HATE INCOME TAXES? GO AHEAD, BLAME GERMANY
As Canada’s 150th birthday approaches, the right-leaning Fraser Institute has decided to ring in the sesquicentennial the best way they know how: With an intricately detailed report about big government.
Specifically, they got Lakehead University economist Livio Di Matteo to comprehensively track all 150 years of government spending, tax revenue and debt.
The result is a bunch of boring spreadsheets and numbers, to be sure, but within them lies the story of a nation: A tariff-funded agricultural colony blossoming into a giant, oil-rich welfare state full of seniors.
At first, if you weren’t at a port, you probably never saw a taxman
In 1867, the Canada government got all its taxes from one of two places: Duties and excise taxes. Just like tattoo parlours and opium dens, federal taxation was a thing that happened out of sight in seedy port cities. Canada still collects a gargantuan quantity of money from these two sources ($16.7 billion projected for 2017), but it’s not nearly enough to prop up a modern welfare state. In 1867, by contrast, all the federal government really had to do was run the post office, keep the lighthouses and build the occasional canal or transcontinental railroad.
We’ve never, ever been debt-free
Even in the debt-loving United States, there was one brief window of time in which their government was completely debtfree. President Andrew Jackson had an obsessive distrust of any money that he couldn’t physically see, so he prioritized an aggressive six-year paydown of the national debt that was wrapped up by 1835. It lasted for a year, until the U.S. suddenly plunged headlong into a severe recession (caused in part by Jackson’s weird fear of non-gold money). There were plenty in early Canada who saw deficit spending as a sinful road to ruin, but regardless, we’ve never had a “clear title” moment. In 1867, the sun rose over a new country with $75.7 million in liabilities. With a few exceptions, that number has steadily climbed ever since.
From the beginning, Canada was paying one quarter of every tax dollar to service the debt
As much as we like to talk about “shared values” and whatnot, one of the major reasons that Canada exists is cold, hard debt. By the 1860s, the colonies of British North America had run up their respective credit cards to dizzying levels, so the Fathers of Confederation pitched a unified country as a way to consolidate their debts. Just ask Prince Edward Island and Newfoundland. The two Atlantic islands largely hated the idea of joining with a bunch of snooty Ontarians and Quebecers, but both were ultimately forced into Confederation in order to keep the bill collectors from the door. All this debt consolidation means that when Sir John A. Macdonald was first able to put “Canadian Prime Minister” on his business card, the biggest single expense of his government was servicing the debt. For every dollar collected in 1867, 26.7 cents went to interest charges, and it’s still one of the highest levels of debt burden in our history. In fact, it’s almost exactly the same interest burden as in 1990, when Canada was already well into the default-risking fiscal hell that would precipitate the Paul Martin budget slashes of the late 1990s.
The biggest thing the government did in 1913 was “transport and communications”
In the modern era, most government dollars end up on social services: Pensions, health care, welfare, etc. But in 1913, an incredible 48.93 per cent of the federal budget was spent on “transport and communications,” compared to a barely noticeable sliver spent on “welfare and social security.” Nowadays, being the Minister of Infrastructure barely gets you on TV. But in the years before the First World War, the House of Commons spent much of its time building railroads and canals.
Hate high taxes? Blame Germany
When you really think about it, an income tax is a pretty radical thing for a country to have. It taxes a complex sum of money that most people wouldn’t normally write down — and it empowers the government to leaf through your papers if they think you’re lying about it. But government overreach is of secondary consideration when there’s a bunch of guys in Prussian helmets shooting at your son. The First World War ushered in massive surges in taxation and spending, including, most notoriously, the income tax. Without war, Di Matteo figures Canada would have eventually adopted an income tax anyway. “However, without wars to drive expenditure, we would probably have grown accustomed to much lower income tax rates,” he told the National Post.
For 23 years, income taxes weren’t the largest revenue stream
The next time you see a Mountie in ceremonial dress, know that one half of their Stetson hat was paid for with income taxes. In 2015, income taxes represented more than 48 per cent of the total government revenue stream. But in 1918, the first year the tax was collected, they pulled in a measly $8 million ($109 million in 2016 dollars). Even by 1929, income taxes were still only a six per cent chunk of the revenue pie — compared to the seven per cent pulled in by selling postage stamps. Only in 1942 would income taxes finally pull ahead of excise tax as the largest single money stream for the federal government.
The Second World War was really, really, really expensive
The First World War was expensive, to be sure, but the Second World War was an utterly dizzying expenditure that stretched the budget to heights we have not seen since. On multiple graphs in the report, the years 1939 to 1945 are projected as a razor-sharp spike completely out of proportion with the 144 other years in Canada’s history. Canada’s debt-to-GDP ratio hit 108.9 per cent in 1946 — our highest ever. Over the course of the war, tax revenue nearly sextupled from $562 million to $3 billion. Spending, meanwhile, went up nearly ten-fold. Canada has gotten used to large, expensive governments, but we’ve never been anywhere close to the dramatic rise in spending witnessed by the 11.9 million Canadians of 1939.
To an economist, it looks like an unspeakably devastating tragedy hit Canada in the 1970s and 1980s
Canada was noticeably spending beyond its means. A depression and a recession, respectively, caused the two small bumps in the late 19th century. Then there’s a bump for the First World War, a small hill for the Great Depression and a massive spike for the Second World War (see “really, really, really expensive,” above). But what about the 1970s and the 1980s? No war, no depression; that is simply when Canada collectively decided that giant deficits would be more fun if we didn’t need to wait for a national crisis first. And we can’t blame it all on Pierre Trudeau. Canada’s favourite rose-wearing spendthrift was out of office by 1984, roughly midway through the 20-year spending bump.