Just like a Dad tax, government taxation can inspire behaviour changes — both good and bad

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The federal fiscal picture points in the same direction. The latest federal budget revealed a deficit of $78 billion for this current year — fuelled by out-of-control spending — while projecting large ongoing deficits for years to come. Prime Minister Mark Carney frequently misleads and frames the spending as “investments,” but the fiscal mechanics remain unavoidable. Spending must eventually be paid for.

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Interest payments on the federal debt are projected to reach roughly $55 billion this year and continue sharply rising in the years ahead. That outlay of money produces no public services and no benefits for Canadians.

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If Carney gets his much-desired majority government, the pressure to raise taxes or create new ones will intensify. That is precisely why Canada urgently needs serious tax reform rather than a steady stream of new taxes layered onto an already complex system.

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Last week, economist Jack Mintz and his colleagues released a report through the C.D. Howe Institute proposing “Big Bang” tax reform, a comprehensive restructuring of Canada’s tax system designed to improve economic growth, investment and productivity.

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Among the key proposals are: major reductions in personal income tax rates; the introduction of an optional simplified personal credit of $10,000 to reduce complexity; a five per cent reduction in corporate tax rates along with the elimination of many preferences, such as the small business deduction; and an option to introduce a corporate distribution-based tax model, like Estonia does, where corporate profits would be primarily taxed when they are distributed to shareholders rather than when they are earned by the corporation, which would encourage companies to reinvest earnings and expand productive capacity.

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To help pay for the tax reductions and reform, Mintz and his co-authors propose to increase the GST by 2.8 percentage points or to introduce a new three per cent employer-paid payroll tax.

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Significant tax reform should lead to behaviour changes. The authors say that in “the long run, the reforms could increase non-residential capital by roughly $140 billion and raise (gross domestic product) by approximately $79 billion (about 2.5 per cent), generating more than $26 billion annually in additional tax revenues while preserving Canada’s strong redistributive outcomes.”

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This is exactly the type of behaviour shift Canada needs.

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Canada’s current system does the opposite with high tax rates, endless targeted credits and politically motivated tax provisions that discourage investment, reduce productivity and drive capital elsewhere.

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Without reform, governments facing rising deficits will continue searching for new sources of revenue. History suggests those searches rarely produce elegant solutions. Three centuries ago, British policymakers thought taxing windows was a clever way to raise money from wealthy homeowners. Instead, it encouraged people to brick up their windows.

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My kids eventually figured out how to avoid the Dad tax by ordering food they knew I wouldn’t want. Tax policy works the same way. If governments continue to allow spending to grow out of control without meaningful tax reform, Canadians should expect increasingly creative tax proposals in the future.

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Just like the window tax or the Dad tax, people will find ways to respond.

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Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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