A 10% tax rate? Dare to dream

One of the more encouraging trends in the Conservative leadership race has been the revival of interest in cutting personal income taxes. This is newsworthy: not only has the top marginal tax rate in Canada not been cut in three decades, but rates at both the federal and provincial levels have been creeping up in recent years.

The top combined rate in Canada’s two largest provinces is now around 54 per cent — among the highest in the OECD — even as the Republican Congress is preparing to make sharp cuts in taxes south of the border.

Three candidates in particular have staked their campaigns on tax-cutting plans of varying degrees of ambition.

Michael Chong would eliminate three of the current five tax brackets (15, 20.5, 26, 29 and 33 per cent), leaving just the 15 and 29 per cent rates. Maxime Bernier would go further, bringing the top rate down to 25 per cent, and raising the basic personal amount on which no tax is paid to $15,000. Finally, Rick Peterson would eliminate even the second bracket, leaving everyone paying the same basic 15 per cent rate on all income above the basic personal amount — $12,000 in his plan.

Where the plans really differ is in how they would pay for these cuts. Roughly speaking, they would cost about $20 billion, $30 billion and $40 billion respectively, not counting any offsetting increases in revenue from faster economic growth.

Chong would introduce a carbon tax, starting at $10 in 2021 and rising to $100 by 2030. But he’d bring in his income tax cut in year one: the “revenue-neutral” carbon tax is actually revenue-negative throughout the phase-in period.

Bernier is vaguer, saying he would make deep cuts in spending, notably for corporate welfare, and would phase in his income tax cuts only as and when there was fiscal room, after balancing the budget.

Peterson, with the simplest and starkest plan, finances his in the simplest way: by raising the GST four percentage points.

In each case, this would seem to leave them several billion dollars short. So both Chong and Bernier — I have to imagine Peterson would not be averse — propose to eliminate a number of the many special-interest credits and deductions cluttering up the tax system, collectively known as “tax expenditures.” These have become the target for tax reformers as they have proliferated, and with good reason.

As the name implies, tax expenditures are spending programs by another name — only because they are delivered through the tax system do not attract anything like the same scrutiny.

Typically they are addressed to particularly narrow constituencies a government wishes to court. As such, they rarely meet tests of good tax design: either they reward taxpayers for things they would have done anyway, or induce them to do things they would never think of doing on their merits; on top of which they are often of greatest benefit to those least in need.

Small wonder that reformers on both the left and right have them in their sights — if only they could agree on what they were.

This is the tricky part. Not every deduction or credit ought properly to be considered a tax expenditure. The test should be whether they represent a departure from tax neutrality: a system that neither rewards nor penalizes particular economic choices, but treats all with an even hand.

But some measures sometimes identified as tax expenditures — RRSPs, for example — in fact make the tax system more neutral. A system that does not exempt savings ends up taxing income that is consumed later at a higher rate than income that is consumed now, since it taxes the former twice: once before it is saved, a second time after, on the return.

Others would make sense to eliminate but would be tough to cut politically: we’ve already seen the prime minister rule out taxing employer health and dental benefits. But the children’s fitness tax credit, the volunteer firefighter’s tax credit, the public transit tax credit, the political contribution tax credit, the age credit (why give every old person a tax credit, whether they’re rich or poor?), and dozens more could be cut without much harm, especially in return for broadbased tax cuts for everyone.

All told, a 2015 Fraser Institute study identified more than $20 billion worth of tax expenditures for the chop — and while some of the institute’s cuts might be judged politically impossible, its list does not include some others, like the lifetime capital gains deduction for fishermen, we’d be better off without.

But back to the candidates. Each of the different ways they’d pay for their plans is a good idea in itself: we’d be well advised to cut wasteful spending, tax carbon, and eliminate useless tax expenditures, even if we weren’t planning on cutting income taxes; likewise, it is a good idea to tax consumption, as with the GST, rather than income. So why not do ... all of them? How much could income taxes be cut then?

By my calculations, adding four points to the GST would raise about $30 billion or so. Chong’s carbon tax would raise a further $18 billion and change. Let’s say we cut tax expenditures by $12 billion, and made another $12 billion in cuts to spending (out of $300-billion in total).

All told that’s $72-billion — nearly half of current federal personal income tax revenues — enough to cut the 15 per cent lowest tax rate another five points, raise the basic personal amount and increase the GST tax credit besides, on top of the cuts already identified.

Perhaps this sounds like too much to throw at people. Maybe so. But in return for a 10-per-cent federal income tax? Maybe not.