Comprehensive tax reform cannot wait until 2015

www.conferenceboard.ca

OTTAWA, March 23, 2012 /CNW/ - Comprehensive tax reform in Canada seems to take place once a generation, and the tax system is well past its "best before" date, according to a Conference Board of Canada publication, released today.

"Twenty-five years is a long time to go without examining the fundamental workings of the Canadian tax system," said Glen Hodgson, Senior Vice-President and Chief Economist.

"Our tax system has lost sight of the basic principles of efficiency, neutrality, and transparency, due to myriad changes that have been added over the past two decades without regard to how the entire tax system is functioning. It is time for this generation to consider how the tax system can be reinvented."

In the fall of 2011, the Finance Committee of the House of Commons recommended that an expert panel undertake a fundamental review of taxation once fiscal balance is restored in 2015-16. While this is the right approach, the proposed timing is several years too late. Tax reform should be part of the plan to deal with structural challenges within our economy - principally an aging population, workforce shortages and the strong dollar.

The Conference Board briefing, Reinventing the Canadian Tax System: The Case for Comprehensive Tax Reform, outlines four areas for action. More analysis, modeling, and debate will be required on these ideas for reform before any changes are implemented, including detailed assessments of the effects on all income levels.

Simplify Personal Income Taxes and Reduce Rates
When it comes to personal income taxes, Canada has drifted far from the ideal. An efficient tax system should have a broad, stable and neutral tax base. There are now 190 tax expenditures or exemptions at the federal level - about half of which apply to the personal income tax system and half to business taxation. These cost the government approximately $100 billion in foregone revenue annually.

A  simpler, more transparent system would include: the same three tax bracket structure as today to maintain a progressive system; a higher basic exemption; lower rates of taxation in each bracket; and many fewer exceptions -unless they are a high public policy priority and provide demonstrated value for money (such as the retention of the Goods and Services Tax credit).

Shift Personal Taxation Toward Consumption
As more Canadians retire from the workforce or work fewer hours, income available for taxation will grow at a slower rate than at present. Shifting the balance of personal taxation to consumption would help to sustain the revenues needed to fund government programs. Consumption taxes have the added advantage of being a more stable revenue source for governments through the business cycle.

A higher goods and services tax and/or provincial sales tax rate would be the outcome. But the GST itself should be reviewed and modernized, and other provinces should be encouraged to harmonize their sales taxes with the GST. These adjustments should be combined with transparent income tax reductions.

Simplify Business Taxation
The logic of a broad, stable, and neutral base should apply equally to personal and business taxation. Governments have made efforts to improve the business tax climate in Canada, through lower corporate income tax rates, elimination of capital taxes in some jurisdictions, and harmonized sales taxes. But these adjustments have neither been undertaken systematically nor applied consistently across the country.

Effective business tax reform cannot take place without federal and provincial cooperation and coordination. Business tax reform and simplication should reduce the dead-weight cost to businesses of tax compliance as well as reducing unproductive activities by firms in which they take business decisions simply to minimize taxation.

Enhance Taxation of "Negatives"
The tax system could be used more aggressively and consistently to put an explicit price on what economists call "negative externalities." Environmental degradation or socially undesirable behaviour are two challenges that the tax system could play a greater role in alleviating.

Carbon tax:  Pricing carbon would create a financial incentive for businesses to innovate and reduce the production of CO2, and would spur consumers to shift their pattern of consumption away from CO2-intensive products and services.

A number of provinces have introduced carbon taxes in some form. However, the federal government has yet to act in this area, and there is little discernable coordination on carbon taxation taking place with major trading partners or among the provinces. Carbon taxes would impede economic growth in the short term, which reinforces the importance of introducing other tax reforms at the same time to help boost productivity growth and mitigate the negative impact.

Population health: Rising obesity rates contribute to related chronic diseases such as diabetes, hypertension, circulatory and heart diseases, and even cancer. As policy-makers and business and community leaders examine ways to improve population health, the possible role of taxation merits consideration.

The Executive Action briefing is available at www.e-library.ca.

Brent Dowdall, Media Relations, Tel.: [phone] ext.  448
E-mail: [email protected]