Canada's Outdated Tax System

Reports by The School of Public Policy highlight need for increased emphasis on consumption taxes

CALGARY, April 11, 2012 /CNW/ - Two papers released today by The School of Public Policy reveal how Canada's tax mix is skewed towards income taxes rather than consumption taxes and why this is problematic.

The first paper, authored by Professor Richard Bird, shows that Canada's federal VAT -- the GST -- has been largely neglected over the past 20 years with the exception of some provincial harmonization. In fact, Canada has chosen to move away from VATs or consumption taxes as proven by the reduction in the GST to 5%.

The extent of this shift is put into perspective by Professor Sijbren Cnossen's paper, which offers an international comparison of how countries rely on consumption taxes versus income-based taxes. Cnossen finds Canada "to have a relatively high preference for taxes on personal income and property" in comparison to other countries with similar economies.

Cnossen contends that this is a mistake and that Canada would do better to increase its reliance on consumption taxes such as the GST and subordinate VATs.

Tilting the balance toward consumption taxes would benefit public revenues because demand fluctuates less than income; consumption is largely local, which means there is less tax avoidance; and the GST is less amenable to being co-opted for market-distorting political purposes.

The study can be found online at www.policyschool.ucalgary.ca/publications.

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