Okay. Translating the entire study will be a major work project for someone.
At any rate, the major message I hope you take away from the study and my presentation is that an economically efficient and socially equitable tax system hinges on its overall structure and design, not its overall level.
Other countries have applied taxes at much higher levels than Canada while still attaining very good levels of productivity growth and enviable standards of social programs. The key to achieving an efficient and growth-oriented tax system, whatever the desired overall level of taxes and size of government, is to shift the taxable base further toward consumption and labour income, and away from capital and investment income.
In the four years preceding my 2004 study, Canadian governments at both the federal and provincial levels made significant progress in pushing the tax system in the desired direction, and further constructive changes have been made in the four years since then. Some examples include large reductions in corporate income tax rates, reduction and elimination of corporate capital taxes, expanded allowances for depreciation of business investment, reduction in personal tax rates, reduced tax rates on capital gains, the rise in contribution limits for pension plans and RRSPs, and, most recently, the introduction of tax-free savings accounts. All of these measures move the tax system further toward consumption-based levies, and away from income- and capital-based levies.
But there remains room for further improvements in the tax system at all jurisdictional levels in Canada. I will briefly describe what I believe to be the eight most important areas for future tax reforms.
First, I begin by noting an item that applies at the provincial and municipal levels, the disproportionately high rates of property tax applied to business and industrial properties relative to residential properties across most of Canada. This discourages productive business investment, and it sends the wrong signals to provincial and municipal actors about what voters are willing to pay for additional local services. That, of course, is because most voters are homeowners rather than business owners.
Reforms to restrict the differential rates between business-industrial and residential property tax rates could easily be implemented through provincial legislation—though, undoubtedly, issues of public acceptance would arise.
Second, at the combined federal and provincial levels, the most urgent tax reform is to achieve a harmonization of indirect consumption taxes for the five provinces that still utilize a retail-level tax. In those provinces, nearly 40% of the total sales tax revenues are paid by business inputs rather than final consumers, inhibiting business investment and the efficient allocation of resources.
The federal government missed an opportunity to achieve this goal when it reduced GST rates without any linkage to provincial sales tax harmonization. To get the provinces on board with this change—especially Ontario and B.C.—the federal authorities will have to provide greater fiscal compensation than they have offered to date, and greater flexibility to the provinces as to the taxable base of the harmonized tax.
Third, at the federal level, one of the more important tax changes would be to raise the annual dollar limit for contributions to tax-deferred savings plans, like registered pension plans and RRSPs. The introduction of the tax-free savings accounts is helpful for individuals in efficiently arranging their lifetime savings on a consumption tax basis, particularly for lower and moderate income households. But Canada lags other countries, such as the U.S. and the U.K., in its limits on tax-recognized savings for higher earners. The current annual limit of $20,000 should be substantially increased, say to $30,000. This change would also make the Canadian tax system more competitive with other countries in attracting and retaining highly skilled technical and managerial talent.
Fourth, also at both the federal and provincial levels, the upper-bracket personal tax rates bite at incomes that are low, relative to where they bite in some competing countries. The top federal marginal tax rate of 29% kicks in at just over $123,000 of taxable income. This could be raised substantially—for example, to $180,000. The provincial personal tax schedules mostly hit their top marginal rates at taxable incomes below $100,000, with three provinces reaching their top rates in the $60,000 range. While the federal top tax rate is not excessive internationally, some of the provincial rate schedules are more steeply progressive than they should or need be.
These changes, as well as stretching out some of the intermediate tax brackets and reducing their rates, will be helpful in improving incentives for individuals and in attracting and retaining the most productive workers for our economy.
Fifth, while on the topic of direct personal tax, which is still called an income tax but in reality is closer to a consumption-based tax, another aspect warrants change. The major tax reforms of 1987 converted a number of items that had previously been deductible in computing taxable income into non-refundable credits. However, a few of those items are more properly allowed as tax deductions because they define the taxpayer's ability to pay tax. Thus, they should not be credited at a common rate independent of the individual's marginal tax rate. Three items in particular should be restored to tax deductible items: employee contributions for Quebec and Canada pension plans, employee contributions for employment insurance, and medical expenses.
Sixth, another aspect of the personal tax also deserves careful thought and reform. Unlike most other countries' tax systems, Canada seeks to attribute taxable income on assets transferred between spouses to the donor for tax purposes. This leads to highly complex attribution rules and equally complex manoeuvres by taxpayers to skirt the rules.
Based on my analysis and a study on income splitting published also by the IRPP, but just last month, I recommend that Canada follow the British practice of allowing full splitting of investment incomes between spouses when there is a bona fide transfer of assets. In conjunction with that change, I would also recommend that Canada simplify its complex and cumbersome rules for deductibility of investment interest expenses by allowing them up to the filer's taxable investment income, following U.S. practice.
Seventh, the payroll taxes, or so-called premiums, for the employment insurance program are levied at uniform rates on employers and employees, independent of the risk of unemployment in particular industries and firms. This structure leads to highly inefficient cross-industry and cross-firm subsidies as well as to disincentives for individual employers to stabilize their employment levels. A remedy to this problem is to differentiate the premium rates—at least those applied to employers—to reflect the differential rates of layoffs and employment stability. This system of so-called experience rating has been applied to good effect in many of the provincial workers' compensation programs as well as in the U.S. states' unemployment insurance programs.
And eighth and final on my list, which is certainly not an exhaustive list, is an item that appeared in a limited form in my 2004 paper, which was increased excise taxes on transport fuels, mainly gasoline. Given changes since then in our thinking about environmental issues and climate change, we should pursue higher taxes not only on gasoline but on a wide range of carbon-dioxide-emitting fuels and activities. The revenues from these levies, which could become very large over time, should be recycled in the economy through reductions in other taxes, such as some of the reforms that I've suggested here. Sensibly pursued, such environmental levies will yield the so-called double dividend; that is, reduced climate and environmental degradation along with a more efficient economy through reduction of distorting taxes.
You might note one item that was not on my list of tax reform priorities—tax-free rollovers of capital gains as promised by the current government in the last election. I would cite several reasons for not including that on a list of priorities.
The TFSAs and expanded access to tax-deferred savings that I've recommended provide tax-free treatment for capital gains and also for interest and dividend incomes. So unlike a capital gains rollover, they do not distort portfolio holdings.
Tax-free rollovers of past-accrued gains provide an inefficient windfall for past behaviour rather than incentives for future savings behaviour. Tax-free rollovers would provide large tax savings highly concentrated in the very top income classes. Tax-free rollovers are technically more difficult to implement and enforce than the existing tax-deferred saving schemes and the forthcoming TFSAs. And finally, Canada's effective tax rates on capital gains are already competitive with those in the United States, especially for short-term gains, where the U.S. applies full tax rates. So I commend the government in choosing not to pursue that particular item of its campaign platform.
To conclude, Canada at both the federal and provincial levels has made major strides since 2000 to improve our tax system, but additional steps are needed. These changes will move our revenue system further toward an economically efficient consumption base. Regardless of whether one seeks larger government or smaller government, it is important that revenues be collected using an efficient, smart design.
I have outlined briefly what I believe to be the top priorities and I'll be glad to answer any questions that members of your committee might have.