Jack M. Mintz is President's Fellow at the School of Public Policy, University of Calgary. He was head of the Technical Committee of Business Taxation in 1997.
It's good that Finance Minister Bill Morneau has announced a review of tax expenditures. I would go further. With low normal growth, Ottawa needs to jolt the economy by revamping Canada's overall tax structure for the first time since the tax reforms of 1986-87. We should broaden the tax base, lower marginal rates and shift reliance on to the less economically harmful taxes to encourage investment, risk-taking and entrepreneurship.
Tax reform is not about raising or reducing revenue, since the revenue requirement is ultimately determined by government spending. Instead, the aim of tax reform should improve the tax structure, given that a certain amount of money is needed to "feed the beast."
A framework would enable governments to adjust taxes over time to achieve better results. Those countries that have had better growth rates are also those that rely on consumption-based taxes, rather than income and transfer taxes.
The recent federal budget demonstrates that the Liberal government should develop a tax-reform framework to guide its budgets in the coming years. Some measures, such as dropping the child fitness tax and arts credit, were appropriate. Simplifying the child tax benefits was a good idea. Freezing further reductions in the small-business tax rate arguably avoids increasing distortions between big and large firms.
On the other hand, raising the top income-tax rate to one of the highest among industrialized economies will hurt investment and entrepreneurship. The reintroduction of the Labour-Sponsored Venture Corporate Credit was a miscue, as the program has been vitiated in study after study as harmful to the venture-capital industry. So, too, is the extension of the mineral-exploration tax credit, shown to lead to uneconomic results. A teacher tax credit was no better than the plethora of targeted credits introduced by the former Conservative government.
However, the current budget should not be faulted alone for its directionless tax policy. The Canadian tax system is fraught with distortions and complexity built up over the years. Tax credits, accelerated depreciation, differential corporate and dividend tax rates, preferential capital-gains taxes (relative to dividend taxation) and a host of other provisions have made the personal and corporate income tax convoluted and detrimental to growth.
Even the GST, so beloved by economists, is loaded with exemptions and preferences, with a mediocre efficiency compared to value-added taxes around the world. It would be nice to rely on it as a pure consumption tax, but the federal GST could be reduced by two points if it were implemented like New Zealand's.
Governments are also looking to raise other taxes on Canadians, be they transfer taxes, property taxes or carbon levies. We need a comprehensive review to determine which taxes make sense and which should be discarded as unfair and distorting.
Major tax reform is no simple matter. The best system minimizes economic distortions and is fair, keeping administrative and compliance costs as low as possible.
Pursuit of such worthy objectives on a revenue-neutral basis, however, typically leads to winners and losers, with losers screaming the most.
Nevertheless, we have seen some successful reforms. The 1972 income-tax reform that led to the introduction of capital-gains taxes was significant because many taxpayers were able to convert taxable income into tax-free capital gains. We lowered tax rates, adopted a better approach to international taxation and improved corporate and personal taxation of shareholder income.
The 1972 reform was by no means perfect, but then successive governments created a mesh of tax incentives leading to distortions, especially among businesses, many of which could no longer use tax preferences as they became non-taxpaying.
Canada then took on a major corporate-tax reform in 1986 to lower rates and reduce investment-tax credits and other incentives.
The federal government followed with personal-tax reform, and introduced the notion of converting the manufacturers' sales tax into a broad-based consumption tax that eventually led to GST adoption in 1991.
Other reforms followed, included the harmonization of provincial sales taxes with the federal GST for every province east of Manitoba. The federal and provincial governments reduced personal tax rates after 2000.
In response to the 1997 report on business reform, both federal and provincial governments turned Canada's business tax structure around from the most onerous to the middle-of-the-pack among industrialized economies.
Facing pressure to innovate, to grow our exports, to attract investment and to encourage skills training, Canada's tax system should be reviewed on a comprehensive basis.