Why Do We Pay Taxes?

"Tears and taxes are the price of liberty. The pockets that pay are more blessed than the eyes that weep." So said Toronto newspaper editor John "Black Jack" Robinson in a 1928 editorial urging the conscription of wealth.

Conscription was an important issue when Robert Borden's Conservative government introduced Canada's first personal income tax in 1917 with the Income War Tax Act. WWI was raging and Canada's commitment to Britain's war effort was large and costly. The "temporary measure" was to help defray the economic burden.

The first known recorded tax paid in Canada was in 1650 by residents of New France as export taxes on beaver pelts. In 1867 the Constitution Act (formerly the BNA Act) gave Parliament unlimited taxation powers but limited the provinces' powers to direct taxation. We've been crying about taxes ever since!

War again altered our tax structure during WWII. The government's need to distribute the costs of war, raise funds and minimize the effects of inflation brought the main sources of taxes under federal authority. The provinces agreed to surrender the collection of personal and corporate taxes to the federal government during the war and for one year after. Expanded federal authority after the war and public demand for increased government involvement in many areas made direct taxation a permanent aspect of federal finance, though the provinces have a constitutional right to these taxes.

The principles of taxation propose that a tax system be judged in a number of ways-efficiency, economic growth, administrative ease-but the cornerstone of taxation theory is fairness, a subjective quality at best. One view suggests that taxes should be paid according to the benefits received. The difficulty of determining the value of certain expenditures to the average citizen diminishes this principle's effectiveness.

A more populist opinion is taxation according to the ability to pay, a system that operates at both public and private levels. Horizontal equity proposes that people be treated equally when they are equally able to pay. Since income alone is an imperfect method of assessing someone's ability to pay, horizontal equity is difficult to achieve. Vertical equity suggests that those with higher incomes be taxed more heavily. Business and high-income earners have opposed progressive taxation because it discourages investment and initiative.

Federal taxes are collected by the Canada Customs and Revenue Agency (CCRA), the department formerly known as Revenue Canada, the Department of National Revenue and the Department of Customs and Excise. The government uses our tax dollars to finance government services. In the last quarter of 2001 government expenditure of the GDP on goods and services was over $203 billion.

Another function of tax revenue is the equalization of Canadians' standard of living by redistributing income, in effect conscripting wealth. Transfer payments ensure that less prosperous provinces can provide comparable public services without substantially higher taxes than those of more affluent provinces. Qualifying provinces are Quebec ($5.4 billion in 2000-01), Nova Scotia ($1.3 billion), Manitoba ($1.2 billion), New Brunswick ($1.2 billion), Newfoundland ($1.1 billion), Prince Edward Island ($2.4 million) and Saskatchewan ($2.3 million). Figures are estimates by Statistics Canada.

Taxation influences the behavior of consumers and investors. When the government needs more money to pay for things like health care or education, it can increase its expenditures without causing a corresponding increase in prices because the amount of money available for private spending is reduced by the same amount as the increase in taxes.