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The Canada Revenue Agency headquarters Connaught Building in Ottawa on Aug. 17, 2020.Sean Kilpatrick/The Canadian Press

Aaron Wudrick is the domestic policy director at the Maconald-Laurier Institute.

Canada’s economic prospects appear bleak, with sluggish GDP growth and persistently low productivity. Growing fiscal restraints make it unlikely that further attempts to “stimulate” the economy through higher spending will remain a viable option for the federal government.

Accordingly, we should be looking at alternative ways to invigorate our economy. Tax policy in particular holds great potential, and it is vital that we recognize that there is more to tax policy beyond the simple dichotomy of raising or lowering taxes. The structure and complexity of our tax system are equally important factors that warrant careful consideration.

In this regard, the Washington-based Tax Foundation’s 2023 International Tax Competitiveness Index offers a valuable perspective. It ranks Canada at 15th overall among 38 Organization for Economic Co-operation and Development countries and provides a useful overview of both the strengths and weaknesses of Canada’s tax system.

Starting with the positives, Canada boasts a tax system that keeps consumption taxes at a relatively low level and with a relatively broad base. Businesses can swiftly write off investments in machinery, providing a powerful incentive to invest. Similarly, Canada refrains from imposing wealth, estate or inheritance taxes – tools that may sound politically appealing but carry significant detrimental distortionary effects.

The bad news is the tax burden elsewhere is heavy.

The personal tax on dividends stands at a whopping 39.3 per cent, substantially higher than the OECD average of 24 per cent. Similarly, the tax rate on capital gains (26.7 per cent) and the corporate tax rate (26.2 per cent) exceed the OECD average by 7.5 and 2.6 per cent, respectively. Perhaps worst of all, unless they are extended or made permanent, good policies such as the aforementioned equipment write-off are set to begin phasing out in 2024.

Make no mistake: Tax policy alone will not fix Canada’s sclerotic economy. But a sound tax framework is a solid foundation on which to build. As proposed by the Tax Foundation, two key principles should inform such a framework: competitiveness and neutrality. These principles will not only enhance economic performance but also promote fairness and sustainability in our tax system.

A competitive tax code is one that maintains low marginal tax rates. In a globalized world, capital is highly mobile, and businesses can choose where to invest based on the expected rate of return. This means that, all else equal, countries with lower tax rates on investments will attract more capital, leading to accelerated economic growth.

High tax rates, on the other hand, drive investment away. Research from the OECD reinforces the idea that corporate taxes have the most negative impact on economic growth, with personal income taxes and consumption taxes being somewhat less harmful. Notably, taxes on immovable property have the smallest effect on growth.

Moreover, a neutral tax code aims to generate the most revenue with minimal economic distortions. It avoids incentivizing consumption over saving, which can occur with investment and wealth taxes. A neutral tax system also minimizes targeted tax breaks for specific activities carried out by businesses or individuals.

As tax systems become more complex, they become less neutral. In theory, if the same taxes technically apply to all, but complicated rules allow large businesses or wealthy individuals to alter their behaviour solely for the purpose of capturing tax advantages, the system’s neutrality is compromised. A competitive, neutral and simple tax code can nurture sustainable economic growth and investment while simultaneously funding essential government priorities.

The time for tax reform in Canada is now. By pursuing a more competitive and neutral tax code, we can encourage investment, attract capital and foster much-needed economic growth – with the added benefits of ensuring fairness, minimizing economic distortions and generating the tax revenue needed to fund public spending priorities.

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