Tax, Borrow &Spend: Financing Federal Spending in Canada, 1867-1990 by W. Irwin GillespieReview by: Douglas J. MccreadyThe Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 25, No. 3 (Aug.,1992), pp. 754-756Published by: Wiley on behalf of the Canadian Economics AssociationStable URL: http://www.jstor.org/stable/135743 .

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Reviews of books Comptes rendus

754 Gillespie Tax, Borrow & Spend: Financing Federal Spending in Canada, 1867-1990 by DOUGLAS J. MCCREADY

Tax, Borrow & Spend: Financing Federal Spending in Canada, 1867-1990 by W. Irwin Gillespie. Ottawa: Carleton University Press, 1991. Pp. xvi, 347. $24.95

Gillespie is noted as a careful documenter of statistics in the public sector and as a writer who demonstrates the importance of knowing the data for understanding policy. Tax Borrow & Spend fits into this mould for Gillespie has obviously read every budget speech for the 123 years under review to document the trends in choosing the form of revenue raising that will be used by the government at any point in time. Such careful work is clearly of benefit to those of us who teach institutional public finance and ought also to be of interest to theoreticians and economic historians.

The book opens with what is called a positive model of revenue structure, which is a revised version of material which appeared in Canadian Tax Journal and Canadian Public Administration but when developed in full, as it is here, is worth a great deal more than the parts that were previously in the public domain. The theorist will have little to dispute in so far as the fourteen hypotheses that are set out in this portion of the book although clearly some of the hypotheses are of greater importance than others. For instance, it would be expected that the hypothesis that the political cost of introducing or increasing a tax on a revenue source for which citizens have a tax preference will be lower than the political cost of introducing or increasing a tax on a revenue source for which citizens do not have a tax preference would be a more important factor than the hypothesis that political costs of borrowing are inversely related to the good credit standing of the nation. Also, within this section, Gillespie develops curves to demonstrate a political equilibrium with respect to the composition of revenues. Those who delight in the curve-bending exercises economists sometimes engage in will find this section appropriately developed and yet simple enough that is could easily be taught to senior undergraduates.

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Comptes rendus 755

From this rather delightful compilation of theoretical structure, Gillespie moves the reader through different periods in the development of dominion finances. He carefully notes themes that were relevant to the period. For instance, he is careful to point out that during the first fifty-year period Canadian governments were likely to place emphasis on attracting a population to permit expansion of production and to provide defence in the uninhabited portions of the vast land.

The concept that the country needed to attract population led the ministers of finance to use deficits (i.e., taxes lower than they would otherwise have been) in order to keep the country attractive. The ministers also had concerns about tax competition with the provinces, who had been given the direct tax under the constitutional agreement, and tax competition with other countries such as the United States; thus, the use of an income tax federally was postponed until 1917 (just several years after the United States had started to raise significant funds from that tax).

War finance is discussed in detail as well. Here, the model fits very well with the Peacock-Wiseman theory about growth in government - that is, growth occurs most readily when there is some catastrophe for which there is general agreement on the need for extra taxes and a patriotic commitment to those increased tax revenues. While the post-war periods were the only periods in Canadian history during which there was some significant debt reduction rather than major tax decreases (although there was a mixture here as well), since it was in the early 1920s that many changes were made to the tax structure, including the introduction of a federal sales tax.

The early 1920s were the period during which there was a most rapid change in the revenue structure. A federal sales tax, first introduced as a two-stage tax in 1920 became part of the revenue structure, changed rapidly to the manufacturer's sales tax with increased rates and revenues. Selective taxes (excises) were reduced, and coupled with a brief downturn in the economy, the customs duty finally lost its significance as a major revenue source. A similar flurry of change did not occur after the Second World War, although selective tax decreases (i.e., in the federal personal income tax) did occur.

For those of us who have grown up and studied since the Second World War, the tax reforms emanating from the Carter Report (including the white paper and the subsequent legislation between 1967 and 1971), the MacEachen budget (1981), and the Wilson personal income tax rate reductions coupled with base expansion and the introduction of the GST to replace the MST are within memory, and it is interesting to follow Gillespie through these reforms. He does not take the 1971 reform changes from Carter as evidence of weakness on the part of the politicians but accepts it as political reality garnered from consultation, which leads to an equilibrium which otherwise would not have occurred. Further, MacEachen's reforms are often seen as having been totally withdrawn, but Gillespie is able to demonstrate that many of those reforms were incorporated into tax laws, again according to equilibrium by MacEachen's successor, Marc Lalonde.

It would be interesting to know whether Gillespie would have written what he did about the GST in the light of the post-January 1991 period. He shows how there has been a recognized need for reform in the sales tax field and how various

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756 Reviews of books

governments have dealt with the question. He points out the tremendous advantages of the GST over the MST and discusses the acceptance by Michael Wilson and others of political adjustments such as removing food from the base, going it alone without the provinces, and the lowering of the rate to 7 per cent as evidence that the tax was influenced by what the political equilibrium would be. He points to the fact that if a new government was elected, it might tamper with only a few exemptions, such that as on books, rather than change the tax itself. Yet in 1990 it would have been impossible to observe the tremendous public resistance to and resentment of the tax. Some readers will see this chapter as the 'ivory-tower' thinking of academia, but there is no evidence that this is the case. Indeed, Gillespie has done an excellent job of documenting his case, given the circumstances under which he was writing.

As an economist, however, it seems to me that perhaps there ought to be another hypothesis added to chapter 2 to the effect that the the costs of introducing, main- taining, or increasing a tax are higher when the economy is in a downtrend than it is to introduce, maintain, or increase a tax when the economy is booming. It would appear that Gillespie would find evidence of this in the lack of major changes to the tax structure during periods when there have been recessions or depressions in Canada, except in the case of the GST, and when the GST legislation was introduced and passed, the economy was still vibrant. Of course there are some who blame the GST for the recession, but the points made by Gillespie that the GST is a more efficient tax don't support the hypothesis that recession emanated from the GST.

It is incumbent upon a reviewer to examine the usefulness of a book to different readerships. In this case-the book is theoretical enough that it could be useful in the classroom as a supplementary test but readable enough that non-economists can follow and learn from reading. Thus, the book is carefully constructed to be useful to the politically aware and the policy maker as well as the economist. It is well written, and the organization permits one to learn tax principles first and see how they have been applied in Canada's case. The economic historian would be well advised to read this book, since there is much to be learned from the nuances of government funding about the economic history of Canada.

Further, the book includes an excellent bibliography and some superb footnotes which provide the sources and further reading for someone interested in Canadian public finance. There are also significant facts and figures provided in forty-one pages of appendices which are invaluable to the specialist in public finance and the historian. These appendices deal with a number of topics, including a province-by- province outline of the birth and death of taxes, where one finds new taxes almost non-existent in the 1890s and 1930s. He also relates federal spending to revenues and deficits for each of the years in absolute values as well as in relation to national income, and he includes tables of budget speeches and elections. In other words, the appendices are an excellent source of empirical material.

Gillespie has managed to remain unbiased, professional, and thorough throughout, something some others might have had trouble with. His contribution to Canadian public finance is indeed significant.

DOUGLAS J. MCCREADY Wilfrid Laurier University

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