How much change?

The history of tax reform in Canada is a history of incremental changes. The result is an out-dated basic structure and an over-complex system.

In view of the dramatic socio-economic changes that are confronting Canadians, and the current review of social programs and other government expenditures, the time is right for a broader re-thinking of the revenue side of the equation - the tax system.

This means asking two basic questions:

1. Why Do We Collect Taxes?

2. What Should Our Tax System Try to Be?

and answering a third:

3. What are the Advantages of Re-thinking the Tax System?

1. Why Do We Collect Taxes?

There is a basic purpose and secondary purposes. It is now time to re-examine them and arrive at a new agreed purpose.

A Basic Purpose:

To collect the revenues needed to fund government services and transfers to individuals and other levels of government that the citizens are generally agreed are essential and desirable.

Current Secondary Purposes-

To use the tax system to effect certain socioeconomic policies of government. That is, to achieve policy objectives through the use of tax preferences.

A serious problem with using the tax system in this way is that unintended consequences of preferential tax measures can actually turn out to be counter-productive to the global goals.

Another major drawback is that using tax preferences narrows the tax base and puts greater burdens on those not treated preferentially.

An Agreed Purpose:

A compromise position, between those who want to adhere solely to the basic purpose of tax collection and those who believe that government should be able to use the tax system to attain its socio-economic goals, is the following:

To use the tax system mainly as an instrument of tax collection and limit its use as a tool of government policy to those tax measures that:

• Are agreed upon by a clear majority of citizens as necessary
• Will be more efficiently and cost-effectively achieved through the tax system than through direct departmental funding
• Will not result in unintended consequences whose costs are large relative to their intended benefits

   

   

2. What Should Our Tax System Try to Be?

The tax system should collect revenue fairly, simply, efficiently, productively, accountably and competitively.

Fair

Taxes should be collected in such a way that the more you earn the more you pay. This is the essence of true progressivity.

Simple

Taxes should be collected in such a way that taxpayers can understand, and therefore trust, the system. The system should be clear and concise, so that administrative and compliance costs may be minimized.

Efficient

The system should have minimal effect on decision-making, reduces dead weight losses owing to distortion of individual and corporate resource allocation.

Productive

The yield of the tax system must be sufficient to support the required operations of government.

Accountable

Preferences that persist in the system should be visible and open to regular parliamentary scrutiny.

Competitive

Taxes should be collected in such a way that workers, investors and corporations are not handicapped in global markets.

3. What are the Advantages of Re-Thinking the Tax System?

It is an opportunity to re-examine all the tax preferences that have become entrenched in the system. By starting with a clean slate, those who wish preferential treatment will have to justify why they need to be allowed to increase the burden of the average tax payer.

Embedded Tax Preferences

Many of these introduce harmful inequities and distortions to the system. Each one raises the tax rate for the average individual and corporate taxpayer.

Re-engineering the tax system will ferret out those that are no longer needed or would be better addressed through departmental budgets.

Justifying Preferential Treatment

Incremental changes always result in interest groups being able to put the government of the day on the defensive.

Radical change that starts from a broad tax base and requires justification for every base-narrowing measure that raises the tax rate for all Canadians and all Canadian corporations, puts the onus on interest groups to provide the justification.