In the run up to Canada Day and the 150 th anniversary of Canadian Confederation, here is another in a line of recent snapshots of the federal government – this time its consumption tax revenues. Why consumption taxes? Well, economists like to make the case for more emphasis on consumption taxation relative to income taxes, which can have incentive effects on work effort, savings and risk taking. In a very simple model of the economy, you can do only two things with your income – consume or save it. A consumption tax is on the flow of spending and by taxing consumption you raise its price relative to saving thereby fostering more saving resulting in greater investment in productive capital and higher long-term economic growth. The onset and implementation of the federal GST nearly 25 years ago was partly sold on this theory.

What is interesting and generally well known about the evolution of federal consumption taxes in Canada – broadly defined to include general sales taxes, excise taxes and duties and custom’s duties – is that they have declined over time as a share of federal revenue. This is shown in a series of figures below constructed using data from Historical Statistics of Canada, the Federal Fiscal Reference Tables and the 2017 Federal Budget.

As Figure 1 illustrates, the decline was in several stages – a gentle decline from 1867 to the mid 1930s – then a steep drop until the mid 1940s – followed by several decades of stability – and then another period of decline into the present period. As Figure 2 shows, most of the decline is the result of the drop in custom’s revenues as a share of federal revenue. This begins during World War I and is the result of the diversification of the revenue base brought about by the introduction of income and general sales taxation.

Figure 3 presents only federal sales and excise tax revenues as a share of federal revenue and it paints a somewhat different picture. Sales and excise tax revenues as a share of federal revenue peak during the Great Depression – in 1937 at 45.1 percent – and then decline rapidly during WWII. After the war and until the mid 1960s they are between 25 and 30 percent of federal government revenues and then begin another steep decline. At present, they constitute between 10 and 15 percent of federal government revenue.

Finally, Figure 4 presents federal sales and excise taxes as a share of GDP. The onset of the federal sales tax (Manufacturer’s Sales Tax in 1921 results in quite the spike and the peak is during WWII at 6.9 percent. The revenues drop but remain above 4 percent well into mid 1960s and then drop and despite a small resurgence in the 1990s to between 2 and 3 percent, have since dropped below 2 percent.

What is interesting when one looks at these pictures is that notwithstanding the period of the Great Depression and WWII, federal sales and excise taxes as a share of both federal revenue and GDP were generally the highest during the period from the end of WWII to the late 1960s – the so-called Golden Era of economic growth that marked not only Canada but much of the developed world in the 3rd quarter of the 20th century. In Canada, the period since the mid 1960s saw federal personal income taxes as a share of federal revenue rise from 30 percent to 50 percent by 2017. As a share of GDP, federal personal income taxes were about 5 percent in the late 1960s, rose to peak at over 8 percent in the 1990s and have since come down to about 7 percent.

I know that I am discussing very broad relationships that do not control for a very complex set of economic and demographic factors that have affected both the Canadian and world economies over 150 years but still I will ask the question. How much was tax mix responsible for our economic performance during the 1950s and 1960s given that the era of peak dependence on consumption taxation by the federal government also coincides with some very high economic growth rates?

Happy Canada Day!