• Ca­na­da’s in­co­me tax: 100 years old and not aging well

In­co­me tax is now too high, too im­por­tant, too com­plex and too costly. Af­ter a cen­tury, it’s ti­me for se­rious re­form

La Jornada (Canada) - - PORTADA -

As the April 30 tax dead­li­ne pas­sed by, Ca­na­dians will be in­ter­es­ted (though pro­bably not happy) to know that this year marks the 100th an­ni­ver­sary of the fe­de­ral in­co­me tax.

Con­ser­va­ti­ve Fi­nan­ce Mi­nis­ter Sir Tho­mas

Whi­te in­tro­du­ced it for debate on July 25, 1917, th­ree years in­to the First World War and just days af­ter Par­lia­ment adop­ted com­pul­sory mi­li­tary ser­vi­ce.

Con­ven­tio­nal wis­dom says the tax was to be tem­po­rary. In fact, Whi­te said only that he ho­ped

Par­lia­ment would con­si­der it again af­ter the war en­ded. Par­lia­ment did con­si­der it. And we’re still pa­ying.

To ob­ser­ve this 100th an­ni­ver­sary, the Fra­ser

Ins­ti­tu­te is brin­ging out 10 short es­says on the in­co­me tax that Fra­ser vi­ce-pre­si­dent Ja­son Cle­mens and I ha­ve edi­ted. We call the se­ries Ze­ro to 50 in

100, re­flec­ting in­co­me tax ha­ving go­ne from not­hing in 1917 to fully half of fe­de­ral re­ve­nues to­day.

The tax star­ted out as a levy on the very ri­chest Ca­na­dians. In the early years, as few as one in

50 peo­ple paid. As la­te as 1938, only 2.3 per cent did. Now th­ree-quar­ters of Ca­na­dians fi­le re­turns, if only to ta­ke ad­van­ta­ge of such be­ne­fits as the re­fun­da­ble Goods and Ser­vi­ces Tax (GST) cre­dit.

The mes­sa­ge of the 10 es­says is that the in­co­me tax is now too high, too im­por­tant, too com­plex and too costly. Af­ter 100 years, it’s ti­me for se­rious re­form.

Too high? Our top ra­te used to be midd­le-oft­he-road in the G7. Af­ter last year’s fe­de­ral bud­get, On­ta­rio’s top ra­te of 53.5 per cent is be­low only Ja­pan’s and Fran­ce’s. Of the top 10 mar­gi­nal tax ra­tes in North Ame­ri­ca, se­ven are in Ca­na­dian pro­vin­ces. Bri­tish Co­lum­bia’s lo­west-in-Ca­na­da top ra­te of 47.7 per cent is hig­her than in 42 U.S. sta­tes. And top ra­tes for U.S. sta­tes start at over $500,000, in so­me ca­ses al­most $1.5 mi­llion. In most pro­vin­ces, by con­trast, the top com­bi­ned fe­de­ral-pro­vin­cial ra­te starts at $200,000.

Too im­por­tant? Ot­ta­wa and the pro­vin­ces to­get­her get mo­re than a third of their re­ve­nues from the in­co­me tax. The ave­ra­ge Or­ga­ni­za­tion for Eco­no­mic Co-ope­ra­tion and De­ve­lop­ment (OECD) country gets less than a quar­ter. Only four of 35 OECD coun­tries (the U.S., Aus­tra­lia, New Zea­land and Den­mark) rely on in­co­me ta­xes mo­re than we do.

Too com­plex? The 1917 in­co­me tax act is just 3,999 words long and fills only 10 stan­dard pa­ges in 11-point font. The la­test ver­sion con­tains mo­re than one mi­llion words and ta­kes up 1,406 pa­ges. The 1917 act didn’t even allow a de­duc­tion for chil­dren (a mis­ta­ke soon co­rrec­ted). But by 2014, the num­ber of “tax ex­pen­di­tu­res” had ri­sen to 128, in­clu­ding a 27 per cent in­crea­se in their num­ber just sin­ce the mid-1990s.

Too costly? Just fi­lling out your ta­xes - or pa­ying so­meo­ne to fill them out - now ave­ra­ges mo­re than $500 a fa­mily in ti­me and outlay. And that cost is re­gres­si­ve - a hig­her sha­re of in­co­me for poo­rer than ri­cher peo­ple.

Then the­re’s the eco­no­mic cost from dis­tor­tions in ef­fort, in­vest­ment, sa­ving and edu­ca­tion be­cau­se of high mar­gi­nal ra­tes. Uni­ver­sity of Ca­glary eco­no­mics Prof. Bev Dahlby es­ti­ma­tes that in all pro­vin­ces ex­cept Al­ber­ta, $1 of new in­co­me tax re­ve­nue crea­tes mo­re than $1 of eco­no­mic cost, so the to­tal cost ex­ceeds $2 per every new do­llar rai­sed. In On­ta­rio, the cost is al­most $7 for every new do­llar of re­ve­nue rai­sed.

A tax that costly, com­plex and ove­ru­sed should be re­for­med.

For the in­co­me tax’s 100th birth­day, we should broa­den the ba­se and lo­wer the ra­te by eli­mi­na­ting the spe­cial car­ve-outs and tax sub­si­dies that ha­ve built up over the last cen­tury.

Or, as the U of C bu­si­ness school Prof. Jack Mintz re­com­mends, we should gi­ve up on in­co­me ta­xa­tion. Ins­tead, he pro­po­ses we tax con­sum­ption - not with a one-ra­te-for-ever­yo­ne GST but with a per­so­nal con­sum­ption tax, whe­re we each sub­tract any sa­ving we do from our in­co­me and pay a low but pro­gres­si­vely ri­sing ra­te on our con­sum­ption.

Af­ter 100 years, it’s ti­me for a chan­ge. -TROYMEDIA

Wi­lliam Wat­son tea­ches eco­no­mics at McGill Uni­ver­sity and is a se­nior fe­llow with the Fra­ser Ins­ti­tu­te.

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