(Policy papers 2012-2013)

Canada’s tax system is riddled with exceptions, special cases, and limited exemptions that are at best inconsistent and at worst profoundly unfair. Some individuals and many businesses get breaks they don’t need, while low-income people who want to get ahead are held back by counterproductive rules and regulations. Restoring a fair and progressive tax regime would benefit the economy and society.

Le système fiscal canadien est criblé d’exceptions, de cas spéciaux et d’exemptions limitées, qui sont, dans le meilleur des cas, inconsistants, et dans le pire des cas, injustes. Certains particuliers et de nombreuses entreprises obtiennent des allégements fiscaux dont elles n’ont pas besoin, alors que des personnes à faible revenus qui souhaitent avancer sont en fait freinées par des règles et des règlements contre-productifs. Notre société et notre économie bénéficieraient d’un retour à un régime fiscal juste et progressif.

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We pay taxes so that governments can fund public services — services that individual Canadians and the private sector can’t or won’t provide efficiently. Taxes pay for roads and sewers, police and the military, health care and education, and many other benefits we take for granted. Taxation in Canada is progressive, meaning that those who are more successful and earning more income are expected to shoulder more of the burden of paying for public services. In a progressive system, revenue from taxes also directly or indirectly helps lower-income Canadians and gives them the opportunity to get ahead themselves. We expect taxation to be fair, efficient, and effective.

But today these fundamental principles are being distorted. An alphabet soup of exemptions and tax credits have vastly increased the system’s complexity. What’s worse, more often than not these measures benefit those who need them least. The Conference Board of Canada reports that over the past 20 years, only the top 20% of income earners have increased their share of the nation’s wealth. They are not the ones who need a break.

A good way to begin reform would be by gradually eliminating tax subsidies to individuals that essentially bribe certain segments of the population. These subsidies do not help low-income Canadians to keep more of their income. Instead, the boutique micro tax credits introduced since 2006 for everything from transit passes to children’s music classes to workers’ tools benefit only persons with income over $50,000 who would buy these items anyway. Similarly the income splitting between parents of children under 18 that the Conservatives promise to implement once the deficit is eliminated would most benefit a single-earner family earning over $125,000. The new Tax Free Savings Accounts are useful, as long as they do not become yet another tax shelter that can be misused by wealthier Canadians.

We must also adjust the Working Income Tax Benefit (WITB), which is supposed to help Canadians in low-paying jobs. A single person working at a fast-food outlet for minimum wage and making $343 a week, or less than $18,000 a year, earns too much to be eligible for the WITB. But if she reduces her hours by half, she not only gets the WITB but also retains provincial benefits for the working poor such as prescription drug coverage. The national government should systematically remove such disincentives to employment from the tax system, and it should work with the provinces to get rid of counterproductive rules in the welfare system that discourage recipients from making the transition to employment.

Tax subsidies to businesses and industries create another form of distortion. Even in a time of austerity, the Harper government continues to lavish tens of billions of dollars in tax breaks on favoured interests. From the nuclear industry to the various regional development programs, billions have been channelled into failed enterprises. And why did Loblaws need a $10 million subsidy for building a store in the old Maple Leaf Gardens in Toronto? There are more open, accountable, and principled means to determine when public support is needed and ensure it is effectively and sustainably dispensed.

An expert committee led by the high-tech executive Thomas Jenkins advocated winding up the tax subsidies for research and development, which are doing little to encourage meaningful activity. It recommended shifting support to direct targeted grants outside the tax system that can broaden the pool of investors and lower the cost of capital. To its credit, the government began a shift to more direct funding of business R&D and the commercialization of research in the 2012 budget.

Indeed we must ensure that substantial government support continues for pure, basic scientific research[12], independent of industry, which drives the leading edge of technological change. And we need to facilitate increased access for Canadian entrepreneurs to early-stage financing to help good ideas and technology get off the drawing board and the lab bench and into the market, where it can help grow our economy and create employment. A blue ribbon panel must examine all the existing programs addressing the links between research and commercialization, and propose a more robust and coherent role for the federal government in facilitating access to financing, particularly at the seed stage. (The 2006 Expert Panel on Commercialization put forward many useful suggestions for moving forward such as a business-led Commercialization Partnership Board to be the lead advisory body to the Minister of Industry).

Whatever steps may be taken by the federal government to promote prosperity through a creativity and innovation, our tax system needs to get back to basics: financing good public services for all Canadians, helping the most vulnerable to achieve more fulfilling lives, and operating with fairness and transparency.