When I look at the tax system today, I see a number of various credits and deductions that have been introduced over the years. What typically happens is that you have a system where special credits, deductions, and preferences are brought in, and then you look at it and say, “What are we doing? Why don't we have one rate reduction, get rid of this mess, and make it simpler?” That would reduce administrative costs and compliance costs for taxpayers, as well as reduce distortions in the system.
Typically countries every 20 years, or maybe even longer—the United States hasn't done this since 1986, and needs to do it badly—finally undertake to reform their tax system. In Canada we did quite a bit of reform from 1985 to 1987, which was completed with the 1991 GST.
If you look at the system today, there are a lot of special preferences, albeit with a little less on the business tax structure because of the technical committee on business taxation report. I chaired that panel in 1997, and it did lead to a lot of business tax reform, and I would say good tax reform in Canada in the subsequent years. We haven't done this with the rest of the system.
If you look at the personal tax, for example, it has all sorts of credits and deductions. Studies have shown that some are not only ineffective, but even harmful to the economy, such as the labour-sponsored venture capital credit that has been brought in with this budget. Flow-through shares haven't worked very well. I can go through a litany of the stuff.
We also have a complete misalignment between capital gains tax rates and the top dividend tax rate, which we often try to keep aligned so people don't try to pass out income in the form of dividends or capital gains, depending on which is more heavily taxed. That I think is leading to problems.
The two dividend tax credits and the two corporate tax rates have created a lot of complexity and distortions in the system. We clearly need to go to a single corporate income tax rate, and a single dividend tax credit I think would be much better.
When I look at the current system, I think it is in need of review, including the GST. Economists often say that the GST rate should be raised, but we have a mediocre value-added tax compared to the rest of the world, collecting roughly half of what it could collect on consumption because of all the special credits and special exemptions in the system. There are a lot of problems with it, especially around the treatment of financial services.
We need to have a good look at the whole system, including looking at changing the mix of taxes. We need a better GST base, more reliance on consumption taxes at the federal level, and less reliance on those growth-inhibiting taxes such as corporate and personal income taxes.