If you own a 2015 LaFerrari, made by Ferrari, you can go from zero to 60 miles per hour (96.6 km/h) in just 2.5 seconds. Now, my wife Carolyn is the proud owner of a Nissan Versa and, according to MotorTrend.com, her car is the slowest from zero to 60, taking a lifetime of about 10.3 seconds. I haven't shown her these stats yet (and I won't, unless she reads this article – which is highly unlikely), but the findings do explain her complaints that cyclists are constantly passing her by.
Zero to 60 in a short time is good when it comes to cars. When it comes to taxes, we've gone from "zero to 50 in 100 years" – an observation made by the Fraser Institute in a series of essays titled The History and Development of Canada's Personal Income Tax. The year 2017 represents the 100th anniversary of personal taxes in Canada. Prior to 1917, personal taxes were zero. Today, the highest marginal tax rate in every province and territory in our country is approaching, or is more than, 50 per cent.
The start of taxation
The Income War Tax Act came into effect on Sept. 20, 1917, and was introduced by Sir Thomas White, the Finance Minister of the day. The tax was introduced to finance up to 100,000 additional soldiers, sailors and airmen that conscription at that time would provide for the war. Folks called taxation the "conscription of wealth." The tax was expected to raise about $15-million per year, and was to be re-evaluated at the end of the war for possible repeal. Well, clearly that didn't happen.
The tax was 4 per cent on income over $2,000 in the case of unmarried men, or widowers without children. Everyone else had a $3,000 exemption. If you earned $4,000 in 1917 (equivalent to $65,570 today), you paid $80 in taxes ($1,311 today) if you were unmarried, and $40 if you were married. The wealthiest taxpayers at that time paid a marginal tax rate of 25 per cent, for incomes over $100,000 ($1.64-million today). Today, Canadians earning more than $200,000 are paying a marginal tax rate between 47.7 per cent and 54 per cent, depending on your province.
The reform discussion
Now that we've tinkered with the tax system for 100 years, it's far too complicated and stifles growth. In 1917, the tax return was 23 lines long. Today, yours could be as thick as a small-town phone book.
In an essay written by Charles Lammam and Niels Veldhuis of the Fraser Institute, it's suggested that tax reform is overdue and two things should take place: (1) tax rates should be reduced to foster economic growth, and (2) the system needs to be simplified.
They build a credible argument. Economic growth in Canada has been sluggish and there's no reason to believe this will change any time soon. Why not introduce tax reform that will improve incentives to work, save, invest and foster entrepreneurship?
There are number of studies showing that a reduction in marginal tax rates will help to create economic growth. One 2012 U.S. study, by Karel Mertens and Morten Ravn, shows that a 1-per-cent cut in average tax rates raises real GDP per capita by 1.4 per cent initially and up to 1.8 per cent after three quarters.
Our current government has done nothing to make Canada more competitive on the tax front, or to use tax measures to spur on economic growth. Quite the opposite. Marginal tax rates are the highest they've been in about 20 years, and rates which were already uncompetitive internationally have increased for our most highly skilled and educated workers and business owners.
Talk about bad timing. Our cousins south of the border are apparently about to enjoy tax cuts under President Donald Trump's tax reform plan, making Canada even less competitive.
As for simplifying our tax system, the cost of administering the system today is massive. In the previous budget, the Liberals announced spending another half a billion just to beef up the tax audit and compliance process. By getting rid of today's myriad of tax deductions and credits (which all require keeping records, assessing eligibility and perhaps hiring a professional so that you don't miss any of them), the cost of compliance will shrink.
These deductions and credits simply narrow the tax base, driving marginal tax rates higher, and do little to provide incentives to work, save, invest, or be entrepreneurial. Mr. Lammam and Mr. Veldhuis suggest broad-based reductions to tax rates could be introduced – fostering economic growth – if the tax system is simplified by eliminating many deductions and credits.
How about zero back down to 35 in the next three or four years? Sounds like a plan.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.