By Greg Clark, February 2, 1924
It Pays to Marry. But It Doesn’t Pay to Spend Money. Build a House or Have a Stake in the Community – The Floater Keeps Himself Liquid and Escapes Heavy Taxation.
When old John Doe died his estate amounted to only ten thousand five hundred dollars, and as he left it to his two sons in equal shares, no succession duty tax had to be paid on the estate to the Ontario government.
After the funeral’ expenses, debts and probate changes had been paid, there were exactly five thousand dollars left to each of the sons, John H. and Harry J. Doe.
Harry was the cute member of the family, always had been. He was married, but had no children. He was a traveler for a textile concern and lived in a fashionable apartment and had a good car.
Harry took his five thousand and put it at once into Ontario six per cent bonds, which he got at par on issue.
John Junior, was married and had five children, three of them over sixteen, but going to college.
John was bothered what to do with his five thousand. Should he pay off a bunch of debts, or should he get the new big touring car the boys wanted, or should he invest it?
He finally decided to build a house.
So he selected a good lot on a north end street, and went ahead with a house that cost him, in the end, twelve thousand dollars, house and land.
The five thousand cash went into materials for the house. He gave a mortgage for the remaining seven, which covered land and labor.
At the end of the year this is what had happened to the five thousand dollars of the two men.
Harry, that foxy lad, received from his $5,000 bond interest at 6 per cent., or $300.
John Junior first paid a transfer tax to the Ontario government on his $4,000 lot of $8.
He paid the workmen’s compensation tax of the minimum of $4 when the contractor put it in the bill.
On his materials, which cost $5,000, he paid the 6 per cent sales tax which, though paid at the point of production by the manufacturer, was nevertheless included in the cost of the material. So right there, John paid the dominion government a tax of $300.
The city assessment department assessed his new property at $9,000, and John was presented in due time with a tax bill of $300.
So, while Harry’s $5,000 brings him in $300 interest from the government, poor John’s five thousand gets him into a position where the various authorities tax him a total of $612.
Now, both Harry and John earn salaries of $5,000 per annum.
Harry, with this bonds, thus earns $5,300 a year. Being married, he is exempt $2,000.
John earns $5,000 and is exempt $2,000 as being married, and the dominion exempts him $300 for each child under sixteen. This only exempts him $2,600, as three of his children are over sixteen and going to college. But the city exempts him for the whole five children.
Foxy Harry’s Plan
But of his salary Harry saves $2,000 cold cash a year. He does it this way: With his five thousand bond from his father’s legacy as security, he goes to the bank and has the bank buy him $2,000 six per cent industrial bond at par. Then he pays $166.66 a month to the bank, purchasing one bond in one year. The bank charges him interest on the loan, but Harry gets interest on the bond. It works out very nicely at six months’ interest exactly. So Harry pays the bank $60 for the transaction, and gets $120 interest from the new purchase of bonds.
Now, the dominion income tax allows Harry to deduct the $60 he paid in bank interest for the purchase of the bond amongst his exemptions. The city assessor does not.
Harry, who is a traveler, uses his fine new big car in his business. The dominion income fax allows him 25 per cent, depreciation the first year plus his upkeep and repairs. This comes in Harry’s case to no less than $1,200. He keeps an itemized account of the cost of gas, oil and repairs.
So Harry pays income tax as follows: To the dominion, $5,000; salary, plus $300 bond interest, plus $120 new bond interest, less $2,000 married exemption, less $1,200 car expenses, less $60 carrying charges on the new industrial bond, or $2,160 taxable income, which at 4 per cent. makes a tax bill of $86.40. To the city income tax he is not exempt the $60 interest, and he is allowed only 20 per cent. depreciation on his car, plus upkeep and repairs. So Harry pays the city on taxable income of $2,330 at 33 1-3 mills, which renders bill of $69.60.
Now we come to poor old John.
John’s $5,000 salary is exempt $2,000 for being married plus $300 per child under sixteen by the dominion. He is therefore exempt $2,600. He pays the Dominion government # tax bill of $96. For while John has a car, he cannot, by any stretch of the imagination, describe it as an essential to the carrying on of his business. It is a family car. It is for the pleasure of his family of five children.
To the city, John pays a bill of $60. He gets no deduction for the money he has soaked into the building of his house, to the benefit and improvement of the city. He cannot deduct the $300 taxes on his new property.
“Why should he?” asks Harry.
On that cursed mortgage of $7,000, at 7 ½ per cent., poor John pays Interest of $525 per annum, not to mention reduction of principal.
Does he get exemption on that interest? Certainly NOT!
So while Harry, with an income of $5,420, on which to support a wife, a car and pays rent, expends a total in taxes of $156, John Junior, on total income of $5,000, on which to support a family of seven, a car, but owning his own house, a stake in the community, pays taxes totaling no less than $456.
Poor Old House-Owner
It is a wonder poor John hasn’t committed suicide on me before this. I will be glad to get this story written. It is positively pitiful the pickle we are getting John into.
For we are not through with him yet.
What is left of John’s income after he has paid all these taxes and charges on his new property and mortgage, he uses to the last nickel in keeping his family clothed and fed.
And on everything he buys for the use of his family, save only such food as is a direct product of the farm (not all food, remember), on such items as clothing, boots, tobacco, pies, cakes, hair nets, books, furniture, utensils, gas, oil, every mortal thing a family of seven buys from day to day, he is taxed another six per cent, by the Dominion government.
Of course, the tax law says this tax shall be paid at the point of production, but of course again, the people at the point of production are only the collectors of the tax for the dominion.
The tax is paid by the consumer of the goods. It is passed on. It isn’t the famous “turnover” tax they are talking about, but it is turned over, just the same. It is turned over and over until It reaches John.
“I wish,” says John, “they would invent a non turnover tax.”
So suppose John spends $3,000 of his salary (for he spends every cent of it) on manufactured goods which are taxed six per cent: then John pays the dominion another lump of cash – to wit, $180.
We have said nothing whatever about the biggest tax burglar of all, that lays for both John and Harry, but which gets to them only insofar as they are spenders of money. And that is the tariff.
The tariff, ranging from 15 to 35 per cent., is a tax not merely on what comes over the border – in which case the government gets the money again – but also on all things that don’t come over the border, for clothes made right in town, for example, cost what they cost plus what they would cost if they came over the border. That is, lest the American clothes which have to pay 35 per cent. duty on crossing the line, be put at an unfair disadvantage in the stern world of business competition, the Canadian manufacturers of clothing add on thirty-five per cent. too, to do the sporting thing. This Is one way of looking at it, as John says.
The Tariff Burglar
How much out of his $5,000 salary John pays the government through the tariff, through the extra money he has to pay resulting from the tariff, cannot be arrived at. But it is a hefty amount. For it involves not any piker 4 per cent or six per cent., like sales and income taxes, but 35 per cent…
It is so vague and veiled a thing, this tariff burglar, that John can’t visualize him, can’t feel personal about him. So John vents most of his feelings on the two or three taxes he can visualize.
This one year, in which that five thousand dollar legacy came like a blight into his life, John pays out: $300 sales tax on the building of the house, $300 property tax to the city. $156 income taxes, $180 sales tax on the things he buys to keep house. In addition he pays $525 interest on his mortgage. John is so hard up. he tries to borrow a few hundred from Harry. But Harry quite justifiably takes the view that John is in such circumstances it would not be safe to lend money to him.
So John borrows a little from a bank, at 7 ½ per cent.
What about Harry? He saves $2,000 out of his salary, so there is no sales tax on that. It isn’t spent. Having only his wife and himself to keep he doesn’t spend much on food and raiment. He spends some on golf fees and other club fees, which aren’t sales. He spends other sums, having a good time. Say he spends $2,000 on living the year.
Harry slips the government only $120 via the sales tax.
What is the moral of this sad story?
It is pretty clear.
Marry by all means: it exempts you $2,000. But don’t have any children, and don’t spend money, don’t build a house, don’t go and do that most foolish of all things, from a financial standpoint – don’t go and get yourself stake in the community.
Keep liquid. Buy bonds. Rent your flat. Then when times are hard, you can move to the States.
And when times are good, you can move back home.
Keep yourself liquid. Taxes say so.
Editor’s Note: I think the point of this article is that the taxes are too high, or at least not distributed in an appropriate manner, but the examples used do not make the point very well. Of course if John has five kids with 3 in college, he is going to have it tougher that Harry with no kids. Plus John is working towards home ownership which has value, compared to a renter.