Why Canada needs tax reform

With all the topic on day to day events, I thought it would be time to focus more on issues that matter but parties are afraid to tackle.  It seems every election, parties trot out various tax credits to try and win favours in key demographics.  Yet this is exactly the wrong policy and we need to move in the other direction of having a simpler tax system which would mean fewer credits but lower overall taxes.  After the backlash Liberals got on small business tax changes, no wonder all parties are skittish to go here.  Which is a real shame since if done right like in 1971, 1981, and 1987, we could reform the tax system in a way that would receive significantly more revenue which would give parties more flexibility, be it eliminating deficit, reducing income and/or corporate taxes, or spending more on big programs.  It is time as various chamber of commerce’s have asked for another major overhaul and I believe best to have it made up of various stakeholders and also done at senate level to keep politics out.  The three goals should be to make a tax system that is simpler, fairer, and more competitive.  This doesn’t even have to be overly partisan as I am sure all parties agree that two individuals making similar incomes should pay roughly the same amount in tax (only disagreement is what that should be), yet today it is possible for two individuals, particularly higher income ones to make similar incomes but paying vastly different tax levels.  Likewise I think all parties agree someone making more money than another should not be paying a lower rate.  Whether it should be the same as in flat tax or higher as in more progressive, people will disagree on, but I don’t think there is a single Canadian who thinks someone making 200K a year should have a lower effective tax rate than someone making 50K a year.

I would like to see as many tax credits scrapped as possible and only a few that help lower poverty rates for low income individuals or ones like RRSP allowed.  This would bring in billions of dollars in revenue and also it would return the tax system to what it is namely supposed to do: raise revenue rather than engage in social engineering.  I also think its time for someone to raise the GST back to 7%.  Parties need to get over their apprehension on this and realize raising it to that level is $16 billion thus opening many doors.  With that money, we could afford a universal pharmacare program, we could eliminate the deficit with no spending cuts.  And for other tax cuts, there are endless opportunities, be it drop the corporate tax rate federally to 8% making Canada once again below US levels, drop bottom rate to 11% (far more than Tories propose), raise minimum exemption to 17k and with growth we could in time raise it to the point no person below the poverty line pays any income tax.  We could eliminate the middle income bracket, eliminate the third or the fourth.  With the top bracket we could at a fraction of $16 billion reduce it so we go from on the highest top rates in OECD to one of the lowest.  I am not trying to say which we should do, probably a mix of all at a more modest level, but point being if parties could just get past their apprehension of raising the GST, we could open so many doors.  Reason Europe has a generous welfare state is their VATs are between 20-25% so using Ontario’s HST of 13%, if we raised our VAT to European levels, we would have $56 billion to $96 billion.  That is why European countries have a more generous welfare state, not because of higher corporate taxes or higher taxes on rich.  Likewise with an aging population and growth slowing, we need a more efficient tax system.  All taxes harm growth while all spending from tax dollars increases it so the goal should be to minimize harm of taxes while maximize growth from where we spend it.  As such most economists agree consumption taxes are least harmful to growth, income taxes fall in middle, while corporate are most harmful and thus why I think despite political pushback we need to shift more to consumption taxes.

Of the three principles I mentioned here is why I think they are important and the benefits we could gain from them.

  1.  Simplicity: Reality is asides from tax accountants few gain from a more complex tax system.  It means more man hours wasted on taxes vs. other productive activities.  It also means many especially wealthy can dramatically lower their tax take as well as tougher to catch tax evaders.  A simpler tax system would mean we could focus CRA resources on going after tax cheats rather than mailing refunds for those who over paid or sending notices to those who under paid.  Also if tax cheats know their chances of getting caught are higher, fewer will do it.  The fact is asides from tax accountants, everyone else is better off with a simpler one.  This need not be a flat tax although it could include this however I don’t think a flat tax would be desirable or pragmatic in Canada.
  2.   Fairness:  Fairness means two people making same income should pay similar taxes and as income rises the amount you pay should too.  Now off course there will be some disagreements here.  Right will argue we should have a flatter tax system as high marginal rates act as a disincentive to economically productive activities, while left will argue in favour of a more progressive one to reduce income inequality.  I believe if we eliminate enough deductions and tax credits it is possible to partially do both as 1971, 1981, and 1987 reforms did.  In each of those cases, number of brackets were reduced, top marginal rate fell, yet the average effective rate of top earners in each case went up due to fewer loopholes.  For income inequality, I believe programs rather than progressivity of tax system is far more effective.  Nordic Countries have much flatter tax structure than US does so little evidence that a more progressive tax system makes much difference in inequality but programs do.  Liberals’ UCCB is one that helps reduce income equality whereas middle class tax cut and raising top rate likely had almost no impact.
  3.  Competitiveness: We live in a global economy and if Canada is to succeed in the 21st century, we want to attract both businesses and top talent as well as retain them.  We also want to encourage people to engage in economically productive activities.  As such its important to ensure our tax system helps enhance competitiveness not reduces it as it does now.  Off course tax rates are not the only or even most important factor in competitiveness.  Things like infrastructure, education, and R & D play just as big if not bigger a role but the tax system should help augment those advantages not take away from it.

Later today or tomorrow, my next will tackle poverty, income inequality, and affordability.  Latter is a huge topic this election, while second was big in 2015 but less so than this time and first one we seem to forget about as the poor don’t tend to vote despite the fact lower levels of poverty don’t just help the poor, they benefit everyone.

UPDATE: Scheer has just promised a panel to do a whole review of the tax system so great news.  I just hope that whatever comes out will be implemented.

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