Tax reform for efficiency and fairness in Canada
OECD Economics Department
WP 631 (2008)
government has set a high priority on reducing the economic burden of taxation.
In a context of fiscal surpluses, it has been: markedly reducing corporate
income and capital taxes; providing more personal tax relief especially at
lower incomes and above all for saving; and cutting the federal value added tax
(GST). While such measures, in particular income and capital tax cuts, reduce
the economic damage caused by tax, Canada should
go further along this route with significant revenue-neutral reforms to achieve
a more efficient tax mix that also retains its redistributive features.
Numerous tax preferences to favoured activities, firm types, investments and
savings vehicles narrow the tax base and create loopholes, keeping statutory
rates higher than otherwise and distorting resource allocation. They should
therefore be removed. It would also help to shift the tax mix toward more user
fees and indirect taxes – including VAT, environmental levies and
property taxes – which do not distort inter-temporal economic choices as
income taxes do. Lower corporate and personal income taxes could improve the
incentives for capital formation, FDI, innovation, entrepreneurship,
labour-force participation, work effort, and the pursuit of higher education.
The result would be higher standards of living.