No. 1]
A Positive Approach to a Negative Income Tax:
A Proposal for Canada
Arthur B. C. Drache*
I Introduction
The concept of a Negative Income Tax or Guaranteed Annual
Wage1 has begun to receive more attention and study in Canada
as a result of the recent report of the Special Senate Committee
on Poverty. 2
Before the publication of this Report, the subject was of interest
primarily because agreement in principle was one of the few com-
mon meeting grounds of theorists of both the so-called left and
right. The topic had been canvassed on a conceptual basis in
many of the leading American journals dealing with both law and
economics.3 In fact, it has become a catch-phrase solution to poverty
problems, used by almost all strata of society. The greatest problem,
however, is that no plan has been put forward which meets all
the crucial criteria. The concept has always been dealt with in
relatively broad generalities with little in the way of concrete
proposals.
The Senate Report changed this to some degree, but in coming
forward with its proposals, the Committee suggested a plan which
had so many flaws that it could not be accepted by theorists or
politicians, whatever their political hue.
My view has long been that no solution could be found to the
dilemma of poverty without such a plan, but the plan itself must
be devised in harmony with the Income Tax Act. The fiscal inter-
relationship between any plan and the Income Tax Act appeared to
*Of the Faculty of Law, Queen’s University.
1 The terms have been used interchangeably and will be so used in this
paper.
2 Poverty in Canada, A Report of the Special Senate Committee, Information
Canada, (Ottawa, 1971), hereinafter referred to as the Senate Report.
3 Some of the more noteworthy articles include: Pechman, How a Negative
Income Tax Would Work, (1968-69), 21 U. of Fla. L.R. 587; Tobin, Pechman
and Mieszkowski, Is a Negative Income Tax Practical?, (1967), 77 Yale LJ. 1;
Gallaway, Negative Income Tax and the Elimination of Poverty, (1966), 19
Nat. Tax 1. 298; and the symposium on negative income tax proposals, 6
Industrial Relations, (Feb., 1967).
McGILL LAW JOURNAL
(Vol. 18
me to be so obvious that most of the schemes which have been put
forth have to be rejected on the grounds that the proponents have
forgotten the fund raising mechanism of the modern state.
The first major breakthrough, to my mind, occurred with the
publication of an article by Dodge and Crowley 4 in the Canadian
Tax Journal in which they proposed a specific plan in connection
with Canadian needs. This plan was the starting point for the
plan suggested in this article.
My suggestion is, I believe, the ultimate in simplicity. Payments
would be made to every family unit in Canada based on the minimum
amount necessary to meet the poverty level. This amount would be
a 100% payment, made universally.
A concomitant would be that there would no longer be personal
deductions for the purpose of calculating taxable income. We would
have income tax paid on a family unit basis, using a proportional
rather than a progressive tax, and on a much wider tax base than
at present.
The benefits of such a plan are manyfold. A 100% payment to
the poverty level would eliminate the need for any other welfare
or social assistance payments at any level of government.
The universality would not only achieve administrative ease,
but more importantly would eliminate the type of insidious practices
which are now commonplace in determining whether one is “eligi-
ble” for welfare and in determining the amount of welfare a
person should receive.
The universality of the plan would also mean that people in
every walk of life are protected and that a middle-class executive
who loses his job has immediate security, at least to the poverty
level. The plan would envisage every family unit receiving a cheque
on the first of every month, to do with as the members please. Thus,
in an emergency, such as in the case of a lost job, one knows a
cheque will be arriving, with no embarassing and time consuming
application procedures.
The proportional rate of tax will lead to administrative ease
in withholding taxes on a current basis while at the same time be
4 Crowley and Dodge, Cost of the Guaranteed Annual Income, (1969), 17
Can. Tax J. 395. Plans similar in approach to the one discussed in this article
have been proposed in other jurisdictions. Perhaps the first proponent was
Lady Juliette E. Rhys-Williams in her book, Something to Look Forward To,
(MacDonald: London, 1943). See also the unpublished thesis of R.R. Shutz,
Transfer Payments and Income Inequality, (University of California, 1952).
For a discussion of these and other plans, see Negative Taxes and the Poverty
Problems, (Brookings: Washington, D.C., 1967).
No. 1]
NEGATIVE INCOME TAX
set at a level where there is no disincentive to work. The larger
tax base will not only yield the very large amounts of money
which will be needed but will also help assess more accurately
the true financial state of any family unit.
It should be noted that at least two of the items which I have
suggested as being required, the family unit and the enlarged tax
base, were also recommendations of the Carter Royal Commission
on Taxation, 5 which viewed its job, apparently, as recommending
a more equitable tax system for Canada.
An analysis in some detail of each of the foregoing items is now
in order.
II Amount and Timing of Payments
Under the proposed plan, the payments made to each family unit
would be 100% of the amount of money required to raise the unit
to the upper limit of the poverty level. Clearly, the first problem
is to determine how much this is. The major difficulty is that the
poverty level varies from year to year and from region to region.
It is affected by inflation and by a changing notion as to what are
the basic essentials of life.
We have in Canada at the present time, two sets of authoritative
figures as to what the poverty level is, those of the Economic
Council of Canada6 and those – more recent figures –
of the
Senate Committee. The Senate Committee figures are the more
generous and this may reflect both the time disparity in the publi-
cation of the two documents and a different assessment of basic
needs.
Family Unit
Szze
1
2
3
4
5
6
7
Table 17
Senate Poverty
Line
$2,140
$3,570
$4,290
$5,000
$5,710
$6,430
$7,140
E.C.C. Poverty
Line
$1,894
$3,157
$3,788
$4,420
$5,051
$5,051
$5,051
GReport of the Royal Commission on Taxation, Queen’s Printer, (Ottawa,
1967), hereinafter referred to as the Carter Report.
6Economic Council of Canada, Fifth Annual Report, Queen’s Printer,
(Ottawa).
7 Senate Report, op. cit., n. 2, at p. 8.
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[Vol. 18
It is not the purpose of this article to try to determine what
the poverty line is or should be in Canada. Suffice to say that
these are the most recent figures available and will be appropriate
for our use.
In my view, two adjustments would have to be made. The first
is relatively simple. That is, an adjustment for the fluctuations in
cost of living. It is obvious that we cannot have a system which
lags behind inflation to any marked extent. Thus, there would have
to be an automatic increase, let us say, annually, to keep the pro-
gramme effective.
The second adjustment may be more difficult. It is apparent
to anybody who has lived in different areas of Canada that there
is a marked difference in the cost of living between regions –
and
indeed between urban, suburban and rural areas within a region.
I would think that the proper method to handle the differential
is to create a norm within one fairly large area, say Toronto or
Montreal, and measure the cost of living as against that norm –
not only as it relates to annual inflation, but also when the original
basic grants are made. Thus, the basic grant might be proportion-
ately smaller in a small Southern Ontario town than in Toronto,
and proportionately larger in one of the Northern Ontario towns.
It is apparent that this type of adjustment must be made, but
making the adjustment is merely a technical matter which can
be handled by Statistics Canada.
Once the amount to be paid to each family unit has been
determined, the next point to be considered is the method and
timing of the payment. I would suggest that the payments be made
monthly, 1/12 of the annual payment to be received by the head
of the family unit on the first of every month. Thus, using Senate
figures for a family unit of four, a cheque for $416.50 would arrive
each month. Clearly, it is up to any individual family unit to decide
what will be done with the money. Undoubtedly, in those families
which are better off, the money may be banked, invested, or spent
on luxuries. But in any other family, all or a portion of the money
will be devoted to normal monthly expenses.
One of the great values of the system is that such creditors of a
family as the landlord and the grocer will know, beyond a shadow
of a doubt, how much money is being received and when it is
being received –
at least as regards a bare minimum sum. Thus,
many of the problems of credit which the low income family has
at the present time will disappear. At the same time, it means that
No. 1]
NEGATIVE INCOME TAX
since all families are receiving these cheques, the stigma of waiting
for the welfare cheque will be non-existent.
This system opts for the view that the poor should not be told
how to spend the money they receive –
long a contentious issue
in those circles which have considered the problem of poverty.
It may be desirable that if the head of the household is irresponsible
and leaves his family in a state of destitution, procedures will be
available to ensure that the cheque goes to a more reliable member
of the family unit; still, we will never have the spectre of the family
being “cut off welfare”.
One of the most appealing aspects to this proposal is that the
fact that everybody receives the cheque removes the characterization
of the payment as a handout, and this in turn means that no
bureaucrat is in a position of exercising paternal vigilance. A
valuable service might be provided in the realm of budgeting,
certainly a necessity today and more of a necessity under a plan
where the poor receive a genuine living allowance.
III The Family Unit
In assessing poverty lines, both the Senate Report and the E.C.C.
Report based their figures on the so-called family unit. The logic
of this is irrefutable. In determining needs and resources of Cana-
dians, the family is the logical unit of measurement. The old adage
that two can live more cheaply than one is not true, but two
together can live more cheaply than two separately. As individuals,
usually children, are added to the unit, the per capita cost of living
decreases – obviously because of the savings involved in accommo-
dations and volume purchasing.
By the same token, the Carter Royal Commission on Taxation
adhered to the view that the family unit is also the correct measure-
ment of income.” The recommendation of the Commission was
based on the logic that, in normal circumstances, all the individual
incomes are used for the benefit, direct or indirect, of the whole,
and even one who does not work makes a type of imputed income
contribution. Equity, the Report suggested, requires assessment on
the basis of the family unit.
Thus we have a situation where, both for the realistic assessment
of economic need and the realistic assessment of income, the family
unit is strongly suggested as the appropriate unit of measure.
8 Carter Report, op. cit., n. 5, vol. 1, at p. 17.
McGILL LAW JOURNAL
[Vol. 18
There are clearly some difficulties in assessing who is a member
of the family unit, as the Federal government discovered when it
considered and rejected the Carter proposal. The most obvious
example is the situation where a child is away at university. Does
that child become a separate family unit or is he part of the original
unit? The answer must be left to specific legislation in determining
what is the unit and when does a person leave the unit. Some
substantial work in this area has been done in the Carter Report,
on the income assessing side.9
In broad terms, I would suggest that the definition of the
family unit would be those people living together, and their
dependents who are resident in Canada. Within this broad definition,
there would be more specific definitions dealing with particular
problems.
Thus, two unrelated people who lived together would be treated
as a unit though they are not related. 10 Or, a dependent who lived
apart would be part of the family unit, and thus eligible for a
smaller per capita grant than a person who lived apart and was
not a dependent. Dependency would be, as now, a question of fact
and statute.
Dependents who live abroad would be excluded from the unit,
no matter what the proof of dependency is. This is done regretfully
from a conceptual basis, but from a fiscal point of view, we could
not bear a system which had Canadians supporting foreign relatives
by direct governmental grants.
The test of eligibility would be taxability. Thus, if one is a
resident of Canada for the purposes of taxation, or a resident
dependent of such a person, that person would be treated as a
member of a family unit.
It is obvious that I have sketched out only the barest bones
of the family unit concept, but it should be equally clear that the
concept itself is easily defined and legislated into existence.
The Senate Report has 1969 statistics which indicates the number
of various family units in Canada.
9Ibid., vol. 3, at p. 117.
101 have made reference above to a cheque going to the head of the unit.
In situations where two or more people who are unrelated by birth or mar-
riage are living together and there clearly is no “head of the unit”, I would
suggest that equal cheques go to each member of the unit. Thus, each of
two working women, living together, would receive a cheque equal to 50%
of the payment due a family unit of two.
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NEGATIVE INCOME TAX
Table II
Family Unit
Size
Number of Units
1
2
3
4
5 and up
1,625,000
1,436,000
961,000
1,008,000
1,461,000
These figures will be satisfactory for the purpose of rough calcu-
lations in this article, but it is clear that they are not accurate
within the context of my suggested scheme. For example, these
figures correspond roughly to family size rather than family unit.
But they do not take into account the treatment (whatever it will
be) of, for example, students who are away from home. Nor do
they take into account groups of two or more legally unrelated
people who are living together.
Whatever the definitional problems, the family unit is the proper
basis for both the measurement of economic need and the assess-
ment of income.
IV The Tax Base
Any guaranteed annual wage which is related to the Income
Tax Act must herald a radical reform of the tax base, for both
income assessment and poverty assessment reasons. A guaranteed
annual wage would require the generation of enormous amounts of
revenue, and the required amounts cannot be raised on the stunted
tax base we now have in Canada. The expansion of the tax base
must have the following features:
1. The abolition of personal deductions.
2. The inclusion of all capital gains.
3. The inclusion of gifts and inheritances made outside the
family unit as well as insurance proceeds and other accretions to
wealth.
4. Imputed income on the equity value of owner occupied
dwelling.
” Senate Report, op. cit., n. 2, Appendix Table 4A, at p. 214.
McGILL LAW JOURNAL
(Vol. 18
5. Imputed income of some return on all savings, whether cash
in the bank on what is popularly known as investments. 12
The question of personal deductions has already been briefly
canvassed. The personal deduction
is a regressive method of
exempting the first few thousand dollars of a family’s income in
order that the members might have enough to live on. The system
of direct grants which has been proposed will eliminate the need
for such deductions. It might be that for policy reasons, some small
exemptions would be given to children to exempt such things as
babysitting money or money earned delivering newspapers, but
this would be a departure from the norm and equity. Conceptually,
all income from the family unit, whoever earned it, would be
considered with no deduction whatsoever.
Capital gains must be included in any tax base as any derogation
from the treatment of capital gains as income is a major departure
from tax equity, one of the key goals of the negative income tax
system.
Again, gifts and inheritances transferred outside the family unit
must be included in any true assessment of income. We could hardly
have a situation in which a member of a single family unit was
financed totally by gifts –
and
still declare himself to have no income. Both points two and three
are merely restatements of the recommendations of the Carter
Report.
as for instance a college student –
The imputation of income of the equity value of owner occupied
housing is most important. Firstly, this would remove, to a great
extent, the current bias in the Income Tax Act against renters. 13
Secondly, it would close a loophole which would otherwise allow
tax free investment. And finally in the assessment of need, it would
clearly be a factor in determining a person’s position vis-h-vis the
poverty line. For instance, a person who owned outright a house
worth $25,000, but has no cash income whatever, clearly is in need
of money. But that person may not be poverty stricken. We would
12 With the exception of doing away with personal deductions which are
simply a logical feature of the Negative Income Tax scheme, the addition of
imputed income, and the refusal to have an annual deemed realization of
capital assets, the income base I am proposing is essentially the classic Haig-
Simons definition which was adopted in great measure by the Carter Report.
See K. LeM. Carter, Canadian Tax Reform and Henry Simons, (1968), 11 J. of
Law and Econ. 231.
13 Kitchen, Imputed Rent on Owner Occupied Dwellings, (1967), 15 Can.
Tax J. 482. See also, Carter Report, Vol. 3, p. 48.
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NEGATIVE INCOME TAX
not require such a person to sell the house, but rather impute
income to him. Thus at, say, 8%, there would be $2,000 annually
of income imputed. Since this person obviously is not in further
need of assistance with regard to shelter, we have a more genuine
method of assessing need. Of course, the cash grant at full figures
would be received each month, but there would ultimately be some
tax liability, based on the imputed income. At the same time, by
imputing income just on the basis of equity holdings, we are not
crippling young married people who are in the process of buying
a house with heavy imputed income on top of the non deductible
mortgage payments.
Much of the same reasoning applies to an imputed income on
savings. Normally, the amount would be perhaps 5% or the income
actually received, whichever is greater.14 This assessment would
apply to all property, with perhaps some specific exemptions to
reasonable amounts of personal property, probably limited to that
property which is depreciable plus some small added exemptions.
The problem here is that we cannot have people switching assets
into valuable objets d’art to avoid imputation. It goes without
saying that any property which carries with it imputation of income
will also be property which can yield a capital gain.
Once again, we would have a situation where a person who has
large holdings which give little or no return will have income
imputed for both the purposes of assessing his position on the
poverty scale as well as his liability for tax.
It is noteworthy that the imputation of income may have some
very desirable side-effects. It would discourage speculation in non-
income producing properties, such as raw land –
such speculations
historically having the effect of driving up prices on such a crucial
consumer product as housing. Secondly, there would be strong
shareholder pressure on corporations to pay out income at least
to the value of imputation. A continuing problem in this country
has always been the inability of the government to force companies
to pay out profits to shareholders.15 This might also give the govern-
ment a new weapon in the fight against foreign control –
by
14Thus, in the simplest case, there would be imputed income in any case
where the yield on capital failed to reach the prescribed percentage. If it
exceeded this percentage, there would be no imputation.
15 Section 105 of the former Income Tax Act and the transitional provisions
of the new Act are just two of the attempts made by the government to en-
courage a pay-out of earnings by corporations.
McGILL LAW JOURNAL
[Vol. 18
imputing at a higher rate on the shares of companies which do
not have 51% Canadian equity ownership.
In considering the tax base, we might look briefly at the deduc-
tion side. This would be an area of pure public policy for the
government. For example, would we allow deductions for charitable
donations? Would we allow deductions for money laid out to gain
or produce income? The answer to this is not certain because we
would have claims for deductions for money laid out on what we
now consider to be personal property because of the imputation
of income. At the same time, there are legitimate deductions which
are taken under the present Act which should be continued.
One area of importance which might be considered here is the
whole question of pension plans. My view is that pension plans,
including the Canada and Quebec Pension Plans could be continued
on a voluntary basis. But contributions to these should be on a
tax-paid dollar basis rather than a tax free dollar basis as at present.
Encouragement might be given, if it were thought desirable, by
imputing income in connection with such savings at a lower rate
than other types of savings. But in a system where everyone has a
guaranteed minimum wage, there would be no justification for
allowing the funding of such plans on a tax-deductible basis along
with the very important deferment of taxes which we presently have.
There are undoubtedly great administrative problems inherent
in any plan which required extensive imputation of income, but the
problems must be overcome to create a viable system. The policy
questions are rather more easy, and simply require a decision at
the top levels of government, decisions which will in all likelihood
be based on political and fiscal rather than conceptual grounds.
V Proportional Rate
For many years, critics of the existing tax system have suggested
that there is no reason for the progressive tax other than a soak-
the-rich notion. Put a little more elegantly, in their classic study
of the subject, Blum and Kalven suggest that there is no rational
reason why Western nations have adopted a progressive tax, other
than an attempt to redistribute wealth. 16 Even this rationale fails
16Blum and Kalven, The Uneasy Case for Progressive Taxation, (U. of
Chicago Press, 1953). One might also look at A. Kenneth Eaton’s classic
Canadian article on personal income tax, Essays in Taxation, Canadian Tax
Foundation, (1966), particularly his comments on proportional taxation at
p. 25.
No. 1]
NEGATIVE INCOME TAX
when we realize that redistribution has not occurred because we
have never had a proper tax base upon which to apply the progres-
sive tax.
Under the system proposed in this article, we have done away
with the two major stumbling blocks. By definition, under this
plan we are achieving a massive redistribution, and therefore the
classic notion of redistribution by progressivity becomes an ana-
chronism. We have also proposed a proper tax base upon which to
apply the tax rate, and therefore each person in the community is
bearing tax at a true and proper rate, namely, his share of the
cost of government.
The proportional tax, bearing in mind the lack of personal
deductions, also leads to great administrative ease, especially when
viewed from the vantage point of an employer withholding taxes
or a professional paying his quarterly tax bill. For those who do
not prepay taxes in any way, it also gives them a fairly accurate
view of what their tax bill will be on the basis of any given receipt.
My view would be that rates would be varied according to govern-
ment expenditures. Thus, the rate would be determined by an
analysis of the tax base and governmental expenditures. Some
suggested rates on the basis of 1969 figures will be suggested
below.17
VI Corporations
My basic view is that there is no need for any massive change
in corporate taxation. Most of the radical changes which I have
proposed will be implemented at the personal level.
There are, however, some adjustments which must be made.
Firstly, I would suggest that within certain limits, imputed taxation
would be applied to corporate investments not used directly in
generating “active business income” within the present meaning
of the term.18 Thus, we would not apply imputed income to the
losses or low yield of a manufacturing company which was under-
17 Throughout this article, I have attempted to use 1969 figures as these
are the latest figures available covering both revenue and expenditures.
1s This term is admittedly vague, but it is used in several places throughout
the new Income Tax Act, and we will soon have some judicial interpretation
of the scope of it.
McGILL LAW JOURNAL
(Vol. 18
going difficult times, but we would apply the concept to the holding
which represented non-active business income.
Secondly, we would do away with the low or split rate for
small corporations. In my view, such corporations must get aid
in the form of direct government grants, which are subject to
public and parliamentary scrutiny, and not through the all em-
bracing and unselective system which we presently have. A con-
comitant would also be that the selected rate for corporations be
at all times equal to, or greater than, the personal rate.
Finally, we would have to steel ourselves to the fact that there
would be double taxation of dividends. It would be unthinkable
that we would create a class of income which would bear tax at
a lower rate than other forms, especially when this class of income
is concentrated most highly in the upper income groups of the
country.
The treatment given to other entities, such as partnerships,
trusts, non-resident individuals and corporations which are taxable
would be questions of policy, but would be determined bearing
in mind the fact that we would not wish to allow situations where
there could be substantial avoidance of tax at the selected rate.
VII Cost of the Proposal
The two bugaboos which have up to now most often presented
serious consideration of a guaranteed income plan have been cost
and the disincentive to work. On the latter point, it is my view that
as long as the rate of tax applied is under 50%, there is no
disincentive effect. While there will always be isolated cases where
individuals will take advantage of the system, most experts agree
that until rates reach confiscatory levels, people will work when
there is an opportunity to work.
It is my view, unsupportable except by “gut reaction”, that
there would be no serious problem about people working under
this scheme, but there will be much more peace of mind in knowing
that the necessities of life will be provided even if there are
layoffs, large scale unemployment or other reasons for not working.
Studies of the disincentive effect of high taxation have been flawed
19 For example, a manufacturing company which had $2,000,000 of capital
assets used in manufacturing would have no imputed income on this capital.
But if it also held $1,000,000 in corporate securities, an imputed yield would
be mandatory. This is analagous, in some ways, to the proposed tax on
ineligible investments under the new Income Tax Act.
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NEGATIVE INCOME TAX
by the very small groups surveyed, but those studies which have
been done support the position I have put forward 20
The more crucial issue here is cost. The annual cost of such
a plan, using the Senate Committee family units as a guide, which
as I have pointed out, would be slightly inaccurate under my
formulation, would be as follows:
Family Unit
Size
1.0
2.0
3.0
4.0
6.2
Table 11121
E.C.C. Poverty
Line
$ 3,077,750,000
4,533,452,000
3,640,268,000
4,455,360,000
7,743,300,000
Senate Poverty
Line
$ 3,477,500,000
5,090,820,000
4,122,690,000
5,040,000,000
9,642,600,000
$23,450,130,000
$27,373,610,000
Now these are staggering figures when one considers that
total Federal Budgetary expenditure in 1969 was, including old
age security payments, just a little over 12 billion dollars. How
is the money to be raised?
Firstly, let us look at the savings envisioned at the federal level
alone.2 –
Family and youth allowances …………….
Old Age, Blind, etc. pensions …………….
Canada Assistance Plan ……………………..
*C.A.P. Opting-out grant, Quebec …………
*Indian and Eskimo direct welfare ……..
*Retraining Living costs ……………………..
Veterans Pensions ………………………………
*Conditional Provincial grants re welfare
other than opting out programs ……
$ 612,600,000
8,400,000
257,900,000
150,000,000
75,000,000
75,000,000
222,300,000
276,500,000
$1,677,700,000
20 Barlow, The Effects of Income Taxation on Work Choices, Study No. 4
for the Carter Commission, Queen’s Printer, (Ottawa, 1967).
21 Table 3 has been constructed from data taken from the Senate Report.
The family unit of 6.2 is the figure given by the Report as the averages size
of all families containing 5 or more persons.
22 These figures have been taken from the figures available in The National
Finances, Canadian Tax Foundation (1970-71). Those figures marked* are esti-
mates of the amount of overall allocations made to fund some particular
programme of which a portion goes directly for the support of individuals.
For instance, I have made an estimate with regard to the manpower retrain-
McGILL LAW JOURNAL
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I have not included in this figure amounts for Canada Pension
Plan, Old Age Security Fund payments and Unemployment Insurance
figures because, in normal times, special taxes levied and earmarked
for these programmes roughly equal the amounts paid out from
them.2 3 Of course, in times of high unemployment, for instance,
general revenues may be called upon to supplement amounts in
the Unemployment Insurance Fund.
Without looking at the provincial side of the picture, we have
a saving at the federal level of about 1.6 billion dollars plus a
return, in a sense, to the public of the moneys paid into the
three special programmes mentioned. In my view these three special
programmes need not be maintained on a compulsory basis, though
the Canada Pension Plan could be continued on the basis referred
to previously in this paper.
If, as I suggest, we are only to reform the personal side, an
elimination of personal and estate taxes would have, in 1969, cost
the government about 3.5 billion dollars. Therefore, our overall
programme must raise the amounts listed in Table 3 above, plus
roughly two billion dollars in added revenue. In other words, if we
were to apply the E.C.C. poverty line, personal taxation must raise
approximately 25 billion dollars, and if we were to apply the Senate
figures, we would have to raise about $30 billion. 4
What is the revenue potential of our proposed tax base? I must
hasten to say here that much of the estimate must be guesswork,
though I suggest educated guesswork.
Total personal declared revenue before deductions was ap-
proximately $46.5 billion.2 To this must be added the amounts
ing programme of the amount which goes to support the families during
the retraining period as opposed to the amount which goes to the actual
retraining itself.
23 If the overall scheme were implemented, the government could, I believe,
without too much soul searching, convert the money in these plans to general
usage, because the amount of the payments under the proposed system is
greater than the benefits available under any of the individual plans. These
moneys could fund the first month or two of direct payments until withholding
taxes started to flow in, which could be used for the continuing payments.
241 am conscious of ignoring the provincial and municipal side of the coin.
I would hope that insofar as money is saved at these levels, there would be
a reduction of retail sales taxes, certainly the most regressive taxes in our
present revenue system.
25 Taxation Statistics, Information Canada, (1971), covering the 1969 taxation
year.
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which were not declared, as for instance those amounts under $250
received by wives who did not file returns and those amounts
under $950 received by dependent children who did not file returns.
Full taxation of capital gains would apparently yield about
$800,000,000 though I personally feel this is a low figure.
In 1969-1970, the 7,514 taxable estates had a net value of more
than one billion dollars.26 We should bear in mind that in this
period, more than 150,000 Canadians died. The total value of their
estates must have reached a billion dollars. If we then consider
that insurance proceeds payable to living beneficiaries are not part
of the taxable estate, and clearly would be under our proposed
tax base, we could add even substantially more to the estimate
of the yield from the passing of estates.
Where we have no figures to go by, but must work on a purely
speculative basis, is the value of investments and equity in owner
occupied homes. Bearing in mind that we are counting in as
revenue the investments held by corporations, the figure might
run into the hundreds of billions of dollars.
For instance, in 1969, declared bond interest, bank interest and
dividends and dividends alone on personal tax returns reached
over two billion dollars. 27 If we assume that the average of all
these yielded a 4% return, we come to the conclusion that 50
billion dollars capital was personally held.28 If we added to this
the enormous amount of capital held by corporations plus the
addition to the capital base of property which produces no revenue
and therefore cannot be identified even roughly by the above method,
such as raw land, jewelry and precious gems, antiques, paintings
and so forth, a figure of $150 billion does not seem out of line 29
There are, unfortunately, no recent statistics whatever which
might allow a genuine estimate of the equity value of owner oc-
cupied housing in Canada. I suggest for the sake of argument a
26 Ibid.
27 Ibid.
281n my view, a 4% yield is probably a gross understatement, given the
propensity of companies to pay out a relatively small part of their annual
earnings to shareholders.
291 am aware that I have lumped together here, corporate and individual
holdings, though we are talking here about personal taxation. However, im-
putation of income on the corporate side at rates at least equal to individual
rates, will make the corporation tax yield much higher, and thus reduce the
amount which must be raised on the personal side.
McGILL LAW JOURNAL
[Vol. 18
figure of $50 billion, on the assumption that affluence and inflation
have sharply increased owner equity values since 1966.30
I therefore suggest that we have a base of capital assets of,
very conservatively, $200 billion. If we were to apply imputed
income to this figure of 5%0 per annum for capital and 8% for
housing, we would add to the tax base about $11.5 billion. We
would deduct from this the amount of revenue actually generated,
in 1969, the aforementioned $2 billion, which gives us a net addition
to the tax base of $9.5 billion. Thus, I suggest that in realistic terms
we have a tax base of about $60 billion.
The next step is to supply a rate of tax. If we were to use
the figures of the Senate, we would have to raise about $30 billion,
and therefore the rate would be about 50%. If we were to use
the E.C.C. figures, which would require the raising of $25 billion,
the rate would be roughly 42%.
VIII Conclusion
This article has been written with one goal in mind – to stimulate
debate on the topic of a negative income tax. The system which
I have proposed has some very clearly defined virtues. I suggest
that it is the ideal system for the recipient in that it removes the
stigma of poverty and welfare and provides each unit with a steady
flow of income which is not dependent upon external conditions.
It lends itself to a more equitable system of taxation in that there
is a radical reform of the tax base along the lines most tax theorists
view as appropriate and equitable. At the same time, it takes into
account imputed income of the person who by other standards
might be considered to be in poverty, and gives us a more genuine
assessment of his economic income as opposed to the cash flow.
There are several desirable by-products of the system, some
of which have been discussed and some of which have not. For
instance, it should stimulate the economy by putting cash into
the hands of those who’ spend a very high percentage of their
30 Kitchen, in his article, op. cit., n. 13, assumes a 1966 figure of about $42
billion. Harvey E. Brazer, Review of the Report, (1967), 15 Can. Tax J. 273,
estimates a revenue yield under Carter recommendations of $400-500 million
per annum. Using $50 billion as a base, and imputing 8% as income and
applying a flat rate of tax of 50%, we would have a yield of about $2 billion.
When the results of the 1971 census are available, much more precise figures
could be calculated.
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NEGATIVE -INCOME TAX
income, and remove income from many who put their savings into
unproductive use.
It may be that few parents see the shortcomings of their off-
spring, but this certainly is not the case here. There are two major
stumbling blocks: The first is administrative – and I am tempted
to say, merely administrative – for it is my view that any admin-
istrative roadblock can be overcome if a government is determined
to do so.
The second is a question of cost: On the analysis side, I am
the first to admit that there is a large amount of pure guesswork
in this article when it comes to the estimate of the capital base
for the imputation of tax. I would hope that this glaring weakness
will be taken by my critics as an invitation to do detailed work
in an effort to refute my estimates. It would be beneficial to the
country as a whole to have the accurate figures which I have so
boldly estimated in order to make a genuine assessment of the
feasibility of the plan.
The more perceptive will realize, however, that the accuracy of
my estimates, where guesswork has been substituted for data, does
not change the challenge which the system throws out. More ac-
curate figures will merely refine the rough edges and produce
more exact estimates of governmental savings under such a plan,
a more precise assessment of the number of family units, a more
precise estimate of the monetary needs of family units in disparate
parts of Canada, and a more precise estimate of the rate of tax
to be applied. I invite critics as well as friends to involve themselves
in data accumulation in the hope that ultimately all the necessary
facts will be available to the decision makers of our country.
Ultimately the challenge is this: are we simply going to talk
about the problems of poverty or are we going to do something
about them? We might as well recognize right now that any suc-
cessful attack upon the problems of poverty will take amounts of
money which are beyond present fiscal comprehension. But any
plan which does not have the elements I have described in this
system will only be a stop-gap measure and will not remove the
continuing problem of poverty in our society.
