Yahoo Finance Tax reform cannot wait until 2015, Conference Board warns
It's been 25 years since comprehensive tax reform has taken place in Canada, meaning our current system is well past its "best before" date, suggests a new Conference Board of Canada publication.
"It should be reviewed with each generation (every 20-25 years). What tends to happen with each budget and change of government is people stuff new things into the tax system, often through tax expenditures or exemptions, and we never step back to look at the entire system," remarks Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada in Ottawa.
Due to a myriad of changes over the past two decades, our tax system has lost sight of the basic principles of efficiency, neutrality, and transparency, he says.
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, notes the Conference Board's report, "Reinventing the Canadian Tax System: The Case for Comprehensive Tax Reform". The report outlines four areas for action beginning with personal income taxes.
An efficient tax system should have a broad, stable and neutral tax base, the report reads. 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.
"If you do away with the 190 exemptions built into the tax code and reallocate that money, it would allow you to cut tax rates across the board," he says. "It's a question of how much appetite one has for reform.
A simpler, more transparent system would include:
the same three tax bracket structure as today to maintain a progressive system
a higher basic exemptionlower rates of taxation in each bracket
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).
"The fundamentals would be simplification, making it much more transparent, and allowing people to have a tax code that they can actually do their own tax form. It's a trade-off between tax expenditures and allowing governments to convert that into lower tax rates."
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.
GST reform?
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.
"It's time to think about broadening the (GST) base and if you're worried about the income effects you can then, for example, take the money you're saving by getting rid of tax expenditures and increasing the GST tax credit," Hodgson continues. "But the core principle is to broaden the base and trying to minimize the number of things that are exempt from tax."
Ontario went through the same debate when it introduced a harmonized sales tax (HST) where certain items were exempted from the HST such as buying property that's less than $500,000.
The logic of a broad, stable, and neutral base should apply equally to personal and business taxation, the report continues. 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 HSTs. But these adjustments have neither been undertaken systematically nor applied consistently across the country.
Corporate taxation
PricewaterhouseCoopers LLP reported last month that Canada's tax system was well ahead of G8 and BRIC economies with respect to the ease of paying taxes.
"Canada used to be able to trade with a dollar that was worth between 65- and 70-cents (US), that made a lot of firms competitive in the world ... then by 2003-04 the world started to change. China got fit into the global economy, commodity prices started to rise and our dollar started moving up," Hodgson recounts. "With our dollar at par, we've lost a lot of the price advantages that we had.
"(Minister of Finance Jim) Flaherty realized Canadian firms were getting squeezed by the dollar movement and now we're in a position where we've reduced corporate tax rates. I hear anecdotally that firms are now deciding to declare incomes in Canada for the first time so we may see a net positive revenue boost."
Regardless, effective business tax reform cannot take place without federal and provincial cooperation and coordination.
Taxing our bad habits
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 is two challenges that the tax system could play a greater role in alleviating.
Also noteworthy, 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, Hodgson adds.
It's critical for Ottawa to define a national policy that's aligned with the U.S. and a recognized global standard.
"Many corporations are building in an implicit carbon price in their investment decisions going forward. So they assume they'll end up in a world where we're putting a price on carbon," he says. "That's shaping their investment behaviour now."
