TAXATION

Canada taxes poor at robber-baron rates

The Globe & Mail – Friday, September 30, 2005 Page B2

OTTAWA -- In the beginning, it wasn't exactly war that induced people to accept income taxes. It was patriotism. And a huge personal exemption. In crafting the Income War Tax Act in 1917, Sir Robert Borden, prime minister at the time, explicitly exempted the first $1,500 of income -- or more than $25,000 in 2004 dollars -- from any tax whatsoever.

The highest rate, at 72 per cent, was reserved for people earning $1.7-million (in 2004 dollars). Here was the real thing -- an authentic progressive income tax.

Contrast Sir Robert's personal exemption with Prime Minister Paul Martin's. Sir Robert, we all know, was a Neanderthal Conservative; Mr. Martin, we all know, is a compassionate Liberal. Mr. Martin has promised to raise the personal income tax exemption -- by 2009 -- all the way to $10,000. Mr. Martin makes Sir Robert, in retrospect, look positively caring.

Canadians are remarkably indifferent to the vigour with which this country taxes its lowest-income citizens. We have lived too long with it, and have grown too comfortable with it. But there are a few voices calling for reform: the Canadian Chamber of Commerce, Toronto-Dominion Bank, the C.D. Howe Institute. (The institute published a comprehensive report last week on the need for fundamental tax reform -- on the 88th anniversary of the promulgation of the Income War Tax Act.) Only from the radical Establishment come any audible calls for an end to this national scandal. Thank God there are still some people with consciences in this country.

The effective marginal tax rate on low-income people can now exceed 60 per cent -- a higher rate than Canada's highest income earners pay. TD Bank chief economist Don Drummond has calculated that (with "clawback" of benefits taken into account) the effective marginal tax rate for a person earning as little as $25,000 can be an astonishing 80 per cent. Sir Robert didn't tax multimillionaires as aggressively as this.

It's not only the poorest Canadians who get hit with the robber-baron rates. Take an Ontario worker earning taxable income of $35,000 as an example. This person will pay only $5,650 in income taxes, for an apparently reasonable tax rate of 16 per cent. Calculate all of the taxes paid by this person, however, and you get a tax bill for more than $17,000, and an average tax rate of 50 per cent. Canada has set a unique standard here. Our harshest tax rates now apply to people with modest incomes. We do, indeed, have progressive taxation in this country. The problem is that the highest rates are at the wrong end of the income scale.

Borden's Income War Tax Act survived as a temporary war measure for 32 years, through the rest of the First World War, through the Roaring Twenties, through the Great Depression, through the Second World War. Conservative Prime Minister Arthur Meighen introduced a national sales tax in 1920; it was Canada's first. A year later, Mr. Meighen went down to defeat. Two successive Conservative prime ministers, though, had established the two taxes that would finance the welfare state and the nanny state -- income taxes and sales taxes.

The Second World War transformed income taxes, turning them into a weapon of war, turning a temporary expedient into a permanent illusion of national purpose ("the war on poverty," "the war on drugs," "the war on cancer"). Not only did the income tax system come to represent common purpose; it came to be deemed noble all by itself -- so long as it could be considered "progressive." Income taxes, no matter how dysfunctional, are now widely deemed to be the price that good people pay for a civilized nation.

A parallel indoctrination took place in the United States, where the Treasury Department hired cartoonist Walt Disney to help the public understand the intimate connection between income taxes and war. In the wartime cartoon that Mr. Disney produced, Donald Duck expresses pride in his country, then hears on the radio that his first duty as a citizen is to pay his income taxes. In response, a severe depression overwhelms the famous duck. Nevertheless, as he surrenders two stacks of coins to the government, he sees them slowly turn into twin smokestacks on munitions factories, from which roll guns, tanks, ships and airplanes for the war against Hitler. The United States also enlisted songwriter Irving Berlin to sell the income tax as patriotic obligation: "You see the bombers in the sky. Rockefeller helped build them. So did I. I paid my income tax today."

It was Louis St. Laurent who finally -- on Jan. 1, 1949 -- made income taxes permanent. By then, the old Edwardian principles -- no income taxes on the poor, very low rates on the working class -- had been forgotten. We are highly civilized people now, and we have the income tax rates to prove it. An irksome question, however, refuses to go away. When will we stop taxing the poor at a higher rate than we tax the rich?

neilreynolds@rogers.com