As procrastinators buckle down for the fast-approaching June 1 extended federal tax deadline, it’s worth recalling that income taxes were an innovation in 1917 to deal with a previous fiscal crisis.
Last week, Canadian Finance Minister Bill Morneau insisted that despite the nation’s current financial pickle, he is not contemplating raising taxes just now, even as the Parliamentary Budget Office suggested public debt could this fiscal year for the first time reach $1 trillion at the federal level alone.
While now may not be the time, at some point soon governments around the world will have to face up to how they are going to pay for all their COVID-19 largesse.
As some economists consider using artificial intelligence to improve revenues or modern monetary theory to pay the bills, and while others call for a universal basic income, there is no question that historically, times of crisis have been times of radical financial innovation.
It is well documented that voters love handouts and new spending from one finance minister but normally loathe the tax increases or austerity when a later finance minister decides spending is getting out of hand.
But historian Elsbeth Heaman, author of Tax, Order and Good Government, contends that while people generally dislike the idea of governments taking a bigger bite in taxation, there are many historical examples where a crisis of the kind we are experiencing now can dramatically shift opinions.
New attitude to taxes
“A catastrophe, a war, a famine, something like that creates a different kind of attitude toward taxation,” said Heaman, a McGill University professor whose specialties include social, medical and taxation history and who edited the Who Pays for Canada? volume.
And while in good times, people tend to accept the kind of market forces that offer greater rewards to the rich for their efforts in creating wealth, that attitude can change markedly once a crisis shines a light on the disproportionate suffering of the less fortunate.
The Irish potato famine that led to thousands of deaths in the fever sheds of Canada, including Montreal and Toronto, might be such an example. The Great Depression of the 1930s was another.
“Whenever you have these major events that have differential consequences for different kinds of people, where the rich don’t actually seem to be suffering very much and the poor seem to be suffering very, very acutely, then you do tend to get kind of a backlash against a tax system that seems to mimic the market,” said Heaman.
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She said the historical evidence is plentiful and the changes caused have been momentous.
The backlash against suffering during the Depression permanently remodelled the structure of Canadian taxation power, said Joe Martin, director of Canadian Business History at the University of Toronto’s Rotman School of Management.
Based on recommendations from the Depression-era Rowell–Sirois Commission to expand federal taxation for redistribution from wealthy Ontario and Quebec to the drought-battered Prairie provinces, the federal government used the crisis of the Second World War to expand personal and corporate income tax at the expense of the provinces.
From crisis to innovation
“[There was] strong opposition from both Ontario and Quebec, but it passed because of wartime conditions,” said Martin. That transformation formed the basis of Canada’s postwar welfare system and evolved into the current system of equalization payments that is still contested today.
Geoffrey Hale, the Lethbridge, Alta.-based academic and author of The Politics of Taxation in Canada, said that rather than taxing back the money the government is lavishing out now, Morneau would rather coax the economy into growth so that debt shrinks gradually over a period of years, not in absolute terms but as a percentage of GDP.
That’s why Hale doesn’t see governments boosting corporate taxes: for fear of chasing investment away. Similarly, he does not think there is a lot more opportunity for taxing the rich who would merely be driven toward tax shelters. Hale suggested a more politically palatable source of revenue would be to go after foreign digital sales, which for a large part escape Canadian taxation.
But everyone interviewed agreed that if finance ministers decide they need revenue, there are always places to find it.
Expanded consumption taxes or increased premiums for employment insurance are two examples. But more radical innovations might include wealth taxes, increased capital gains tax, death duties, financial transaction taxes (a Tobin tax), a flat tax or a poll tax, maybe aiming the revenue at a specific need, such as seniors’ care or better overall health care.
In a simulated economy, an AI came up with a counterintuitive tax policy that led to a smaller gap between the rich and the poor. <a href=”https://t.co/gavOrrBdLL”>https://t.co/gavOrrBdLL</a>
The experts said that projected borrowing so far is no danger to the country and has been higher before in relative terms. Some said we may be better placed than the United States just now.
‘We have the tools’
But as tax historian Shirley Tillotson from Halifax’s Dalhousie University said, evidence from the past shows that government confidence or even cockiness when a financial crisis begins can turn into alarm if the crisis worsens over a period of months or years. That is certainly what happened in 1917 and at the start of the Depression.
As both she and Morneau said last week — though each with a slightly different meaning — these are early days yet.
In the Canadian case, in particular, we have the fiscal capacity, both the scope for borrowing and if necessary, the scope for expanding some element of our tax system.- Shirley Tillotson, tax historian at Dalhousie University
Perhaps, as optimists say, the Canadian and global economy will bounce back soon. But if things do get worse, Tillotson said, Canada is luckier than most.
“We have the tools,” she said. “In the Canadian case, in particular, we have the fiscal capacity, both the scope for borrowing and if necessary, the scope for expanding some element of our tax system.”
Recovery may be around the corner. But early days or not, the time to begin exploring alternative tax options is before a financial crisis turns into something worse.
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