A Few Words in Support of Tax Evasion BY PERRE LEMIEUX Hull, Que. Globe & Mail, Jan 31, 1994 As budget day nears, politicians of all stripes warn us that tax evasion is rampant in Canada. Before he started talking about tax increases, Finance Minister Paul Martin had declared that "hundreds of thousands of otherwise honest people . . . have withdrawn their consent to be governed" by escaping into the underground economy. The problem is that the politicians do not seem to draw the right conclusions. Pressed for money - actually nearly bankrupt - the federal government, as well as some - provincial goverments, has decided to - clamp down on the underground eaonomy. - Revenue Minister David Anderson has declared a war on tax evaders. After shopkeepers defied the law by openly selling smuggled cigarettes in St.Eustache, Que., Bloc Quebecois Leader Lucien Bouchard came out against what he sees as a new state-cheating culture. He apparently thinks that citizens should always obey the rulers. Indeed, the governing class shows a rare unanimity in wanting to bring Canadians back under the government's rod of iron. This raises three interesting questions, First, how did tax evasion develop among so docile a people as the Canadians? The answer lies in the tax burden they have to shoulder. Tobacco, on which federal tax rates have increased by 150 per cent over the past five years, is only the tip of the iceberg. The total tax take by all levels of government now amounts to nearly 40 per cent of the Canadian gross domestic product. If we include the deficits, which are just future taxes, government takes close to one-half of what people produce and earn in this country. In sort, tax evasion is a response to tax invasion. An intensting element of comparison is given in the work of William Fogel, this year's Nobel Prize-winner for economics. The inventor of cliometrics, Mr. Fogel calculated (in his 1974 book TIME ON THE CROSS) that the 19th-century American slave-owner had to spend 87 percent of his slaves' production on their, and their families', upkeep over their lifetmes. In other words, the slave was subjected to an effective 13-per-cent rate of expropriation. You've come a long way, baby, Galloping regulations are another factor. Some of them come with taxes: Small businesses now have to preform time-consuming GST accounting and prepare a complex quarterly report. I don't know if we were ever a nation of shopkeepers, but we are certainly becoming one of tax collectors and accountants. Other forms of regulation - labour regulations, for instance - make it much simpler and cheaper to go underground, for consumers and suppliers alike. The second question is, how could we accept such a tax burden in the first place? One hundred or 200 years ago, the great Western thinkers to whom we owe whatever liberty we have left would never have thought this could happen in a free country. In his celebrated WEALTH OF NATIONS [1776), Adam Smith wrote, referring to England: "The tax upon shops, it was intended, should be the same on all shops. It could not be otherwise. It would have been impossible to proportion with tolerable exactness the tax upon a shop to the extent of the trade carried on in it, without such an inquisition as would have been altogether insupportable in a free country." About the possibility of a taxing income, he also wrote: "An inquisition into every man's private circumstances, and an inquisition which, in order to accommodate the tax to them, watched over all the fluctuations of his fortune, would be a source of such continual and endless vexation as no people could support." When I recently showed these quotes to my graduate civil-servant students at L'Ecole National D'administration Publique in Quebec City,.one of them commented that this guy would fuel a revolution today. Although the typical, law-abiding Canadian would generally be at pains to distinguish a tyrant from a rocking-chair, the underground economy is indeed a peaceful tax revolt. In his "Lectures on Jurisprudence", Smith added: "No doubt the raising of a very exorbitant tax, as the raising as much in peace as in war, of the half or even the fifth of the wealth of the nation, would, as well as any gross abuse of power, justify resis- tance in the people." The third question relates to the state's reaction. Politicians argue that the individuals who do not pay their "fair share" thereby increase the tax burden of other citizens. The main thrust of the coming federal and provincial budgets may well be to increase the effective tax burden under the guise of "fairshares." This is a naive cliche which assumes that political and bureaucratic processes naturally lead to the optimal amount of taxes required to finance unanimously demanded public services. What actually happens (at least if we aggree with the "public choice" approach in economics) is that the government will take as much as it can, and charge what the traffic will bear. Governments satisfy minority pressure groups and buy votes throgh spending. If Canadians in the underground economy were to start paying their "fair" taxes, government revenues and expenses would just increase by the amount of the new taxes. Seen from this perspective, the underground economy is a useful restraint on Levathan, and a beneft to all taxpayers. Canada has been changing rapidly over the past decades. Consider: After the Second World War, the federal government greatly increased tobacco taxes. Smuggling ensued, to a level not very different from today's. Leon Balcer, then the federal MP for Trois-Rivieres declared that seven in lO of his fellow MPs smoked smuggled American cigarettes - proof that individualism was alive and well in the House at that time. The federal government wisely backed down; in 1952 and again in 1953, tobacco taxes were drastically reduced. There is now talk of going the same route, although it remains to be seen wheher tax reductions will be substantial or will serve only as an excuse to repress smuggling. Confronted with tax resistance, today's governments mainly reach for new powers to crush it. This, I think, is a denial of the Canadian tradition. The real Canadians are those who peacefully resist tyranny by retreating to the underground economy. They merely put into application The Globe and Mail's motto, borrowed from Junius:"The subject who is truly loyal to the Chief Magistrate will neither advise nor submit to arbitrary measures. " I recently wrote to the federal Minister of Revenue, quoting Adam Smith, and suggested that the Governor-General give medals to the Canadians caught in the underground economy. He has not replied yet. -------------------------------------------------------------------- Pierre Lemieux, a visiting professor at the Universite du Quebec a Hull, is a Montreal economist and author who has published many books on political and economic matters. --------------------------------------------------------------------