Taxes happen. Shouldn't they at least be smart?
As governments look to deliver on their mandates and help the ever-pinched middle class, few if any look to tax policy or tax reform as an answer.
That is a shame, because tax policy is one of the most powerful public policy levers available to government. When a tax system is smart, taxes enable governments to generate revenue while also enhancing the living standards for all citizens. Taxes create incentives and barriers for personal choices and investments. It is important that governments have an accurate understanding of the costs and benefits associated with certain tax credits.
Ontario has dramatically improved its tax system in recent years by introducing the harmonized sales tax, phasing out the capital tax and lowering corporate taxes. The result has been a marked decrease in the marginal effective tax rate, making the province a destination for business expansion and foreign direct investment. However, there are always new ways to modify tax policy in a manner that spurs growth, investment and competitiveness.
We at the Institute for Competitiveness and Prosperity have taken a close look at the areas of personal income and business taxes, at both the federal and provincial levels. Our new paper on the subject, published Monday morning, outlines several ways in which our tax system could be smarter. A smart tax system ensures taxes are proportional to one's ability to pay and minimizes economic distortions. A smart tax system rewards actions that benefit society, such as investments in research and development and in education, and discourages actions that have hidden social costs, such as smoking or pollution.
On the personal tax side, the time has come to revise the Basic Personal Allowance so that it can truly benefit those at the lowest end of the income scale. Our tuition and education credits could be converted to grants, thereby reducing tuition by some $1,900 per student. Finally, targeted tax policy measures such as the Children's Fitness Credit and the Ontario Clean Energy Benefit should be reviewed for effectiveness, or eliminated.
On the business tax side, much has been done to reduce corporate taxes and spur economic growth. However, the Institute recommends that governments adopt a principle of neutrality, so that all industries are seen as equal, rather than giving some a leg up. Most importantly, we should shatter the myth that our provincial economy is driven by small businesses, phase out the small-business tax deduction, and use the proceeds to provide incentives for economic growth across the board.
Tax reform is hard work, but the benefits are enormous. With fresh thinking and political courage, Ontario and Canada could have a more equitable, effective and efficient tax system that can increase our prosperity and competitiveness. With greater consideration of the broader effects of current tax measures, Ontario can ensure it rewards the right actions and puts more money back into the pockets of people who need it. If our recommendations were followed, a significant amount of funding would become available to federal and provincial governments for reallocation to meet public policy goals. That is an opportunity that could capture the minds of the public and elected officials alike.
Jamison Steeve is executive director for the Institute for Competitiveness & Prosperity and the Martin Prosperity Institute, at the University of Toronto's Rotman School of Management