Tax reform fraught with challenges

The concerted complaints by aggrieved groups potentially impacted by tax reforms proposed by Finance Minister Bill Morneau show how tax reform is fraught with challenges.

As I pointed out in an earlier column, the arguments advanced against the measures — they would cause a mass exodus of physicians, stop economic growth and cause countless small business to fail — are hugely overstated.

More objective analysis shows that the number impacted would be less than 1.5 per cent of all taxpayers. So why not just let well enough alone? We need to step back and look at first principles.

The tax system has several major objectives and is based on certain widely accepted principles.

The first objective is to raise, at minimum cost to both the agency collecting and the taxpayers, the revenue needed to fund the government’s activities.

Depending upon the condition of the nation’s economy, funding may exceed or fall short of government spending.

A political decision to incur a deficit is usually aimed at stimulating the economy and surpluses are a way of moderating inflation and limiting economic bubbles.

A second objective is to make the tax system at least neutral and preferably positive in promoting long-term economic growth.

For example, a system that encourages saving would be preferable to one that stimulates consumption. Investment in infrastructure or capital — both human, plant and equipment — can be encouraged by tax policy.

A third objective is a degree of stability in the system because frequent changes in its features could discourage investment by the private sector and saving for retirement by individuals.

That does not mean the tax code should be written in stone. It does mean that changes should be infrequent, telegraphed well in advance, and defensible by government.

Finally, the tax code and the administration of the system should be viewed by taxpayers as efficient and both fair and free of corruption and arbitrary or capricious rulings on what is or is not taxable.

However, our tax code as it exists is a complicated piece of legislation filled with inconsistencies and special provisions that, in many cases, have never been evaluated as to whether they achieve the original goals for which they were designed. It’s also due for an overhaul since the last major change in the system occurred in 1972.

In 45 years, much has changed. The information base regarding the health of the national economy in scope, currency and detail, the nature and scope of international trade and financial flows and instruments and their impact on the economy, the demographic structure of our population, trends in expenditures both by governments and the private sector all have exhibited wide variation.

Further, research and public discourse regarding spending and taxation have evolved. Therefore, it is worthwhile to question the suitability of our current tax system to the economic realities of today and potential developments in the next few decades.

The last major examination of the Canadian tax system was undertaken by the Carter Royal Commission on Taxation that, in 1967, issued a six-volume report together with a large number of detailed study papers.

Such a massive review would be both expensive and take several years to complete. A new Royal Commission is a luxury we don’t need. Nevertheless, we need a detailed review of the federal tax system.

My suggestion would be to appoint a committee of five to seven people composed to economists, accountants and those familiar with administration of the system.

They could be charged with examining all the existing tax expenditures; that is, income flows that are treated differently from normal income (capital gains would be one example). They could make recommendations on their continuance and give an estimate of the impact of each item on total revenue.

They could be charged to issue a report in 2019 on the date of the next federal election for consideration by the next government.

David Bond is an author and retired bank economist. Email: curmudgeon@harumpf.com.