In the summer of 1990, Mohawks from the Kanesatake reserve near Montreal held marches and erected a peaceful blockade to protest the planned expansion of a golf course in Oka, Quebec. The Mohawks claimed the golf course expansion would further encroach on their land. Early in the 78-day standoff, after the arrival of supporters from the Akwesasne reserve, police attacked the barricade with tear gas and flash grenades. Gunfire soon erupted and officer Corporal Marcel Lemay was killed.

What was the fighting about? Land claims, certainly, but also taxes. Most bands of Aboriginal Canadians have signed treaties with the federal government recognizing them as distinct nations within Canada, exempt from taxation. The government has a bad record of not fully honouring treaties, which has led to frequent disputes over territory. For some Mohawk reserves, issues related to taxation were never far away.

You could say the Oka conflict started with the Akwesasne reserve, which overlaps parts of Ontario, Quebec, and New York State. This was the centre of “tax-based” conflicts related to gambling and smuggling, starting in the 1980s. According to one source, by the spring of 1990, Akwesasne had become the fourth largest gambling centre in North America. More than a dozen casinos were bringing in millions of dollars, paying no taxes, and were not accountable to anyone, including Mohawk band leaders. The smuggling business and sale of tax-free cigarettes were similarly large-scale, very profitable, and depriving governments of many millions in tax revenue.

In early 1990, divisions within the Akwesasne reserve led to anti-casino blockades erected by Mohawks, violence, several killings, and the eventual intervention from Canadian and U.S. police forces. The casinos and alleged smuggling operations were shut down. A few months later, those on the losing side, eager to repair their image and regain strength within the Mohawk reserves, happily sent weapons and manpower to Oka.

And tax and land disputes continue. The sale of tax-free cigarettes remains a thriving business, providing impoverished people with income, but possibly dodging tax laws. In 1994, a Revenue Canada building in downtown Toronto was occupied for over a month by protesters reacting to a government plan to tax Aboriginal people and businesses for any income earned for work off-reserve (even if the employer was on a reserve).

There are two main (tax) morals to these stories. One, taxes are necessary: all governments need money to function. Without taxes, governments could not provide the services we want, from national defence to public parks. But taxes have a cost that normally exceeds the money actually paid to the government. That’s because taxes distort incentives to engage in mutually beneficial transactions.

And that leads us to the second moral: making tax policy isn’t easy—in fact, if you are a politician, it can be dangerous to your professional health. But these stories also illustrate some crucial issues in tax policy—issues that economic models help clarify.

One principle used for guiding tax policy is efficiency: taxes should be designed to distort incentives as little as possible. But efficiency is not the only concern when designing tax rates. As the government learned from the Revenue Canada occupation and the on-reserve gambling, it’s also important that a tax be seen as fair. Tax policy always involves striking a balance between the pursuit of efficiency and the pursuit of perceived fairness.

In this chapter, we will look at how taxes affect efficiency and fairness as well as raise revenue for the government.