Fifteen years ago Canadians welcomed the most significant tax reform in 50 years. The tax reform of 1971 followed more than a decade of criticism that the system was unfair, too complex and so patch-worked that provisions and incentives were working at cross-purposes. The Royal Commission on Taxation placed its primary emphasis on the need for the tax system to be fair. Not all the recommendations were later implemented in the Income Tax Act, but enough endured to influence the tax system we face today. Needless to say, we have a more complex system than ever. What is less obvious is that some of the most complex provisions of the act are designed to ensure that all taxpayers are treated equally.
The irony is that the complexities themselves—pension income deduction, interest and dividend deduction, provision for dividends received by a spouse, transfer of education deduction to a supporting parent and so on—have become a barrier to equality because the people they are designed to help can’t understand them.
It also seems unnecessary to say that the tax system is cluttered by a myriad of incentives designed to achieve numerous economic objectives. Investment tax credits, fast writeoffs of depreciable property to stimulate investment, regional incentives to help less developed regions of the country, others to help the film industry or scientific research—all of them made sense to someone in the bureaucracy when money was no object in the golden years of the 1960s and 1970s. But times are tougher now and it is evident that some of these incentives do not deliver the appropriate response, while the ones that do set a cost to the public purse that, in many cases, exceeds the benefits.
In our current rush to economic efficiency, there are indications that Canadians may be in for a reform of the tax system as dramatic as the reform of the early 1970s—but with none of the fanfare. Says David Laidley, a partner with the accounting firm Touche Ross: “Instead of trying to build a new boat to replace the leaky old one, we may be looking at an entirely new method of transportation.”
If Laidley and other tax experts are right, the “new method of transportation” will represent a 180-degree turn
in the philosophy that has governed the Canadian tax system since it was devised. Our present system taxes income, which is the proxy for all that a person puts into the economy. The policies of the Conservative government now lean in the direction of taxing consumption, which reflects all that a person takes out of the economy.
Four specific items support the conclusion that consumption taxes will proliferate in the next few years, while income taxes will recede. First, there is the minister’s statement that his next budget will introduce fundamental changes to both personal and corporate taxes. Second are provisions in the February budget that eliminate the investment tax credit and lower corporate tax rates. Third, there is the statement by the finance minister that a discussion paper on a business transfer tax will present options for replacing manufacturers’ sales tax with a
The complexities of our tax system have, in effect, become barriers to the people they were designed to help
broader tax that would include services as well. Finally, there is the recent introduction of a minimum tax with no distinction about whether the income represents capital gains, dividends, rents, wages or salaries.
This new philosophy of efficiency sits well with Canada’s bureaucrats, just as it does with their counterparts in other industrial nations. A consumption tax is simple to administer: it would likely consist of one fixed tax rate, rather than the dozen or so marginal rates at which income taxes are collected. It is more difficult to avoid paying than income taxes are. It appeals to the belief that if Canada is to restructure its economy, vast sums of money for investment and social programs will be required in the next 20 years. Encouraging people to make money by not taxing it and encouraging them to save and invest it by taxing them when they spend is the newest thinking in public finance.
The finance department is well ahead in its plan to reform the system. It would like to put the business transfer tax in place in the next budget,
likely with the blessing of even the small-business sector, which views it as a lesser burden than a value-added tax (VAT), which would have added layers of taxes at each stage of the production-distribution process. Once the business transfer tax is in place, it will be a simple matter to make adjustments, depending on how much revenue is raised. If it works well enough, a full VAT could be instituted to enhance government revenue, and the income tax phased out. The single exception would be the minimum tax, which took effect last January.
The obvious criticism of a consumption tax is that it is regressive: people with lower income dispense proportionately more of their income for taxes, leaving less funds for savings. This concern spelled the death of the “flat tax,” a plan to institute a single tax rate on all incomes. That issue never found enough support even to create public debate. Now, Finance Minister Michael Wilson has approached tax simplification from another direction by introducing refundable tax credits in his February budget. All that has to be done is to tinker with the amount of credit and the level of income at which a credit will be refundable in order to siphon money back to the lower income groups.
From the government’s point of view, it will be more difficult to target specific incentives. But the problem it has now is that there are too many incentives distorting investment decisions. As well, the incentives have proven too costly in terms of lost revenues for the federal treasury to bear. Virtually everyone involved believes that a consumption tax system is a better alternative to what we have now.
A number of elements in the consumption tax system are already in place. This has been accomplished without substantial opposition. They include the business transfer tax, the minimum tax, the refundable sales tax credits and the half-million-dollar capital gains tax exemption to encourage investment and saving. The biggest danger to unopposed—and as yet unquestioned-tax reform is that the phasing out of income tax will not happen on schedule and that instead of an efficient, fair, simple system, we will all be taxed as it comes in and as it goes out.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.