100 Years of Income Tax
This paper is not an academic history. It is an attempt to offer some common sense alternatives to present taxation and economic policies. The internet and print are dominated by criticism of selected policies, but fail to provide a comprehensive view or provide suggestions for change.
Canada introduced the Income Tax Act on August 17th, 1917. The 11 page Canadian Act of Parliament is now a 3200 page monstrosity. A Senator of that time dubbed it “ that most insidious of taxes”, which it has proven to be. The concept for a tax, based on work and the creation of wealth was, and is, so detrimental to the economic interests of both individuals and society that continuous amendments to correct it has led to taxation that is complicated, costly to administer and unjust.
The effect of Income Tax, together with misguided monetary and trade policy, especially during the last half of its life, is reflected in Canada having allowed the concentration of wealth and income in a small 10% of their citizens. The ranks of the poor have grown and the middle class has shrunk. Canada experienced its’ “Golden Years”, from 1945 to 1970, but now has beggars on their streets and food banks to feed the poor.
Some economic history of the period since the tax on income was introduced, together with some rational thinking might be of interest. Before income tax was introduced most government revenue was from import and excise taxes. The people paid the costs of government as part of what they spent on things not produced by their other citizens. This encouraged production and work within Canada and enabled exports of products surplus to the needs of consumption. Trade between countries was, is and can also be enabled and restricted by the control of foreign exchange. Canada follows the wrong path in both policies. Canada has had to export depletable (usually unprocessed) natural resources to provide foreign exchange for unnecessary imports. Foreign investment in Canada also provides foreign exchange used for imports but at the cost of non Canadian control of our productive assets and rental and other passive income property. Look at it this way. This foreign money might provide some immediate work which pays for the import of food and other personal consumption but is a drain on the economy for many decades to follow. Later sections explain how money, created in the country, could replace foreign control of our economy.
As history has repeated many times, war gives an impetus to increase production and to pay for it by increased taxation together with the creation of money. WW1 added the income tax to raise more money than was being provided from import and excise taxes. Income tax of that day was hardly the tax we suffer today. It was mostly a tax on the wealthy and the rate of tax on most people was minimal. The top marginal rates of income tax, on a small part of the total income , were over 70% until the 1920’s. The Roarin’ 20’s saw those rates drop to 40%, accompanied by financial and monetary policies favouring the rich, as well as great increases in debt and excesses of speculation. All of which transferred income and wealth to the richest. Then the workers, middle class and poor suffered through the Great Depression of the 1930’s.
The cure for that economic depression was, as usual, war. The trouble was that Canada provided lives as well as armaments to the allied war front. Once again the productive capacity of Canada was boosted to produce things to sink in the ocean, crash from the skies or blow apart on land. The 40% tax rates of the 1920’s was increased to 70% in the 30’s and over 90% in the 40’s. Personal consumption was restricted by the lack of goods, which necessitated price controls, and by increasing personal savings. But Canadians, other than for sorrow for the killed and wounded, were more than satisfied for the work, and their standard of living.
The Golden Years
The years after the War have been deemed “the Golden Years” of Canada. Government efforts to increase productive capacity for war carried over to a mixed economy. There was a significant role for Government induced, as well as for the private sector, economy. The private sector converted to production for personal consumption and exports for reconstruction of the war torn countries. Governments provided employment with investment in public infrastructure and social advances. Massive projects like the Trans Canada highway, and the great St. Lawrence seaway, corresponded to the railroads and infrastructure construction of the previous century. There was also local school and hospital construction and great advances in health and social services. Much social legislation was introduced. The technology business sector grew with Government sponsored research and development. The private sector, principally small business, expanded together with Government. Employment opportunities were abundant, personal debt was low and savings high. The top tax bracket decreased from the 90% range to the 75% range, rates that did not discourage individual productive effort or the expansion of industry.
The Last 50 Years
From the 1970’s onward, the top tax rates moved down to levels not seen since before the Great Depression. In addition to the lower rates in the higher brackets, the calculation of the taxable income amount was substantially reduced for incomes other than from work and employment. In Canada, the top tax brackets were eliminated between 1970 and 2017, leaving only 4 of 25 tax brackets. By eliminating the higher brackets, decreasing rates and offering those in the top brackets deductions from taxable income, the tax burden was increased for the employed and decreased for those in the corporate and financial sectors. Taxpayers in the lower brackets, including the middle class, saw their tax burden increase by 18% while those at the top decreased by 38%.
Financial, monetary and trade policies over the last 50 years have further devastated the economy. Governments have failed to control their debt to the private sector, resulting in massive increases in taxation requirements to pay debt charges. The failure to require taxation of imported goods and services, to the same extent as tax costs were added to national production, has resulted in diminishing levels of national manufacturing and employment. The loss of good employment has resulted in increasing private debt to support gross domestic product growth. Savings by the majority of citizens decreased. Value based investment in productive infrastructure and research and development has been replaced by speculation and gambling. The growth and collapse of financial bubbles has occurred many times during the last 50 years. The legislators, and by association, the economists who advise them, have quite rightly been labeled “economically illiterate”.
The History Lesson
Many questions and observations arise from considering this history. Why is it that a country can provide good employment and standard of living by manufacturing, and using, war materials, but not by producing goods and services during peacetime? What is the benefit to society in producing and consuming goods and services? Why is it that countries allow, and encourage, financial speculation leading to economic bubbles and recessions, as in the 1920’s and many times since 1980? What influenced the decrease of the Government role in the mixed economy since the Golden Years? Why is it that prosperity and the standard of living for the majority declines when tax rates in the high income brackets are lowered? Why do our politicians succumb to influence by lobbyists of the financial and corporate sectors?
These, and many other “why” questions, and not being asked by either our elected representatives, or by the members of the media, both who have direct responsibility to question Government. Many of the independent commentators have been accused of providing unjustified “conspiracy theories”. “Conspiracy” is not necessarily a bad thing, people working together to achieve anything “conspire”, usually with good intent. There are those who conspire to reduce global warming, or globalization, which intend benefits, either to humanity or themselves.
World War II clearly shows that personal consumption is not necessary for a vibrant economy, work and production is. The needs of citizens, although restricted, were met, while their savings moved many to the middle class. We learned after WW2 that a mixed economy benefits both individuals and society as a whole. During those times it was not personal consumption but work and production that was the driver of the economy. During war we produced and destroyed, during the golden years we produced for personal needs and for public works, and fully utilized our productive capacity.
The last 50 years tell a different story. The ascension of the financial sector as the controlling sector of the economy, and its emphasis on consumption and gross domestic product numbers, has benefited the moneyed few and weakened our economies. Based on the trend from “investing” to “speculation” has moved corporate decision making from long term growth and stability to short term decisions based on financial engineering or manipulation. The trend of our major corporations to use capital to redeem their stock, instead of investing in research and expansion, has shrunk industry, employment and wages.
We now have food banks, beggars on our streets, gambling and drugs, instead of hope that work and effort will provide a better living for our children,s children. The financial sector has again fostered the speculation of the 1920’s. Personal debt for excessive consumption and speculation is again threatening the economy. Highest bracket income tax rates, together with taxable income definitions favourable to the wealthy, are below the 40% tax rate of just before the Great depression. The creation of money by Government has been turned over to the financial sector and has created massive Government debt, and debt charges, as well as excessive personal and corporate debt.
Our elected representatives have not intentionally allowed this deterioration of our economy and society. Many recent books of, and by, politicians express their dissatisfaction with what is happening to the country and their failure to accomplish change while in Government. Political parties seem to attract candidates that are most susceptible to control by others. Most legislators lack economic literacy or an understanding of taxation. It is really the fault of the voters who elect members without the necessary skills, and will, to carry out their duties. Neither is it the fault of voters, they are swayed by advertising and spin doctors to abandon rational thought while voting.
The lesson that our citizens, and our legislators, have not learned is that creating debt should not be the way to create money. Money should only be created to create lasting wealth, productive assets, factories, infrastructure, human capital, not for speculation in current wealth and not for unnecessary consumption. The financial sector has created our money with thought only for their profits, creating too much money and debt. Only the Bank of Canada should introduce new money, only as needed, by financing capital expenditures and for currency circulation.
What is Income?
To most people their income is the money that they receive and are able to spend. Normally income, especially for workers, equals what they do spend, their consumption. The saver and investor gives up personal standard of living until they actually receive and spend the money. It is very rational to think that tax should be applied on what people spend, on their standard of living.
The definition of income should be “all money received that could be spent” and “taxable income” should be “all income spent, not saved or invested”. All people in a country benefit from savings but only the consumer benefits from consuming. Savings and investment is used by people, industry, and by Government, until repaid for the future needs of the saver. The rest of society is spared the necessity to provide future support of the needs of others if there are personal savings to do so. Determining the amount of “all money received that could be spent” and “all income spent, not saved or invested”, is readily available under present standards of record keeping. The calculation of “income received” and “taxable income” would be much simpler if based on cash transactions rather than by the present complicated income tax calculations.
The money received from wages, as well as, sale of goods, assets, houses, securities , inheritance, gift and other receipts, is money that could be spent on personal consumption or saved. The definition of “all money received that could be spent” would be much simpler to calculate than income determination under present tax rules. The present income tax calculation of payments for work, salaries, commissions, bonuses, profits are needlessly complicated beyond all reason.
Money that can be spent and consumed can also be borrowed. Under the present definition of income, money earned is taxed, but money borrowed, is consumption without being so taxed, especially, through default, if never repaid, but added to the expenses of all other taxpayers.
There are many alternative names for a tax on “income not saved”. A “standard of living tax” seems appropriate because standard of living is usually quantified by money spent. “Cash flow tax” seems appropriate because it denotes the simplification of defining a taxable amount. “Diminished wealth tax” seems appropriate because all goods and services represent wealth created and used or destroyed. “Consumption tax” seems appropriate because it relates directly to that action by people.
Amount of Tax
Government expenditure for infrastructure, and to add to the currency in circulation, should not be from taxation, but from new money borrowed from the Bank of Canada. The amount of tax collected from citizens, in a year, should be the amount spent by Government to pay for the services provided to citizens during that year. Surpluses and deficits should always be carried forward only one year. Whether or not taxpayers feel that Government expenditures benefit them personally, they presumably benefit the society as a whole. The pros and cons of a balanced budget should be considered in terms of capital and current expenditures. Current expenditures should be clearly defined as those expenditures that relate to being used or consumed during the year. No such expenditures should be amortized over the future but should be fully recovered from tax revenues of the current year. Capital expenditures should be clearly defined as that part of the expenditure that benefits citizens in the future and therefore be amortized over the future citizens who benefit therefrom.
The amount of tax levied on money used for standard of living should be the main factor of achieving distributive justice among citizens. Those benefiting more from the productive output of the country should pay a higher rate of tax. Much of the income of any citizen of a country is only marginally a reflection of their personal effort. Without the society having provided the productive environment, prior levels of research and development, education and skills, distribution and marketing facilities, and people to buy, personal income income, especially larger ones, could not be achieved.
Very little of the goods and services consumed by individuals are self produced. Goods and services consumed are the result of work and efforts by others. It does not seem reasonable that citizens should work to produce for others and be taxed on that work as well. Taxation should not be on the worker’s income but on the consumer’s expenditure for their standard of living.
The amount of government expenditure recovered from a standard of living tax base need not be the major source of tax. There are other sources that should bear the major portion of taxation because they harm, or do not benefit people or the economy.
Imported Goods and Services Tax
All taxes, at all levels of Government, must be recovered from the cost of goods and services produced in the country. Imports compete with national production without bearing the same tax. The money spent for nationally produced goods and services is re-spent many times, recovering tax each time. An equal tax on imports would decrease their competitive advantage in the country and decrease the tax load added to the cost of products locally produced. All of the nutritional needs for food and for shelter, and the basic living of citizens, can be produced in the country. Imported foods should be taxed as luxury consumption. Canada is capable of producing, and have in the past produced, most of the items now imported. Tractors, ships and many other goods that are now imported would be competitively produced if the tax on imports were equal to that raised through work and production in the country.
The continuing replacement of human labour with mechanical and digital machines and automation has benefited the few in the corporate and financial hierarchy but not the majority of citizens. The society as a whole has not shared in the benefits that their collective labour saving efforts developed over time. Much of the development in the past is now being exploited by the few. Henry Ford increased the wages of his employees “so they can afford to buy the products they produce”. The aim of today’s corporate elite seems to be to reduce the ability to purchase by importing everything from foreign countries, and sending them our natural resources and technology. The end game will be when our productive human and finite national resources are depleted and our future generations have been reduced to serfdom or worse.
To reduce the taxes on production and consumption by individuals, which provide an acceptable standard of living for citizens, tax should be levied on purchases that harm, or do not benefit our society.
Alcohol, tobacco, sugar, salt, fat and other food or ingredients not only harm individuals but add economic costs through reduced health and productivity. Consumption of harmful items might be reduced, in addition to providing government revenue. It is not enough to inform and educate people, what really sways people is the money. Freedom of choice would not be diminished, since there would still be the choice to buy either domestic or imported.
All packaging materials damage the environment, some more than others. Usually, the less benefit the product is for consumers, the flashier the packaging. By taxing packaging, and reducing the tax on work and income, the consumer would be paying the taxes anyway so be no worse off financially. Tax on packaging would discourage use and help cover cost of environmental remediation.
Advertising is of little value to individuals or society. It provides little utility to individuals and can create stress and other harm to those vulnerable, by creating unattainable desires or inducing unnecessary purchases. It is harmful to the economy by encouraging unnecessary consumption. Once again, people must pay the taxes anyway, better it be on harmful advertising, instead of work and income.
Carbon tax is being imposed to discourage carbon emissions. And, like other deterrent taxes, is serving a dual purpose, providing government revenue and deterring carbon discharge. To the extent that it reduces the tax required from other tax sources it is of no additional cost to taxpayers and citizens. There are many other sources of taxation that serve worthwhile purposes in addition to eliminating taxation on the production of goods and services.
In economics, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. The purchase of a financial instrument, including corporate shares, is speculation. Government has proven that speculation, seeking income without production, is a good source of income (taxation). Government conducted lotteries provide 47% of the amount speculated to Government coffers. That is just a tax, and usually on the poorest members of society. Sale and resale of financial instruments is nothing but speculation and should bear a flat tax on each transaction. Unless the proceeds from the sale is an “initial public offering” or direct investment in small business, it adds nothing to the nation’s ability to produce goods and services, and employment. In addition, money spent on securities that do not increase production is diverted from investment in productive assets. Derivatives, options, futures, and financial instruments have no intrinsic value in themselves, are not value investing but only speculation or gambling. The speculation in financial instruments has changed from value investing by humans to computerized and instantaneous trading, that do not reflect factors of value. Such speculation, and the associated debt creation, has caused valuation bubbles and their economic crashes at an increasing rate. These have become more frequent, and more damaging to the economy since the 1970’s. Only a very small percentage of individual citizens participate in securities trading. Most that do, have the money and wealth to meet the taxation needs of Government without sacrificing their standard of living.
Rational taxation and distributive justice can be achieved together with a strong economy. A strong economy results from maximum effort to produce goods and services (wealth) for current consumption (the use of wealth) and for private and public investment for the future. The wealth of a country is the combined wealth of both individuals and government. There will always be the richer and the poorer individuals in society. Civilized and intelligent individuals accept that all citizens require an appropriate standard of living and that our country should, and can, provide it “from each according to their ability”. Without a universal basic standard of living “to each according to their need” citizens can not produce “from each according to their ability”.
Over the 100 years of income tax each generation hoped to do a little better than the one before. In 50 years we have destroyed that hope. Now we are passing to future generations; lower employment opportunity, personal debt induced by the predatory banks, shrunken non-renewable resources, over exploited renewable resources, speculative bubbles, diminished moral standards, and, of all things, making them pay the cost of creating our national wealth of education. The only hope for the young is that our representatives in Government take back the power from the political and financial oligarchy, and serve the society that chose them as their representatives, instead of the wealthy few.
Bank of Canada
The shares of Bank of Canada are owned by all the people of Canada, the government. The money created by the Bank of Canada, and any interest earned by it, reverts back to the people. After the bank was established in 1938 it loaned most of the money required by all levels of government, at little or no cost for interest. Repayments of loans went back to the bank to be circulated as required. Then in 1974 the Government and the Bank of Canada gave control of currency and credit to private financial predators. Since then Canadian taxpayers have paid billions in unnecessary debt charges. Money is now created by private financial corporations, instead of Government. The banks, and similar financial institutions, create money by issuing credits to customers, which are offset by public, corporate and private debt. Instead of money being created by banks and financial institutions as debt, money should be created by Government, as needed by the economy, and only for public or private investment in productive assets.
Financial interests since 1970 have subjected Canada to destabilizing monetary and fiscal policies. Private, corporate and government debt has escalated to dangerous levels. Our productive sectors have shrunk, together with wage levels and employment opportunities. Recessions have become commonplace with corresponding hardship on much of the population.
Prime Minister W. L. MacKenzie-King, in 1937, stated “Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.” The statement of such a fact many times, before and since, has fallen on deaf ears.
It is time that our government take back monetary control and create all money needed in circulation and for public and private investment.
The present methods for the provision, to some citizens and not others, of money for basic human needs, is neither just nor efficient. The generations before us established a society capable of functioning without the need for beggars on our streets and food banks to feed our poor. The cost to taxpayers and charitable donors, together with the administrative costs of Government and the charities, exceeds what would be required under a universal basic income. Universal payment to all, need not change the cost to taxpayers in total, but would reduce administrative costs.
Payment to all citizens could be of an amount determined to be just above the poverty level. It then would be added to all other taxable “all income spent, not saved or invested” of each individual. The total would bear a graduated tax so that the basic income amount would be fully recovered from when a fair average standard of living was reached. Tax rate increments of 1% per bracket would result in the payments being recovered by the time income reaches a fair mean level for all citizens. Such gradual 1% rate increases per bracket would encourage personal effort of additional work or other income. It would mean that all taxpayers would be equal in starting to contribute to the tax requirements to operate government, after their basic income payments had been repaid.
Graduated Tax Rates
A gradual tax rate increase by 1% per bracket of consumption would provide distributive justice without discouraging productive effort. Greater distributive justice would be realized with 90 brackets of taxable amount. The reduction to 4 brackets from the 25 in 1970 appears to have been an avenue to decrease the tax on the rich. It is a lie to claim that the reduction was made to simplify calculation of tax payable. There always were tax tables that provided the amount of tax at each small increment of taxable income. Rates increased by 1% per bracket would eliminate the unfairness of sharp increases in tax payable between brackets.
The whole concept of basic income requires no additional gross taxation. Together with the suggested changes in taxation, the gross tax amount collected could be the same. Tax would be based on the amount spent in the elimination of wealth, not on its creation.
HST/GST – Point of Sales Tax
Such a tax is indeed a “consumption” tax. As with the current income tax base, it favours, as presently administered, those with higher incomes. To exclude food, or other necessities of life, from the tax excludes more tax for those with a higher standard of living who spend more than those on a tighter budget. Those with higher disposable income often prefer higher grades of goods and choose more imported goods than those with less money to spend. That tax also represents some government influence over personnel purchasing decisions by distorting value pricing. The level of tax influences the choice between food or other purchases. Point of sales tax is like a flat tax that does not recognize the ability to pay.
Administratively costly and inefficient systems to refund point of sales tax have been instituted as an attempt to correct this fault. Periodic amounts are paid to those with lower incomes to offset part of the amount they pay of this tax. With such refunds of tax, the tax could be applied to all goods, and the payments made to the less well off increased to offset it.
The better solution would be to eliminate point of sale tax completely. Should the present income tax be replaced with a graduated consumption tax, the graduated rates could be increased to provide equivalent tax revenue. Not only would the administration costs be eliminated, but the graduated rates would assure that all elements of standard of living are taxed equally. Distributive justice would be more just.
After 100 years there is ample experience to illustrate that income is not the best base of taxation. The amendments made in efforts to create greater fairness between citizens have resulted in complicated statutes and regulations. These complications now require extensive professional and administrative services that could be better applied to productive endeavours. Even more important, would be the change from taxation of work, the creation of wealth, to taxation of the consumption of wealth.
Those at or below the poverty level, with a basic income, without the demoralizing and time consuming requirements of “welfare”, like other in their society, would have the incentive to better their standard of living by self improvement and work “ to each according to their ability”.
The working poor would likewise have the incentive to better their standard of living by self improvement and work “ to each according to their ability”. To the extent that employment opportunities were eliminated by increasing technology and automation, an acceptable standard of living could be maintained.
Those preferring an alternate style of life through art, study, nature, charitable efforts or other efforts outside normal work participation might still share fairly in the life of their society. Basic income to those individuals or couples who prefer homemaking and who value personal childcare would reduce some of the problems created by “latch key” child rearing.
Those in small business would benefit by the deferral of the taxation of the earnings from their business until the earnings were withdrawn to support their standard of living. The added funds available for investment would provide for growth of small business and the resulting increase in production and employment.
The ability of savers to defer taxation on amounts saved and invested without the necessity of participation in the speculative security markets would encourage savings and discourage excessive consumption. Government could issue savings bonds, (as during war time) or establish savings accounts, paying a rate of interest that would encourage savings. This would also reduce the need for Government to pay a higher rate of interest to the financial corporations.
The majority in high income brackets would accept higher taxation rates on consumption in exchange for simplified taxation and easier business development. Their opportunities in a much stronger economy, with a tax base of consumption instead of income, would provide even greater incentive for them to maximize “from each according to their ability”.
I missed the “Roar’n 20’s” but lived through, its legacy, the Great Depression”, two world wars and several smaller ones, the “Golden Days” , the Financial destruction of our “Democratic Capitalism” and into this new century. I offer my deepest apologies to future generations for what has been wrought during my lifetime. I did not realize what was being done to our country by the financial, natural resource and political cabal. I did not know enough to challenge the unconscionable transfer of wealth and income to a small minority, the surrender of our productive assets to foreign interests, the environmental destruction, the plundering of our natural resources, the shrinking of our renewable resources, the crippling creation of debt, the loss of decent employment opportunities, the shrinking of moral standards, and the problems we created for young people. And now this effort is too late. I am sorry.