Can We Bear Our Tax Burdens?
JOHN A. STEVENSON
PRIOR to the war the problem of finding sufficient revenue to meet the expanding needs of modern states brought the question of taxation into a position of acute prominence in most civilized countries. When Mr. Lloyd George in 1909 introduced his great controversial budget which only attempted to raise 200 million pounds, so experienced a statesman as Lord Rosebery described it as the end of all things, little foreseeing that he would live to see a British chancellor take five times as much from the British taxpayer.
Here in Canada our lot was even more fortunate. We had a very meagre expenditure on armaments, and social reform schemes had not come into existence. In our federal budget a comfortable surplus was an almost annual occurrence, and in 1904 we find Mr. Fielding welcoming the Grand Trunk Pacific as a means of absorbing the surplus of thirteen million dollars with which he was burdened! Customs and excise were practically sufficient in themselves to provide an ample revenue, and the suggestion that other sources should be explored was rudely scorned.
But the situation is now completely changed. The war brought a burdensome legacy of indebtedness and created large demands for expenditure on reconstruction projects with the result that new sources of revenue have had to be tapped, one after another, and the problem of taxation comes home to-day with bitter insistence to every citizen in the land. From Halifax to Vancouver an increasing murmur goes up about the dead weight of taxation which we are now called to bear and the strain is telling acutely on many nerves. Six weeks ago the citizens of Winnipeg were roused to wrath and mass meetings by the proposal of the provincial treasurer to levy a local income tax at half the rate of the federal tax. Under such circumstances an examination of the exact taxation situation and its possibilities cannot be inopportune.
Is Taxation Burden too Onerous?
TAXATION is an active and constant part of our whole social structure. If it can be planned in such fashion that its incidence lies mainly upon fortuitous and accidental gains, it will interfere little with the plans of individuals and business firms and at the same time enable the government to secure the revenue necessary for the accomplishment of its ventures without undue interference with industrial progress. If, on the other hand, its incidence is so distributed as to dry up the well-springs of capital and act as a cog on the wheels of industry, it may put an effective check to healthy natural development. Whether in our present system of taxation we have an instrument of this nature or whether there are really onerous levies which depress industry is easily the most important question of public finance now before the Canadian people.
In the first place some data in the nature of stocktaking should be available as a basis of any calculation. R. H. Coats, the able head of the Federal Bureau of Statistics,
hazarded in a recent address an unofficial estimate of our present wealth and our normal income. He placed the estimated material wealth at sixteen billion dollars and he capitalized at forty million dollars the value of the man power of the country. The annual income he placed at seven billion dollars, of which roughly one-third came from material resources and the remaining two thirds from personal services. The annual income of the United States, which has eleven and a half times our population, was estimated in 1920 at sixty-three billion dollars, so that we stand very well in comparison with our southerly neighbours. In his budget speech last year, Sir Henry Drayton declared that a sum of roughly $435,000,000 must be raised by actual taxation if the expenditure was to be properly balanced. In the course of the first 11 months of the present fiscal year the treasury has obtained $343,846,768, and it is probably safe to predict that our federal revenue will fall considerably short of the sum prescribed by Sir Henry. If the original expectations were to be realized the federal treasury would roughly take by its taxation $50 per head, as the population of Canada at the present time, taking last year’s census figures, is just over eight and three-quarter millions.
Better Off than U.S.?
THE best standard of comparison of our lot is with our neighbours, the United States, whose annual income is estimated at $620 per capita. In 1920 competent authorities estimated that federal taxes took about eight per cent, of the annual income of the United States and imposed practically the same burden per head, namely $50. But our federal taxation last year amounted to only 6.2 per cent, of the national income.
If our burden is slightly lighter than that of our neighbours, it is infinitely easier than the tax load of Britain or France. The taxes levied by the British Government in 1920 took about 23 per cent, of the national income, which was then estimated at $435 per head and this year, owing to the shrinkage of values and business, the same total of taxes will require no less than 32 per cent, of the national income. The leading bankers and captains of industry in Britain maintain with one accord that such a proportion, unless abated, spells commercial ruin, especially when the greater bulk of the taxation is expended on unproductive ends like payment of debt interest, pensions, civil administration, etc., and only a small fraction is devoted to constructive purposes.
In 1907 Great Britain required 8.5 per cent of her income for governmental purposes but this year they will absorb four times as much. In 1907, 33 per cent, of the national income was spent on food and drink but in 1920 this had risen to 40.9 per cent.
The result is that whereas 8.3 per cent, of her national income went in 1907 for depreciation and maintenance of existing capital and another 15.4 per cent, for new capital both at home and abroad, in 1920 there was available for both these purposes only 5.4 per cent, of the national income.
In the light of these figures Canada may consider herself a happily situated country from the financial point of
BUT our Federal taxes constitute only a proportion of our taxation
burdens. In 1919 the nine provincial governments raised among them revenues which totalled $77,76,695 and in the present year their requirements are estimated at about ninety million dollars or a little more than $10 per head of the population. The figures of ordinary municipal taxation are difficult to ascertain but a rough calculation is possible. The cities with a population in excess of 10,000, who in 1919 held almost exactly one-third of our total population, raised for their local revenues $136,515,864, and in 1921, allowing for an increase of 10 per cent., which has been common, they would require $150,000,000. Now taxation in the small towns, villages and rural districts is, generally speaking, on a lower scale than the cities, but the ratio might be taken at two-thirds. There would thus be raised from the population which lives
outside the larger towns and cities, $200,000,000. The
rough annual total of taxation required to meet all current obligations can now be estimated:
Provincial taxation..................... 90,000,000
Municipal taxation.................... 350,0000,00
This shows the taxation burden of the country, all sources of impost being included, at $100 per head, or taking five as the average family, $500 per family. It finds confirmation from another source. A few weeks ago the Manitoba Free Press made an interesting estimate of the total tax bill of Manitoba which may be taken as an average province. It is predominantly an agricultural province, but the position of Winnipeg as the gateway of the West gives it a large urban element. The Free Press admitted some difficulties in the calculation, but subject to minor errors worked out the total tax bill of the people of Manitoba at $57,190,000.
$2,500 Debt per Family
THE 1921 census gives the population of the province at 613,008 and the annual burden therefore works out at $93.30 per head. This figure is slightly lower than the estimate procured by the first method, but it offers evidence that the average tax burden of each inhabitant of Canada is somewhere in the vicinity of $100 per capita. As the Free Press estimate of the annual burden of taxation under the individual is reasonably accurate, its further calculation of the average burden of debt can also be accepted. It finds that the per capita debt of the citizens of Winnipeg is $605.91 or $3,029 per family, the amount being reached as follows:
The Dominion government per capita debt .... $300.00
The Manitoba government per capita debt..... 75.30
The city of Winnipeg per capita debt debt ..... 230.61
The per capita debt therefore, including only the federal, provincial and city debts, amounts to $605 91 The inhabitants of cities have to pay for the many greater conveniences of life which the country people .. _ ____
lack and it would therefore be unfair
Continued on page 38
Can We Bear Our Taxation Burdens?
Continued from nage 19
to put at $3029 per family the capital debt of the dominion, but it is probably somewhere in the neighbourhood of $2500, and to most persons would seem appallingly large. Yet both our national tax burden and our per capita debt are much smaller than the rates which every other country in the civilized world, except the United States, has to face, and in consideration of the fact that Canada is an expanding country they need give no real cause for misgivings. Our taxes absorb roughly 15 per cent, of the national income, but still leave us a much ampler margin than the citizens of less fortunate countries possess. The plain conclusion is that the present taxation burdens, if properly adjusted, are really within our competence to bear if our economic life is kept in full swing and the best use made of our resources and national opportunities.
Do the Farmers Pay Up ’ I 'AXATTON, under no circumstances, . is popular, and constant complaints arise that one class is being unduly pen-
alized and forced to bear more than its proper share of the national burdens. In Canada the chief criticism has been directed against our farmers, who have been freely accused of shirking the payment of income taxes and showing an uncanny skill in evading its collectors.
On the surface the proportion which they have contributed looks distressingly small. Data furnished by the Finance Department show that in the fiscal year 1920-21, 16,632 farmers in the whole of Canada paid income tax and handed over to the Treasury $611,736. Have they performed their duty as taxpayers or have they shirked it? Until the complete data of the latest censuses of Canada and the United States are available comparison will be difficult, but some data for it are available.
By the American census of 1910 there were found to be 6,361,502 farmers in the United States. Agricultural populatioi in the United States has not increased h the same ratio as urban but an additionftr about 5 per cent, might be allowed fonone
seven years up to 1917. Let the number of farmers in the United States at that time be put at 6,680,000. The income tax data of the American treasury show that in the year 1919, 26,838 farmers or about 4 per cent, of the total number admitted incomes in excess of $2,000. In Canada the 1911 census showed 665,242 farmers and allowing for a probable rate of increase slightly lower than the general increment of population their numbers in 1920-21 would have risen to about 760,000. The percentage of our farmers who pay income tax (the number being 16,632) is therefore only a little more than 2 per cent of the total. And it must be remembered that out of this 16,632 a considerable proportion would be bachelors who would be liable for the tax if their incomes exceeded $1,000. The probability is that less than 2 per cent of our farmers confessed to have earned in the calendar year 1919 more than $2,000 income. Our ratio of income tax paying farmers is therefore only about half of that shown by the United States.
This state of affairs may mean one of several things. It may be that our machinery of collection has not reached the same pitch of efficiency as the American, which was set up three years earlier, or that the Americanfarmers possessan inferior skill in concealing their earnings to our farmers, or that the returns available for our fanners’ labour are lower.
Two Humorous Encounters
THE duty of collecting taxes is not the most pleasant or easy of occupations but it is not without its humorous side. Sir J. C. Stamp, who was formerly a member of the British Income Tax Commission, has declared that he» always felt inclined to post up in his office a prominent notice, “Please don’t say you would be pleased to pay the tax if you’d only got the income, because you wouldn’t.” But the excuses which come in to the collectors are many and various.
There is on record in the British Income Tax Office a famous account given by one Michael Kelly a theatrical manager, of his examination by the Income Tax Commissioners, who doubted the correctness of his return of 600 pounds as his income. Here is his story:
“Sir,” said I, “I am free to confess I have erred in my return, but vanity was the cause and vanity is the badge of all my tribe. I have returned myself as having 500 pounds per annum when in fact I have not 500 pence certain income.” “Pray, Sir,” said the Commissioner, “are you not stage manager of the Opera House?”
“Yes, sir,” said, I, “but there is not even a nominal salary attached to that office. I perform my duties to gratify my love of music.”
“Well, but Mr. Kelly,” continued my examiner, “you teach.”
“I do, sir,” answered I, “but I have no pupils.”
“I think,” observed another gentleman, “that you are an oratorio and concert singer.”
“You are quite right,” said I to my new antagonist, “but I have no engagements.” “Well, but at all events,” observed my first inquisitor, “you have a very good salary at Drury Lane.”
“A very good one indeed, sir,” answered I, “but then it is never paid.” '
“But you have always a fine benefit, sir,” said the other, who seemed to know something of theatricals.
“Always, sir,” was my reply, “but the expenses attending it are very great and whatever profit remains after defraying them is mortgaged to liquidate debts in building my saloon. The fact is I am at present very like St. George’s Hospital— supported by voluntary contributions— and have even less certain income than I felt sufficiently vain to return.”
The records of our income tax offices probably contain few such detailed narratives, but if ever they are disclosed they will reveal some exceedingly amusing communications. Not long ago an income tax collector was demanding a return of his income from a certain clerical gentleman and the last of a series of letters brought the following reply:
I have received yourveryrudeletter. I am a poor parish priest dependent largely on the bishop. You may go to the Hell.
(Signed) F. M.”
TT HAS nfteri been urged against an 1 income (ax that, in Gladstone’s words, it made "a nation of liars” and the administrators of il always have been forced to assume that there will be a considerable number of people ready to take advantage of any laxity or loophole. Not a few men and women keep quite a different sort of conscience for their dealings with personal, real people whom they know and for their contacts with the state and railway companies. Our Finance Department has been compelled to take drastic action in a number of unpleasant cases, but on the whole the levying of the income tax has revealed no disconcerting symptoms of a low public morale and its annual payment is now being accepted as one of the normal but less pleasant duties of life.
Rut there is no denying that our taxation problem presents certain difficulties. The civil budget for 1921 to 1922 demands a total expenditure of $591,437,698, and the policy of a government which follows sound business principles is to pay at least all current expenses, including a certain amount of capital charges, out of current revenue.
The late Finance Minister declared that while the investments classed as active, being productive of revenue, could be charged to capital and deducted from the gross debt, yet the sum of $57,102,870 should be provided out of current revenue on the railway account, The actual railway deficit was in the neighbourhood of seventy million dollars but part of it, ex-
penditure on equipment and improvement, could properly be charged to capital and the balance of the $165,687,633 voted for railways was likely required to renew old obligations which were maturing. His financial calculation was that if $435,360,971 could be raised in the fiscal year 1921 -1922, we would be paying our way.
We Haven’t Paid Our Way
HOW FAR have these expectations been realized? Sir Henry has estimated that the taxation rates prevailing in 1920 and 1921, if maintained, would return $372,600,000, and to secure the balance he added a number of new imposts, including a heavy addition to the sales tax. He anticipated a certain falling off in trade but the extent of the curtailment as well as the rate of shrinkage in values has exceeded his calculations, and the probability is that Mr. Fielding will think himself fortunate if he finds that the revenues for 1921-22 have realized the 372 odd millions which Sir Henry expected the old rates of taxation would yield. There can therefore he anticipated a deficit of about sixty-five million dollars, which is a little less than the confessed addition to the national debt for the past year. If trade had kept up to the level of 1920, the revenue would still have fallen short of the 435 millions required, hut the deficit would not have been serious.
But it is the problem of the fiscal year 1922-23 which must give Mr. Fielding and his colleagues real anxiety. The business profits tax they abolished in the last bud-
get has yielded more than twenty millions to this year’s revenues, but next year this fountain will be practically dried up. K: pecially fruitful this year has been the income tax yield, and the final total will be about eighty millions. There has been a steady improvement in the machinery of collection and evasion can only be practised with grave danger of incurring a heavy penalty. The 1921-22 returns included a considerable amount of arrears from previous years and what is more imporl ant the levy for the year was computed on the incomes earned in 1920. That year saw the country enjoying more than average prosperity, the prices of farm products were high and business^ of all kinds was experiencing great activity, but as soon as the post-armistice boom ended a serious depression, beginning in the early months of 1921, descended upon both industry and agriculture. During the year lately ended, farmers and people dealing with farmers have made little or no money and the incomes of professional men, lawyers, doctors, etc., have been materially diminished. Very few industrial plants have been working at full capacity. Many have been selling their products at an actual loss and the average profits of manufacturers have shrunk to very small dimensions.
There are cases of manufacturers who paid $10,000 income tax in 1921-22, who will not pay a cent in 1922-23. Under such circumstances it is probably an optimistic forecast to expect fifty millions from the income tax next year. The decline in
values is unlikely to be checked, and quite apart from any shrinkage in the volume of trade it will reduce the returns from the customs, excise and sales taxes as well as from minor sources of revenue.
An "Overdraft” of Fifty Millions
MR. FIELDING is not by temperament a wild optimist and in default of a sudden revival of trade he will probably allow in his next budget for a shrinkage of at least fifty millions from the federal revenues collected this year. If he had to follow his predecessor in estimating our minimum requirements in the way of revenue at 435 millions then there would be a very disastrous gap between the revenue and expenditure and there would be a danger of the serious impairment of the national credit if it fell behind financially at the rate of 100 millions in a single year. Obviously new taxation on a considerable scale would be inevitable.
But certain circumstances ought to set a limit to any great increase in the federal taxes. The income tax rates were materially raised in the budget of 1920-21 and brought exactly parallel to the rates levied by the American treasury with this addition, that a special supertax of five per cent, of the amount of the tax was levied on incomes in excess of $5,000. However, since the Harding Administration came into power it has managed to effect a very considerable reduction in the American rate of taxation. Fifty per cent, is the highest rate which is now imposed but our highest rate reaches 66
per cent. But for the opposition of the agricultural bloc the American tax rates would have been brought far lower, and the expectation is that they will gradually diminish with each succeeding budget.
The actual incorporation of the budget system, which General Dawes has put into operation at Washington for the first time, will enable many economies to be effected and there is now a prospect of some of the enormous indebtedness of Europe to the United States being repaid. It must be apparent to all intelligent people that the people of Canada cannot afford either a rate of taxation or a cost of living which is materially higher than the standards prevailing with their neighbours. Factories and farms cannot move away but brains and energy are extraordinarily mobile these days, and a country which strips its skilled professional men, its technicians and its organizers of too large a share of their earnings will soon see them slip away to countries where the burden is lighter.
This danger is peculiarly acute in a country like Canada which lies side by side with another using the same language and offering parallel opportunities in almost every line of life. Similarly, we cannot afford to have a much higher cost of living than our neighbours. Bradstreet’s Annual recently shows that wholesale prices for January 1921 in the United States were about thirty per cent, higher than in January 1914, but in Canada the same comparative increase is almost double. An actual part of this discrepancy is accounted for by the sales tax which has prevented the cost of living from showing a parallel decline to the fall in the United States index figures. The Harding Administration has had under consideration the imposition of a sales tax in order to procure funds for a soldiers’ bonus, but the plan has been met with vigorous opposition and now seems likely to be abandoned. If our industries are to have a fair field the cost of living must be kept as low as possible and an increase in the sales tax can be ruled out as a source of revenue. The customs tariff has ceased to be the important feature that it was in prewar days in the production of revenue. In the present fiscal year customs duties will have been found to have yielded not more than twenty-five per cent, of the revenue, whereas as late as 1916 they produced fifty-seven per cent. There seems to be a general agreement that any increase in customs taxes would not yield any appreciable increment in revenue, and the
K"'ical situation at Ottawa, where the Liberals and the Progressives are pledged in categorical terms to tariff reductions makes any addition to the present schedules quite out of the question.
Finances in Safe Hands
OUR finances, however, are now in the hands of an experienced and careful administrator who will not light-heartedly see a recurrence of deficits and he is obviously convinced that the best avenue for a sound national balance sheet lies in the stern and unflinching practice of rigid economy. It is an open secret in' Ottawa that he has implored and instructed his colleagues to pare their estimates to the very bone, and obliterate relentlessly every item of expenditure which is not justified by immediate necessities. But the field of economy is cönsiderably restricted by various circumstances. In the estimates for 1921-22 are shown the following items which are not susceptible of any but infinitesimal reductions.
Interest on public debt . $142,800,127
Pensions ............... 31,816,923
Provincial subsidies ..... 11,490,860
Our post office service last year absorbed about $25,000,000 and as there is an understanding that the revenue and expenditure in this department should always be allowed to approximate one another, a decrease in the estimates for it will bring no profit to the treasury. Last year the estimates for what is known as consolidated fund expenditure were $343,021,594 and it is plain that about $210,000,000 of this must be regarded as permanent burdens for the time being. Accordingly, in the sphere of ordinary expenditures, the field for the introduction of economies will be confined to items in services whose combined cost in 1921-22 has been in the neighbourhood of $133,000,000. But this sum covers many indispensable services and pieces of the national machinery which
cannot be abolished with out serious loss and inconvenience to the country.
The law, for instance, has to be administered and our judges have to be paid, so that there can be little expectation of diminution of the item $2,181,632 allowed for the administration of justice. The process of cutting down estimates which involves the reduction of staffs and the refusal of contracts is at any time a trying ordeal for ministers, but it must be peculiarly difficult for the leaders of a party which has been out of office for ten years. But it must be faced and there is ample scope for it in more than one department of our government.
The Militia estimates for last year absorbed the sum of $11,890,000 and the soldiers felt themselves deeply aggrieved, but since the armistice there was submitted to the Militia Council a perfectly feasible and intelligent scheme for the reorganization of our military forces which if put into effect would provide us with just as competent a nucleus of an army as the militia system does and at a cost of less than $6,000,000 per annum. Mr. Graham may never have seen it but it is in his department that one of the greatest opportunities for economy lies.
Our navy last year claimed $3,726,980 and it is difficult to see what adequate returns we received from this expenditure. The Geddes report which was recently published in London aroused hectic protest from the British Admiralty but its main recommendations about the navy will be put into effect and save the British taxpayer many millions. In view of the decision of the Washington Conferencethere seems no valid reason why two million dollars should not be lopped off our naval estimates.
But obviously the most fruitful vineyard for the labours of the economist lies in our national railways. The deficit upon them will be smaller than last yearbut it will certainly reach $60,000,000 and to it piust be added $9,000,000 more for the luxury of our mercantile marine. The
best method of wiping out this terrible burden opens up a prolific field of controversy and the merits of the various solutions need not be here discussed. The most feasible seems to be an aggressive immigration policy which would bring settlers to our vacant spaces and provide additional freight and passenger traffic. If, as Sir Clifford Sifton has suggested, we could in the next ten years put 500,000 more farmers upon our land, we should be in a fair way to railway salvation, for the country would cheerfully face a deficit of $20,000,000 and count itself well off.
There is also room for considerable economies in the Civil Service. It is both underpaid and overmanned and under a wise system of reorganization both greater efficiency and lessened expenditure should be possible. If we could save $60,000,000 on our railways, $5,000,000 on the militia, $5,000,000 on the Civil administration and $2,000,000 on the navy, we would reduce our annual expenditure to the manageable sum of about $370,000,000, which is easily within our taxable capacity as soon as trade revives and sustains our revenues at the level of the present fiscal year.
One thing, however, is urgently needed. At present the boundaries of taxation between federal, provincial and municipal authorities are vague and ill-defined; both federal and próvincial legislatures levy an income tax and duplicate organizations have to be maintained for its collection. The provincial governments levy succession duties, but at least one of our political parties proposes that the Federal government, as m the United States and Britain, should also impose them. There are other points in which the various jurisdictions clash. A conference if conducted with skill and good temper could probably produce an equitable arrangement which would leave certain fields as the monopoly of each authority or at least allow co-operative action in the collection of taxes which they might agree to share.