Base Reforms and Rate Cuts for a Revitalized Personal Tax

Growing calls for cuts in Canadian personal income taxes have focused on tax rates but neglected a deeper analysis of the most urgent needs for fairness and growth. Moreover, proposals to provide tax relief in the form of special tax incentives for particular sectors—such as tax exemptions for the share options of high-tech workers and managers—would create new inequities and distortions rather than a broader, fairer, and more efficient tax system. An economic analysis can show the way to a revitalized personal tax, one that augments the economy’s efficiency, growth, and productivity, while simultaneously improving the system’s fairness across individuals in differing circumstances. Such a tax will require a carefully designed combination of base reforms and rate cuts. At the lowest income levels, the priority is to raise the taxable threshold, at least into the $9,000 to $10,000 range. Cuts in the effective marginal tax rates at lower income levels should focus on reforms to the tax and transfer clawback and phaseout provisions rather than on a reduction in the statutory tax rate. At middle and upper-middle income levels, the tax cuts should focus on substantially increased bracket thresholds, and perhaps a modest cut in the middle-bracket tax rate. At high income levels, the most urgent need is a major shift in the tax base toward consumption rather than sharp cuts in statutory federal tax rates, though provincial surtax rate cuts would also be desirable. Key means of expanding consumption-base treatment would be large increases in the limits for contributions to registered pension plans and registered retirement savings plans and a cut in the tax inclusion rate for capital gains. These changes would extend to upper-income taxpayers the consumption-base treatment currently afforded to lowand middleincome taxpayers by the Canadian personal tax, with concomitant gains in horizontal equity, efficiency, incentives, and growth. They would also make the Canadian personal tax more competitive with US provisions without debasing the system or abandoning vertical equity. Other base reforms would also improve both efficiency and equity while providing the revenues for further rate cuts beyond those that can * Professor of Economics, University of British Columbia, and director, UBC Centre for Research on Economic and Social Policy. BASE REFORMS AND RATE CUTS FOR A REVITALIZED PERSONAL TAX 211 (1999), Vol. 47, No. 2 / no 2 be financed by the growing fiscal surplus. For example, the personal tax base could be expanded to include employer-paid health benefits, strike pay, and additional public transfer benefits. There are grounds for eliminating or reducing the age and pension credits, the $500,000 lifetime capital gains exemptions, and tax credits for labour-sponsored venture capital corporations. Deductions for interest expense could be limited to the filer’s taxable investment income, and a corporate distribution tax could be instituted to stem the revenue cost associated with dividend tax credits. Some of these changes would be partially offset by the increased taxable threshold and the enhanced savings, capital gains, and investment income provisions that would be provided to all taxpayers. Moreover, converting tax credit items such as medical expenses and social insurance premiums to deductible treatment would improve horizontal equity and, in some cases, efficiency. Conversely, child-care expenses might be converted from deductions to tax credits for social policy reasons.