Compared to other Organization for Economic Co-operation and Development countries, Canada relies more on personal taxation revenues, which generally account for about 50 per cent of overall government revenues — that’s a big number — though it varies annually.
It is a rare event when governments reduce personal tax rates. In 2016, the purported rationale for the new high tax bracket was to fund a decrease in lower income tax brackets. But the plan — unsurprisingly — turned out to be a revenue loser.
It’s obvious Canada needs tax reform. Practitioners such as myself have been beating this drum for years and years. Extremely poor taxation policy over the past nine years has driven successful Canadians out of Canada. It has created extreme complexity in our taxing statute, which has contributed to the decreased administrative performance by the Canada Revenue Agency. The average accountant and lawyer has a hard time giving proper tax advice because of the complexity, and the average Canadian simply does not understand our taxing statute.
Some economists, such as Jack Mintz, have also been beating the drum that Canada needs tax reform. Mintz has been advocating “Big Bang” corporate tax reform in order to help improve Canada’s sagging economic growth and attract investment.
His proposal is based upon the model of Estonia, but modified for Canadian purposes. It’s a bold recommendation that a new federal government should consider because our current government clearly will not. If the Conservatives win the next election, they have promised to convene a Tax Reform Task Force within 60 days of getting elected.
But what about Big Bang personal tax reform? Canada needs to have broad-based personal tax reductions, especially in light of the recent outcome in the United States election. Our personal tax rates are simply too high. It’s not likely we can ever afford to compete head-on with the U.S., given our much smaller population and economy, but we certainly can try to narrow the gap.
Given our country’s large reliance on personal taxation revenues, can we do that?
The most common thing I often hear from the average Canadian is that we should have a flat personal income tax rate. The benefits, conceptually, are obvious: it would be much simpler to calculate tax liabilities, especially if a lot of deductions and credits are eliminated, and tax compliance would be simpler.
The problem with a flat tax is that it can be regressive if it is not properly designed. For example, if the flat personal income tax rate — in a single-rate system — is, say, 20 per cent, that has a much more material impact on lower-income taxpayers than on higher-income taxpayers.
The same can be said for the GST. The five per cent rate has a much greater impact on lower-income taxpayers than the higher ones. That is why the GST was originally designed to not apply to certain basic necessities of life such as food, clothing and most housing (except, for example, new builds). Education and health care costs are also exempt. Combine that with the GST rebate system and the regressive effects of the GST have been sharply reduced.
Using the example of the GST, could a flat-rate personal tax system be designed to eliminate or reduce the obvious regression associated with a flat-rate tax system? If so, should the flat rate be a single-rate system? Dual rate? If it gets to a triple rate, why bother since this gets away from the simplicity principle of a flat rate.
Could the actual rate be set so as to enable Canada to be more competitive for talent and result in all Canadians keeping more of their hard-earned dollars? Can this be done with a minimal net loss of personal taxation revenues? I say “net” because a key consideration will be how much government expenditures have to be cut to help pay for the taxation revenue loss. It shouldn’t be too hard to significantly reduce government bloat and waste.
A flat personal tax rate has been part of Estonia’s tax system since 1994 and it (along with its corresponding simplified tax compliance) has certainly been a contributor to its economic success. If Canada adopts such a model, Estonia would be an obvious place to look at for positive and negative experiences.
I’m hopeful that should the Conservatives win the next election, the Tax Reform Task Force will consider Big Bang personal tax reform. It just might be a great opportunity for all Canadians.
