COVER

BLOWN AWAY

Middle-income Canadians are lashing out in anger—and fear—anainst a rapidly increasing tax burden

MARY JANIGAN March 6 1995
COVER

BLOWN AWAY

Middle-income Canadians are lashing out in anger—and fear—anainst a rapidly increasing tax burden

MARY JANIGAN March 6 1995

BLOWN AWAY

Middle-income Canadians are lashing out in anger—and fear—anainst a rapidly increasing tax burden

COVER

The Middle Class

MARY JANIGAN

Lynn LeRoy McClung can tell you exactly when the fabled last straw fell on his aching back. He was leafing through a magazine, relaxing, when he spotted Toronto Liberal MP Dennis Mills's airy prediction that "Canadians will complain for a few minutes and then they'll roll over" if Ottawa raises taxes. McClung was

stunned. He works full time, for $38,000 per year, as the accountant for a provincial irrigation district office in Magrath, Alta., a tiny community about 30 km south of Lethbridge. To make ends meet, he passes his evenings at the office of another smaller irrigation office, doing its books for $8,000 to $10,000 per year. So, in his careful accountant’s fashion, McClung pored through the last 12 years of his working life on spreadsheets, calculating his earnings and his taxes. He concluded that his income had risen over that period—but that his taxes had shot up “phenomenally.” He has three children, aged 10 to 17, and an ailing wife. He has a mortgage. He drives an old car. He has to save for an entire year for two weeks’ vacation. And something snapped. For the first time in his life, he wrote a letter to a politician.

McClung’s message to Finance Minister Paul Martin echoes the 230,000 letters that were hauled unceremoniously in huge mail bags to the minister’s office last week on the brink of his budget. The letter is tinged with an anger that is rarely heard in Canadian politics. And that heartfelt anger means that politicians ignore such sentiments, and such voters, to their peril. “I am mad as hell and I am not going to take it any more,” McClung wrote in a one-page note sprinkled with sentences typed in capital letters. “Don’t raise taxes. Cut your spending. Your suggestion of raising taxes is revolting. It will not fly this

time. This is a revolt against higher taxes. Tighten your belt as I have tightened mine.” McClung told Maclean’s last week that he has worked for 36 of his 50 years—and he feels that he has little to show for it. “I look at my father,” he says. “He was a partner in a construction firm from 1950 to 1975 and he retired with $600,000 and, along the way, he had a new car every two to three years. And I say those were the heydays of Canada because I don’t see myself....” His voice trails off. And then he adds: “It is just a real struggle.”

Canadians may not yet be dumping their tax forms into the Ottawa River—but there is no doubt that there is growing resistance to tax increases across the nation. A decade ago, they grumbled at every upward notch in the rates. But there was never any doubt that they would pay. Today, although the majority are not as angry as McClung, most politicians concede that their constituents simply would not tolerate another across-the-board hike in personal income or sales taxes. The reason is simple arithmetic. Average family income is declining. In 1989, it was $57,281 (in 1993 dollars). In 1993, it was $53,459. Meanwhile, taxes have increased: from 1989 to 1993, the tab for personal income taxes and unemployment insurance premiums rose 3.6 per cent. As a result, take-home pay fell 5.2 per cent. “People have this feeling that they have been taxed more but they are not getting more for it,” says Donna Dasko, vice-president of Environics Research Group Ltd. “At the same time, you really haven’t seen any progress on the deficit. So you get a pretty high level of frustration with taxes and tax fatigue.”

In international terms, the Canadian situation is complicated. In 1992, Canada’s overall tax burden ranked 14th out of the 24 members of the Organization for Economic Co-Operation and Development (OECD), well below such countries as Sweden, Denmark, Luxembourg and France. The problem, however, is that Canada’s tax

burden has risen extremely quickly: to 36.5 per cent of the gross domestic product in 1992 from 31.6 per cent in 1980. Worse, the tax burden in the United States has remained about the same: it was 29.3 per cent of GDP in 1980 and 29.4 per cent in 1992. Dave Perry, senior research associate at the Canadian Tax Foundation, recently pinpointed the problem for the House of Commons finance committee: “We had apparently aspired earlier to European levels of public services and U.S. levels of taxation. By 1991, the trend was to European levels of taxation and U.S. levels of public services.”

Such changes are straining the very fabric of Canadian society, exacerbating resentments among economic groups. Pollster Dasko reports that higher-income Canadians want govern ments to cut programs-and to avoid tax increases. Lower-in-

come Canadians want governments to preserve programs, especially the social safety net, through taxes on the rich. And the majority of Canadians, the hard-pressed middle class, want governments to cut spending, to tax the rich and to leave them alone. In poll after poll, they have maintained their devotion to the social safety net, especially health care, education and the overall benefit levels of unemployment insurance. But they want governments to end what they perceive as the built-in incentive to resort to unemployment insurance and welfare. And they want Ottawa to clean up its own act before it picks their pockets again. As Toronto Liberal MP Jim Peterson, the chairman of the House of Commons finance committee, ruefully told Maclean’s: “In our hearings, everywhere, everyone, to a person, said that we had to deal with the deficit. But there was no consensus how. Everybody was a NIMBY [Not In My Back Yard].”

Such divisions could become dangerous. No one can predict exactly what would happen if middle-income Canadians, who bear the brunt of the tax burden, lose their faith and their patience with the

system of transfers to poorer provinces and poorer individuals. But Lynne Toupin, the executive director of the National Anti-Poverty Organization, worries that it is the most vulnerable in society who will pay the price. She says that many Canadians have demanded spending cuts—when governments could raise taxes on corporations and on Canadians who earn more than $75,000 per year. More important, she wonders if Canadians have forgotten about the social services that they get for their tax dollars in their rage against the system. “My concern is that, in the end, those who can afford it will pay and those who cannot will be left with the crumbs of programs,” she says. “It would be a real dismantling of a series of values that Canadians have held on to for many years.” Then she adds: “I think somewhere along the line the middle-class has lost faith in our government’s ability to effectively manage these programs.”

That, of course, is the nub of the problem. Although the current Liberal government has retained much of its overall credibility with the public, few Canadians believe that governments are running their own affairs efficiently. Every week, they hear disturbing stories such as Fisheries Minister Brian Tobin’s recent $40,000 splurge on office furniture. So they are understandably skeptical when governments claim that they have cut to the bone—and must raise more tax money.

Instead, there is an instinctive collective belief that governments are wasting money—and that they do not spend the taxpayers’ dollars wisely. Says Liberal MP Peterson: “If you believed that the government was doing the right thing, then you would fall in line with tax increases and say, This is the price that we pay for what we as a community have decided to do.’ But you don’t have a sense of confidence in government any more.” Adds veteran Toronto Liberal David MacNaughton, a candidate in the upcoming provincial elec-

tion: “What people are saying to governments is, ‘I have figured out how to make do with less. When the hell are you going to do it? When you have and you have done it for a while, then you come back and talk to me about taxes.’ ”

And that is why the tax protest was bom. In Canada, that mounting frustration found a focus last September when Financial Post editor Diane Francis described the U.S. experiment with tax and expenditure limitations, the so-called TELs. Such laws essentially curb politicians’ ability to spend or tax: that is, they stipulate that taxation or spending measures must receive approval in a referendum or the consent of super-majorities such as 75 per cent of the legislature. Within days, she received 1,300 responses—a clear signal that Canadians did not tmst their elected leaders. “It was unbelievable,” she says. “I could have filled the letters to the editor pages for five years.” With the help of the public relations firm Edelman Houston Group, which donated its services, Francis contacted other anti-tax crusaders such as David Somerville, the president of the National Citizens’ Coalition, and Jason Kenney, the executive director of the Canadian Taxpayers Federation, who has become the leading spokesman of the movement.

The coalition’s first task was to prove that it had public approval. In a December poll by Ottawa-based COMPAS Inc., it determined that 77 per cent of the 2,586 respondents believed that it was “extremely” or “very”

important for Canada to control its taxes. (Residents of British Columbia and Ontario were the most concerned.) Eighty-six per cent of the respondents said that it was “extremely” or “very” important to control spending. And 85 per cent shared those sentiments about the debt. The coalition organized 15 “tax alert” rallies in British Columbia, across the Prairies and Ontario during the first two weeks of February. And it elicited 230,000 letters of protest, which it, in turn,

delivered to Parliament Hill. “The public is uglier that it has ever been in this country,” says Francis. “And they had better bloody well understand it in Ottawa.”

But if Kenney, Francis and their coalition partners have provided taxpayers with an outlet for their anger, they did not spark the resistance. Although taxpayers barely noticed it at the time, their taxes began to creep upward during the mid-1980s. Between 1984 and 1993,

Tour suggestion of raising taxes is rev

DUES HIT HOME

CREDITS (+) AND DEBITS

FAMILY ALLOWANCES (+) CHILD TAX CREDIT (+)

INCOME TAX__

CANADA PENSION PLAN UNEMPLOYMENT INSURANCE

AFTER-TAX INCOME_

GST (MST)____

PROVINCIAL RETAIL SALES TAX SPECIAL TAXES ON: TOBACCO ALCOHOL GASOLINE

PROPERTY TAXES DRIVER AND CAR LICENCES

T0TÄI TAXES

Over the past 10 years, taxes have steadily eroded Canadians’ incomes. These charts, prepared by the Canadian Tax Foundation, calculate the average impact of higher taxes on typical low-, middleand high-income families-before this week’s budget. Among assumptions: two working spouses with a 60-40 income split and two children under 16.

ing. It will not fly this time.’

the Conservative government raised taxes 39 times. The strongest hit came with the introduction of tax reform in 1988: the number of tax brackets fell from 10, ranging from six per cent to 34 per cent, to three: 17 per cent, 26 per cent and 29 per cent. Such changes reduced the tax burden on very wealthy Canadians—although they have been subsequently hit with surtaxes. At the $ame time, tax reform removed many lowerincome Canadians from the tax rolls. As a result, middle-income Canadians found themselves paying a greater share of Ottawa’s mounting bills. The tax burden worsened two years later when Ottawa clamped limits on the growth of its transfer payments to the provinces. The provinces, in turn, began to crank up their taxes to compensate for the missing revenues.

Such changes crept into Canadians’ lives, year by year, in stealthy clauses. Then, overnight, on Jan. 1,1991, along came the GST. The Goods and Services Tax was not a new tax: it replaced the Manufacturers’ Sales Tax, which was hidden in the price of one-third of Canada’s goods such as vehicles, computers and larger appliances. But,

suddenly, in the depths of the recession, consumers were faced with a highly visible seven-percent tax on most goods and services. Whenever they saw a lawyer or went to a barber, whenever they purchased a muffin or bought popcorn at a movie, there was the inevitable GST.

And it rankled. Encouraged by the then-strong Canadian dollar, consumers began to stream over the border into the United States where almost every purchase—cigarettes, liquor, gasoline, groceries, appliances and clothes—was cheaper, often because the taxes were less. Consumers also started to demand under-the-table deals from local tradespeople. The underground economy mushroomed. “The GST started the growing awareness of the increase in the tax burden,” observes the Canadian Tax Foundation’s Perry. “The poor taxpayers realized that, by the time the GST came around, they were paying more and getting less.”

Such realizations do not usually bring out the best in anyone. Across the nation, tens of thousands of middle-class households are simply trying to get by, paying more taxes with less money. In such difficult times, further tax increases could strain the nation’s fabled tolerance, damaging the fellowship that links Canadians in all regions and economic classes.

Already, many Canadians are demanding that someone else, anyone else, should pick up the increased tab. Usually, they select wealthy Canadians or corporations. The problem is that most rich Canadians are already paying their taxes—if only because most so-called loopholes have been eliminated. Worse, even if the earnings of those rich Canadians were simply confiscated, there would not be enough money to make a dent in the $550-billion debt. In such circumstances, of course, even more truly rich Canadians would simply move their wealth out of the country. Others, who earn perhaps $60,000 or $80,000 per year and who do not consider themselves rich, would shoulder the bulk of the increase. Warns Brian Neysmith, president of the Canadian Bond Rating Service in Montreal: “Right now, most individuals at the top pay anywhere between 50 and 54 per cent of their income and that is deemed to be as high as you want to go on

a progressive basis. You hit that when your income is above the $64,000 range and that is not a large, large salary.”

The case for massive corporate income tax increases is equally tricky. Corporate taxes represented only 1.8 per cent of GDP in Canada in 1992, compared with 2.1 per cent in the United States and 2.5 per cent among the OECD as a whole. But that calculation does not include retail sales taxes, payroll taxes such as unemployment insurance and workers’ compensation premiums and property taxes (which are the highest among the OECD nations). As the Commons finance committee noted: “Provincial corporate taxes on top of the federal levy together with other kinds of taxes push us towards the competitive limits. Most important, Canadian tax rates are higher than U.S. rates, an important benchmark for companies considering North American investments.”

The result is that governments have little alternative but to tap the middle class if they need a major increase in revenue. And that would be courting danger. Already, citizens are losing their faith in government, their belief that governments will help them when they are sick or old or simply worn-out. More demands from government could simply destroy their willingness to give any more to anyone else. As former deputy minister Arthur Kroeger told Maclean’s: “As long as we were all getting better off, year over year, people were disposed to be more generous. But if your income is flat, if you really don’t feel any better off than you did 20 years ago, if you feel insecure about your job, which people increasingly do, then there is more of a survival instinct that is going to come to the fore. When people don’t feel very well off and they don’t feel very secure, they are more inclined to protect their own interests and to be more dismissive of others’ needs.”

So far, the social network is holding. As pollster Dasko reports, Canadians still want to give to each other. But, as the taxpayers’ revolt indicates, they do not want to give much more to governments because they believe that governments simply waste it. You can hear the anger in linda Brehmer’s voice when she talks about the day that she learned about the size of her provincial representatives’ pensions. “I thought, ‘That’s it. That’s enough to make me want to do something about it,’ ” recalls the partner in a Calgary trucking firm. She joined the Canadian Taxpayers Federation. Then, she went to a seminar. “You see what is happening in the economy, how, in private business, everybody is taking more and more cuts and paying more taxes, and government spending just keeps growing and growing,” she says. “And you eventually say, ‘This is just crazy.’ ”