Barrier III: Improving the tax system
Editor’s note: Over the past year, the Canadian Chamber of Commerce has consulted its members – local chambers of commerce, large companies and small businesses – to identify the key barriers hindering our competitiveness. The following series will tackle the solutions.
Our tax system is too complex because it imposes major unnecessary compliance and administration costs on both businesses and consumers.
The complexity of the system is particularly challenging for small- and medium-sized businesses because they lack the money or expertise to engage in complex tax-planning arrangements.
Our tax system over-relies on income and profit taxes, the most economically damaging forms of taxation.
The myriad tax preferences enormously complicate the tax structure and increase compliance costs. Tax compliance imposes a heavy burden on business in terms of cost and time, and has the potential to be a disincentive to investment. It costs Canadian businesses $13 billion to $19.3 billion to comply with their tax obligations.
Business taxes have a significant negative impact on investment and job creation, while personal income taxes affect a wide range of decisions regarding work effort, savings and entrepreneurship.
In Canada, about 46 per cent of total tax revenue comes from income and profit taxes, compared to an OECD average of 36 per cent. Consumption taxes (e.g. GST and HST) reduce instances of tax evasion and rely on a broader base. They can be more equitable and economically efficient than income taxes because consumption taxes do not tax savings and investment.
Marginal effective tax rates (METRs) on capital investment vary widely by industry. Service providers (e.g., the retail trade and communications sectors) face a rate of around 25 per cent. In contrast, METRs on capital are relatively low for forestry and manufacturing (6 per cent and 11 per cent respectively). Yet services are a major source of job creation and are increasingly exposed to international trade and competition.
Corporate taxes can hurt the economy most when they are not neutral among industries because capital tends to flow to less taxed activities, rather than to those that generate the greatest economic returns.
Canada’s punishing high marginal personal income tax rates for low- and middle-income earners discourage people from working, saving and undertaking further education and training and, thus, negatively affect productivity and economic growth.
The way forward
Tax reform must be placed back on the national agenda. Canada needs a tax code that is more simple, fair, and growth-oriented. The federal government is encouraged to launch a national consultation aimed at reducing the complexity of the tax system.
An independent panel to conduct a comprehensive review of the hundreds of exemptions, deductions, rebates, deferrals and credits in the federal tax system, with an eye to eliminating special measures that are unfair or that undermine economic effi ciency, should be created.
The federal government should expeditiously work with provincial and territorial governments to create a loss-transfer system to address corporate group taxation.
Tomorrow: Barrier IV: Breaking down internal trade barriers