Fairness by design: a framework for tax reform in Canada
A new CCPA (National) report by Marc Lee and myself argues that Canada’s tax system needs a fairness overhaul and presents a framework for progressive tax reform. Those of you who have been following our tax work so far will find this study a great complement to the BC Tax Options Paper.
Tax policy is an important lever for governments to tackle income inequality, which is why it is particularly important to strengthen tax fairness now, given the increased concentration of income and wealth we’re seeing in Canada. We also call for a comprehensive tax review of the entire system of taxation (as opposed to the current practice of making ad-hoc changes to different elements of the system independently) and remind Canadians that the last comprehensive review of federal taxation, the Carter Commission, was convened more than half a century ago.
The report is a slightly more technical think piece on taxes, but the brief Summary at the start provides a very accessible digest of our tax reform ideas. Those of you who speak (well, read) French would be interested in Simon Tremblay-Pepin’s blog post about our study on the IRIS blogue.
These are the seven priority areas we’ve identified (from said Summary):
1. Broaden the income tax base to reflect the individual’s actual command over resources. We recommend taxing income from all sources according to the same progressive rate schedule, including self-employment income, property, savings and dividend income and capital gains. This would eliminate the preferential tax treatment that currently exists for many sources of income for high earners investment income form stock options and capital gains, for example, that are taxed more lightly than income from wages and salaries. In some cases, such as lottery winnings, sales of principal residences, other long-held assets or family farm/business bequests, provisions for income averaging over several years should be implemented to accommodate large fluctuations in annual income.
2. Rationalize tax expenditures. Canada’s income tax system contains a large number of deductions and tax credits (both refundable and non-refundable), known collectively as tax expenditures, many of which disproportionately benefit high-income earners. Given that they are very expensive to the public purse, we recommend that their effectiveness and distributional impacts be carefully evaluated. A number of tax deductions and credits may need to be modified, scaled down or eliminated, in particular the RRSP and registered pension plan deductions, the basic personal amount, spouse or common-law partner amount and the amounts of eligible dependents and children, the employee stock options deduction, and the charitable donations tax credit.
3. Increase top marginal income tax rates. We recommend the addition of one or more high income tax brackets (for example, at the top 1% and 0.1% of income) to improve tax fairness and tackle income inequality at the top end. A recent U.S. study estimates that the optimal top marginal tax rate for the top 1% of earners is 73% (and as much as 80% if there are no deductions and loopholes to allow tax avoidance).1 These rates are substantially higher than the prevailing Canadian top marginal tax rates.
4. Stop the corporate tax “race to the bottom”. We recommend increasing corporate income tax rates, which are currently the lowest among G8 countries. A shift of business taxation to a cash-flow tax base should replace the current system of arbitrary rules of depreciation and capital cost allowances that differ by sector. This would fully tax pure economic rents, the re- turns from ownership of assets. Higher taxes on natural resources should also be considered.
5. Implement inheritance and/or wealth taxes. These taxes help improve social mobility and reduce the concentration of wealth at the very top by limiting the extent to which capital (and the opportunities it buys) is passed across generations. Canada is currently one of the few developed countries that does not tax bequests and inheritances. We recommend that large inheritances and gifts be included in the recipient’s taxable income. In addition, large holdings of wealth should also be taxes at an annual rate, broadening the base of existing property taxes to include financial market assets.
6. Use consumption taxes cautiously. Value-added consumption taxes may be used to supplement revenues collected from a progressive, broad- based income tax, but should not form the main basis of the Canadian tax system. On the other hand, carbon taxes and financial transactions taxes are examples of specific consumption taxes aimed at internalizing external costs, which should be embraced.
7. Implement a basic or guaranteed income. We recommend amalgamating the various income-tested tax credits and benefits into a single, stream- lined income transfer that would phase out gradually similar in structure to the OAS and the CCTB. The transfer would be broad-based, and designed to take into account individual circumstances such as family size, number of young children, family members with disabilities, etc. Such a transfer would be flexible and could easily accommodate new tax measures introduced in the future.
The exact combination of reforms should be developed on the basis of a comprehensive review of the tax system. A Fair Tax Commission should be convened to examine how federal taxes and transfers work together as a system and make recommendations for changes. Ideally, the Commission would include an expert and well-respected team made up of both academics and practitioners, and would engage Canadians from all walks of life in a meaningful and broad-based public dialogue and deliberation process to produce a framework for restoring fairness to our tax system.
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Originally posted on PolicyNote.ca
What a joke! I am in the top 2% for income earners. I have a mortgage, school debt, and car payments. I have to budget in order to save money for emergencies, kids, and retirement. I am not running around throwing money away and going down South for vacations in the winter. I work very hard and had to all my life in order to get to where I am in my career. There are so many other Canadians that are in the same boat as me. It was our choice to go to school and work hard everyday. How is your policy fair to people who work hard? Why is it fair to pay more tax in order to support people who , by choice, do not work hard and sit around collecting tax payer money from the social programs that this report and you support so much. This will not help the economy and will not help distribute wealth throughout Canadians.
This is a great discussion paper, but I do have some reservations.
First, I think it is misguided to roll EI into a family income tested GAI. EI is a social insurance program intended to stabilize individual income and cushion against the risk of unemployment, rather than be explicitly redistributive between income groups at any given point in time.
Second, I would question if you want the same design for child benefits as for other income supplements such as Earned Income Tax Credits. Certainly there are huge differences at present which have some rationale in terms of eg horizontal equity between families with and without children.
Third, most studies show that countries with high levels of public and social spending redistribute much more through the transfer system than through the tax system. To the extent that consumption taxes finance redistributive spending, they are far less regressive than when seen in isolation.
Hope others weigh in on an important paper.
Rory, congrats on making the top 2%! As a reflection on your success, I would encourage you to make a list of all the lucky things, in addition to hard work, that got you there. I’d also encourage you to think about what the public sector has done for you: subsidize your education, provide a safe environment for you to thrive, roads you can use, and so forth.
Please do not assume that other people do not work as hard as you. You should not be so quick to judgement.
Also, a big chunk of what we suggest is making sure that the really well-off, who get a lot of their income through capital gains, inheritances, and so forth, pay a higher share.
Andrew, thanks for the thoughtful comments.
Rory said, “I have to budget in order to save money for emergencies, kids, and retirement.”
A great many people don’t even have to option to set aside money for this.
“There are so many other Canadians that are in the same boat as me”
By your own estimation, less then 2% of Canadians are in the same boat as you.
You should also note that the paper only call for higher taxes on the 1%, not the 2%.
I think the idea of rolling all general-revenue funded benefits (so not EI or CPP) into a guaranteed annual income has the potential to simplify the tax system. I also agree that the boutique tax credits make the system more complex without really generating proportionate benefits.
However, there are a number of areas where I think the paper has flaws. Some of these are factual and some conceptual. I also think that some of policies advocated might have unintended consequences. A sampling:
1) On page 34 of the report EI premiums are described as regressive. Under usual social insurance principles the EI system should be considered as a whole. Yes, there is a maximum limit to contributions, but there’s also a limit to benefits – they aren’t a constant percentage of pre-unemployment income. The EI clawback (sorry, social benefits repayment) is also ignored.
2) The paper advocates an inheritance tax. Canada’s provinces did in fact have estate taxes until 1972, but these were dropped when capital gains tax (and the associated deemed disposition on death) was introduced. Deemed disposition on death acts as Canada’s inheritance tax.
3) When advocating removal of RRSP and pension plan deductions, consider that these plans defer taxable income to the future: they don’t provide a permanent tax exemption. DB pension plans are already in decline and likely don’t need an additional drawback inflicted on them.
4) Same goes for removing the charitable deduction. The Red Cross, the Cancer Society, and others do good work and discouraging this might be unwise.
5) The statement on page 26 that the basic personal amount favours the affluent is incorrect. If you look at your Schedule 1, you’ll see that it’s calculated as a credit at 15%, regardless of income, not a deduction of the first $10,257 of taxable income.
6) Optimal tax rates are tricky for a few reasons. The Diamond & Saez estimate of an optimal rate was for labour income only (although they handwave in the middle of the paper that capital income should be taxed at a rate greater than zero) and used elasticities that are quite low compared with Canadian data for high income earners: see Table 1 at:
(http://www.fin.gc.ca/taxexp-depfisc/2010/taxexp1003-eng.asp)
There’s more, but time flies…
I wouldn’t consider the basic personal amount as a tax expenditure, but a tax bracket where the tax rate is 0%.
Awww, pooor Rory. In the top 2% solely because he’s so much more awesome than all the other 98%, and those jealous ignoramuses just want to take all his stuff. My heart bleeds.
Yup, all 98% of them don’t work hard and didn’t go to school. I didn’t actually realize that only 2% of Canadians do post-secondary education, much less that low-income jobs are all very easy and don’t require any hard work. Live and learn, I guess.
Perhaps Rory will live and learn how to budget. I can tell you that, in a household roughly at the 50% point for income, right in the very middle of the distribution, we have to be fairly careful but our mortgage is close to paid off (about 2 years to go), our car is paid off, and we have no credit-card debt. When our daughter hits post-secondary we may have some expenses, to be sure. But if I were in the top 2% I’d certainly have no debt of any kind and a solid fund for education. Maybe Rory should have gone easier on the big house, flashy car, expensive restaurants or brand name clothes.
Some good suggestions here, but isn’t this kind of missing the elephant in the room: the personal tax cuts under Chretien/Martin? They were sold as “middle class” tax cuts (after all they left the 29% top rate in place but starting at higher income levels while slashing the other rates) but the well-off have been the main beneficiaries (since they reaped more from moving up the brackets) and I don’t see how we can build a progressive/social democratic reversing these tax cuts.