Tax cut promises: We can do better: None of the
proposals by the major parties would do much for the efficiency and fairness of
the current system
The Vancouver Sun
Mon 16
Jan 2006
Page: A7
Section: Editorial
Byline: Duanjie Chen and Jack Mintz
Source:
Special to the Sun

For tax-weary voters, a surprising contrast between the
2006 and 2004 elections has been the political acceptance of cutting taxes.

In 2004, the debate was whether to spend money on health care or reduce
taxes, with only the Conservatives proposing meaningful tax relief.

In this election, the major parties have proposed a variety of cuts to taxes.

If anything, this election proves that tax cuts can be popular. However, from
a long-term perspective, a key issue is whether the tax relief will
substantially improve Canada's competitiveness by encouraging work and
investment.

None of the tax proposals in this election are brave policies that would lead
to fundamental tax reform.

In terms of their economic impact on competitiveness, the most important
proposals are the broad-based tax reductions to the GST and income tax that the
Liberals and the Conservatives have announced in the campaign.

Taxes on labour: The Conservative two-point GST cut would reduce the labour
effective tax rate by 1.1 percentage points from 28.3 per cent to 27.2 per cent.
This is somewhat deeper than the proposed one-point Liberal income tax cut (for
low- and middle-income taxpayers), which results in an effective labour tax rate
of 27.7 per cent. Thus, the Conservative proposals would have a somewhat
stronger effect in encouraging employment and labour supply.

Taxes on investment: While both GST and income tax proposals will cut the
effective tax rate on labour, what happens to taxes on investment? The Liberal
personal income tax reductions for low- and middle-income taxpayers, while
helpful to savings, do not alter much the cost of financing capital.

The Liberal mini-budget proposals for corporate tax cuts, which have been
accepted by the Conservatives, would have a significant effect in reducing taxes
on investments.

By 2010, the effective corporate tax rate on investment for multinational
businesses operating in Canada would be cut from 39 per cent -- currently the
second highest of 36 countries -- to 35.2 per cent, which would help improve
Canada's competitiveness.

The effective tax rate on investment for a medium-size entrepreneurial firm
(including business taxes and personal taxes on dividends and capital gains)
would fall from 52.7 per cent to 47.4 per cent. The small entrepreneurial
effective tax rate (likewise including business and personal taxes) would be
reduced from 42.4 per cent to 41.7 per cent with the elimination of the
corporate income surtax.

The further one-point reduction in the small business rate offered by the
Conservatives will cut the effective tax rate on capital for small business to
41.2 per cent. Thus, the Conservative tax cuts, including corporate tax relief,
would have a somewhat larger impact on investment, although the small business
tax cut increases the tax penalty when firms grow from small to medium size.

These estimates do not include proposed changes to the lifetime capital gains
exemption by the Liberals and targeted tax reductions by the Conservatives,
since the provisions would have little impact on new investments and employment.

Can we do better than what has been proposed?

None of the tax proposals in this election would substantially improve the
efficiency and fairness of the tax system.

The most important tax barriers to Canada's economic growth are related to
excessively high marginal taxes that deter work effort, savings and investment.

As shown in the C. D. Howe Institute's 2005 Tax Competitiveness Report, the
highest marginal tax rates apply to large business investments (second-highest
in the world), moderate-income savers (tax rates up to 80 per cent) and
employment income earned by moderate-income workers (tax rates up to 80 per
cent.)

To reduce these high effective tax rates, a fundamental tax reform is needed
that would lower rates and broaden tax bases to make the tax system more
neutral.

The Liberal and, to a somewhat greater extent, the Conservative proposals
move in a direction of lowering tax rates on labour and capital but far greater
effort would be needed to modernize Canada's tax system to make it as efficient
and fair as possible.

Duanjie Chen is the George Weston Tax Analyst and Jack M. Mintz is president and CEO of the C.D. Howe Institute.

Illustration:
• Cartoon: (See hardcopy for
illustration)

Edition: Final
Story Type: Busienss; Opinion

Length: 683 words