only, then, did Laurier’s plan envisage taming, to the extent possible, American protectionism,28 opening US markets to Canadian exports, it also envisaged attracting capital, enterprise, and above all people from under the American eagle’s nose. This he planned to do by making it clear that people who came to Canada from south of the border or beyond the seas would find in the Dominion a society of free men and women where everyone was expected to work hard, and where, if they did so, they would keep more of the fruits of their labours than anywhere else, including the United States of America.
Laurier didn’t merely willingly grasp the baton that was handed to him by his predecessors and the founders of the Dominion; he took it to be his duty and obligation to keep the burden that government imposed on taxpayers light and unobtrusive.
In this regard, he was himself a major tax reformer, for he believed that it was not enough to keep taxes low; it was also essential to impose the right kind of taxes and to the right degree.
Taxes were, of course, a rather different affair at the beginning of the twentieth century than at the beginning of the twenty-first. To understand Laurier’s plan on taxes, one must realize that the major source of tax dollars for the Dominion government was not the income tax, a tax that was only to emerge with the exigencies of war in 1917,29 nor the sales tax—it was the tariff on imports.
A tariff is a tax imposed on the value of imported goods. What we forget today, when governments have the administrative and technological know-how to impose and collect far more sophisticated and efficient taxes, is that tariffs can have their virtues in simple colonial societies. You can concentrate the machinery of taxation at the points of entry into the country, making the costs of policing relatively light. The revenue authorities need little in the way of coercive or surveillance powers over the domestic population, because the tariff is paid directly by those importing goods from abroad, and that tax is then passed on indirectly to consumers by being included in the final price.
Used to thinking of tariffs exclusively as a weapon in the protectionist’s arsenal today, we forget the extent to which they were a simple and efficient way to generate cash for government a century ago. Indeed, they were the chief source of revenue.30 Customs duties constituted at least 60 per cent of federal revenues from 1866 to 1917, a fact that finds a faint echo even today in Ottawa: control over tariffs falls, not under the jurisdiction of the Department of Foreign Affairs or International Trade or even Industry but that of Finance.
So as someone who believed that the tax burden should be kept light and simple, and who believed ardently as well in the principles of free trade, Laurier had his work cut out for him in tariff reform. He was dealing with the most important source of revenue the government enjoyed.
The competing principles that might guide thinking about the tariff were, on the one hand, that government should interfere as little as possible in the choices people made, including the choice to buy imported goods over domestic ones, and, on the other hand, the wish to keep the cost of raising revenue as low as possible. The solution, Laurier thought, was major tax reform: the steady move away from a “protectionist tariff ” and toward a purer “revenue tariff.”
The distinction today may seem a fine one, but then it was an important shift in policy. In the years prior to Laurier’s rise to office, the protectionist role of tariffs had risen steadily to the fore. A protectionist tariff confers major benefits on domestic producers competing with imports. Naturally, the domestic lobbies, particularly for manufacturers, push the government to make its tariffs fall most heavily on their foreign competitors, rather than making the tariff a relatively neutral one, falling more or less equally on all kinds of imports. Not only did the tariff, as it grew up under the National Policy, pit manufacturer against importer, but it pitted, for example, the free-trading West against Central Canada’s manufacturers, exacerbating regional tensions in the young country.31
A tariff is, by its nature, not economically neutral in its effects; it falls by definition on products coming from the outside, conferring an advantage on domestic production. That being said, however, the tariff itself could certainly be arranged in different ways. It could be used to favour domestic industries by placing its burden most heavily on industries in competition with domestic producers. Alternatively, its burden could be made to fall more or less equally across all imported goods, getting the government out of the business of using tax policy to favour some groups and industries over others.
Laurier’s view, and it is one that has been shared by many of the historians who have come after, is that under the Tories, who had ruled with only a brief interruption since 1867, the tariff had become infected with politics, its revenue-raising role playing second fiddle to that of selective protection for favoured industries.32 Originally, Laurier and the Liberals, guided by Edward Blake, their former leader, had been pure free traders, but after suffering electoral defeat on the issue, and given the Americans’ manifest lack of interest in reciprocity negotiations, the Liberals trimmed at their 1893 policy conference, preferring tariff reform to outright abolition, at least in the short run.
This was done over the objections of Laurier, who proclaimed himself not only completely committed to free trade with the US but ready to adopt a customs union33 with a single set of common tariffs and a pooling of the revenue that resulted—a policy of deeper integration with the United States than that which exists today.34 But while Laurier would have preferred full steam ahead on free trade, he accepted that it was not going to happen any time soon, and once in power set about reforming the tariff. As John Dafoe wrote of Laurier’s new policy, “A deft, shrewd modification of the tariff helped to loosen the stream of commerce which after years of constriction began again to flow freely.”35
It was not the free trade, plain and simple, that a campaigning Laurier in earlier years had promised the West, and a revenue tariff, dress it up as you will, is still a tariff—but an important start had been made in getting the politics out of the tariff.
Even beyond that dilution of politics in the tariff, in another echo of modern practices of reciprocity in trade liberalization, Laurier’s government introduced for the first time a tariff that would recognize and reward the efforts of countries that opened their markets to Canadian goods. In the words of Laurier’s minister of finance, William Stevens Fielding, there would now be “one tariff for countries which are willing to trade with us and a different one for countries which are not.”36
The other aspect of Laurier’s plan to keep government small and costs under control was government borrowing. Laurier and Fielding were not anti-debt zealots. In most years, they borrowed a little. On the other hand, what constituted an acceptable level of borrowing for Laurier and Fielding was strictly limited by the interplay of three important factors.
First, given the extent to which the government was investing, as we have seen, in the development of a great deal of what we would call today infrastructure, and given the limited size of the borrowing in any year— usually well below 1 per cent of gross domestic product (or GDP)— borrowing was clearly being used solely to finance genuine investment.37 Laurier was not borrowing to pay for current expenditures, such as civil service salaries or public services. He limited debt to its proper use: to finance assets with a long productive life, spreading the cost of their construction over a long period so that all of the people who benefited from them over time would contribute to their cost.38 As Fielding explained, “In a new country like Canada with a great many public works requiring to be assisted with many demands on the treasury, it would not be surprising that each year we would not only be obliged to spend our ordinary revenue but to incur some debt in order to carry on our great public works.”39
Second, borrowing, which allowed the government to spread the cost of major investments over time, made an important contribution to Laurier’s objective of keeping
