William Watson: My favourite finance minister of them all
Last week the Fraser Institute published a short book about the income tax, then and now, edited by Fraser executive vice-president Jason Clemens and myself. It’s called The History and Development of Canada’s Personal Income Tax: Zero to 50 in 100 Years, which makes it sound like a great, thick brick though in fact it’s 10 short essays on various aspects of the origins and current status of Canada’s PIT, which turns 100 this year.
The “zero to 50” bit refers to the fact that 100 years ago income tax accounted for zero per cent of federal revenues but now it brings in half.
Sir Thomas White, finance minister in Robert Borden’s Conservative government, introduced the bill setting up the “war income tax” in late July 1917, just days after the Commons had approved compulsory military service—conscription. I’m not a historian but my reading of the debates leading up to and following the introduction of the bill is that that the income tax was pretty much a political concession to get conscription through. “Conscription of wealth” was the phrase in the air that summer: If young men were going to have their freedom expropriated, the country seemed to feel, wealth should be open to expropriation, too. As my Financial Post colleague Terence Corcoran has pointed out, arguments about taxation—including today’s high taxation—do and should have an important moral component. Economic efficiency is fine but doesn’t stir many people who aren’t economists or accountants.
My three short essays in the book discuss: federal taxation before the income tax (there wasn’t much and what there was was largely the tariff); how the tax came about (see the previous paragraph); and six post-1917 budgets that gave us the tax we have today. They include: 1943 (which brought payroll deduction); 1971 (capital gains tax); 1974 (indexation); 1981 (a political fiasco that illustrated the perils of attacking lobby-favoured tax expenditures); and 1987 (which gave us basically the structure and rates we had until last year).
But I also included the budgets of the late 1920s, which were brought in by a finance minister I wasn’t familiar with until I read his budget speeches in connection with this project, and that is James Robb, a Liberal from Huntingdon, Quebec, who served first as acting finance minister in 1924 and 1925 during the illness of the legendary Laurier-era warhorse, William Stevens Fielding, and then as finance minister in his own right from 1926 until his sudden death, from pleurisy, at the age of 70, just two weeks after the stock market crash of October 1929.
I hope it’s not unkind to Mr. Robb’s memory to say that a key ingredient of success for a finance minister is to choose your years of tenure carefully. James Robb had the good fortune to serve during a great economic expansion—though it was an expansion his pro-growth policies probably encouraged, even if the impact on the economy of that era’s much smaller federal government was much less than it is today. “First, do no harm” is a good rule for anyone seeking improvement of any kind.
Robb is easily Canada’s greatest tax-cutter ever. “Happily,” he reported in his 1926 budget, “our financial and commercial position now enables us to make very substantial reductions in the income taxes. With a desire to make available new money for development, our proposals provide reductions all along the line.” The federal tax on $1 million of income was therefore reduced from $696,349.50 to $453,660.00. Finance ministers in that era kept track of things down to the last half dollar. And they had the guts to reduce taxes on rich people ($1 million in 1926 is $14 million today). Speaking of elites, Robb’s announcement that the tariff on angostura bitters was being reduced from $10.00 a gallon to $5.00 was met with “Hear, hear” all around. He also cut tariffs on automobiles, saying “There is a pronounced sentiment throughout Canada that the automobile industry enjoys more protection than is needed to maintain it on a reasonably profitable basis.” Imagine! A finance minister standing up for consumers against a concerted industry interest! Even more astonishingly, Minister Robb cut the cost of regular postage. Canadians who came of age after the Second World War simply can’t conceive postal rates could ever go down. It’s like lead weights falling upward.
In the 1927 budget, Robb said Canadians should “bend all our energies towards reducing burdensome taxation as rapidly as our revenues will permit” and he began the energy-bend with another across-the-board cut of 10 per cent in income taxes, plus 20 per cent in sales taxes. “The aim,” he said, “has been to lighten the burden of every taxpayer, rather than to afford relief to special groups, provinces or sections of the country.” Would a modern Canadian politician believe such things?
In 1928, urged to use burgeoning revenues to establish a sinking fund, Robb, citing the 19th-century Scottish economist, John Ramsay McCulloch, declared that the best sinking fund is the “productiveness of industry and the greater well-being of the community” and he went on: “Until Canada is nearer the pre-war rate of taxation, annual reduction of taxes is as important as reduction of debt. Our policy is to reduce both.” And, with that, he cut income taxes yet another 10 per cent.
In March 1929, in his final budget, he referred, with ample justification, to “the general optimism prevailing throughout Canada” and the “steady and continuous reduction of both debt and rates of taxation.”
In the 1930 budget, in the kind of ethnic generalization permitted in that era, Robb’s successor, Charles Dunning, said of him that “With the Scot’s characteristic dread of debt he annually budgeted for debt reduction, and the past seven years attained for Canada greater success, relatively, than has been achieved by any country which took part in the great war from the outbreak of hostilities.”
Memo to the current prime minister: James Robb was a Liberal; he even served for a time as Liberal whip and he worked for Liberal prime minister William Lyon Mackenzie King, Canada’s longest-serving prime minister, Liberal or Conservative. You might want to go back and read his speeches.