately $140,000 for every man, woman, and child in the province. This bonanza accrued largely to transnational corporations. Just as this extraordinarily profitable pillage of the province’s non-renewable resources peaked, government royalty revenues jumped. This two-stage transformation in the province’s economic situation created a qualitatively different political environment, which permitted a series of experiments in neo-liberal policy formulation.5 The early years of the oil boom benefited most people, but in quite differing ways. It created more jobs in the service sector and so was quite gendered;6 nonetheless, it lowered the chronically high unemployment rate that had plagued the province since the cod moratorium of 1992, while drawing tens of thousands of people back into the waged work-force. By 2006, median incomes of the bottom half of income earners had risen by 42%, compared to a 24% increase for those in the top half and a 27% increase for the top one percent.

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Figure 15.1  “Net profits compared to wages and salaries” Source: Statistics Canada, Cansim table 384– 0037.

This equalizing trend was rapidly reversed. Between 2007 and 2015, median incomes of the top one percent rose by 66%, the top 10% by 60%, while that of the bottom half by 49%.7 Boom times were also inflationary times, which made the long-term effect of this reversal quite stark. In constant dollar terms, between 2000 and 2015, the median income of the top one percent increased $89,600, the top ten percent by $31,772, while that of the bottom fifty percent by only $4,048.8 The dating of this reversal in fortunes to 2007 coincided with the dramatic increase in the province’s non-renewable resource revenue. These funds financed some fundamental fiscal policy changes: the surtax on high incomes in force since the mid-1990s was abandoned; a shift away from progressive income tax towards regressive consumption taxes was initiated; and the first in a major series of income tax cuts targeting those in the higher brackets was brought in.9 The aim,

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clearly stated in the budget speech that year, was to “leave the money in the pockets of those who earned it.” By 2012, the proportion of all wages and salaries paid in provincial income tax had been slashed by 29%. Significantly, when expressed

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as a percentage of total personal income – so including all pensions, unemployment insurance, workmen’s compensation, welfare payments, and other government transfers – it dropped by only 5.8%. Clearly, the deeper your pockets, the more you got to keep. Meanwhile, revenue from all forms of consumption taxes, expressed as a proportion of retail sales, continued to climb and reached 21.6% by 2016, a 34% increase over 2008.10 To understand this exceptional growth in inequality, Figure 15.3, “Rapidly changing fortunes,” compares the distribution of people and income in 2007 with 2015. As the number of people filing tax returns had increased by 9% and total income increased a whopping 61%, the width of the bars for 2015 have been adjusted to accurately represent their relative growth. By 2015, income exhibited a strangely inverted symmetry: more than half the people earned only a fifth of the income, while a fifth of the people earned more than half. Visually, the most striking aspect of these changed fortunes is the relative collapse in the income of the majority of people: those in the bottom tax bracket saw their share of total income drop from a third to a fifth. Labour’s losses were capital’s gains, as the bulk of increased income went to those at the very top. And yet, there is little here to support the idea of a hollowing-out of the middle class. Both the relative size and actual share accruing to the middle tax bracket increased slightly.11 The greatest losses are clearly at the bottom. In 2007, a third of tax-filers got by on less than $15,000 a year by sharing a tenth of provincial income. In 2015, when earning less than $15,000 placed you well below the poverty line, a fifth of tax-filers and their dependents survived somehow on one-thirtieth of total income. The boom benefited most Newfoundlanders, but it left a significant minority out. Those in need in our society were even more vulnerable than a decade before, for two reasons. First, their lot in life was now so different from the experience of the majority. Second, the dramatic increase in the number of people at the highest income levels changed the political economy of the province.12 In 2015, the one in twelve tax-filers earning $100,000 or more claimed over half the tax credits for contributions to federal political parties.13 To assess how the Williams tax cuts influenced these changing fortunes, I analyzed the final tax tables from 2001 through to 2015. The dramatic decline in the provincial taxes paid by people earning in excess of $100,000 is shown very clearly on Figure 15.4, Basking in

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