What began as a “small wartime generator” now accounts for 51% of all federal revenues
Oh Canada: If it feels like you’ve been paying taxes for 100 years, you’re right. Canada’s personal income tax hits the century mark this year.
And what began in 1917 as a small wartime revenue generator has ballooned to accounting for 51 per cent of federal revenues today and a “costly, complex behemoth that’s difficult to administer and makes Canada very uncompetitive,” concludes a new collection of essays by the Fraser Institute.
“The fears policymakers had in 1917 when the personal income tax was introduced — that governments would become dependent on it and that it would hurt our competitiveness — have all come true 100 years later,” says William Watson, associate professor and acting chair of the department of Economics at McGill University and a senior fellow at the right-leaning public policy think tank.
Officially named the War Tax Upon Incomes, it came into effect on Sept. 20, 1917. Though it was to be reviewed as a revenue generator after the war, “at least one MP confidently predicted, and celebrated, that it was here to stay,” notes Watson.
And boy was that guy right.
It launched with a 4 per cent tax on all income over $1,500 for single people. For everyone else, the personal exemption was $3,000. In today’s dollars, those exemptions would be worth about $24,500 and $50,000 respectively. By comparison, the basic personal exemption for 2016 is $11,474.
As a share of total federal revenue, income tax was a mere 2.6 per cent in 1918.
The main impetus for its creation was actually something that was also controversial at the time: conscription.
“A phrase in the air that summer was ‘the conscription of wealth’,” writes Watson in one of the essays. “If young men were to be conscripted, wealth should be, too.”
The finance minister at the time said the income tax was needed to finance the up to 100,000 additional soldiers, sailors, and airmen that conscription would deliver.
There were no credits or exemptions for children or other dependents, and no capital gains tax like today.
The little tax really grew during World War II, with a flat 20 per cent surtax imposed on all income tax payable by anyone other than corporations in 1939. That was followed by the introduction of a new tax on income known as the National Defence Tax.
One of the essays in the collection, entitled “Zero to 50 in 100 Years”, argues that Canada’s personal income tax rates on its best and brightest workers have made the country uncompetitive compared to other developed countries and most U.S. states.
“Canada is already uncompetitive with the U.S. on personal income taxes, and with the Trump administration vowing to reduce taxes further, that gulf will likely grow,” Watson said.
“It is ironic that a tax that was anathema to federal politicians during the first 50 years after Confederation, and that many believe was brought in and sold as a temporary wartime measure, has come to be the dominant source of federal government revenue,” says an essay by Lakehead University economics professor Livio Di Matteo.
Even the income tax form itself has ballooned. It was just 23 lines long in 1917, and now has 328 lines.
Watson noted that the one certainty about personal income taxes is that “finance ministers never stop tinkering with them.” And that its death “is not inevitable but it might be desirable.”