Tony Clement's Proposed Tax Plan Increases Complexity

Printer-friendly version
Appeared in the Financial Post, February 11, 2004
Tony Clement should first be congratulated for having the courage to propose both tax reform and tax relief, two things Canada is in desperate need of and regrettably very few people are taking about. Unfortunately, his plan falls short of its objectives: it would be expensive and complex to administer and would punish most taxpayers compared with the current system.

The Clement tax plan would not simplify the current system since it would require a parallel tax system to operate for the next 90 to 100 years: one for those of us not eligible for the new plan and another tax regime for those 18 or younger in 2005. In addition, rather than just processing taxpayers’ income statistics for the current tax year, the new system will have to maintain income and tax files on an on-going basis over the course of people’s entire lives.

More importantly, most taxpayers would face higher annual effective tax rates throughout their working lives than they do currently. The Clement plan trades lower rates, actually zero, for the first 8 to 10 years for higher effective rates in later years. For example, under the current tax regime an average taxpayer aged 33 years, earning roughly $31,500 faces a federal income tax rate of 11.6 percent. Under the Clement Plan, the same taxpayer has an effective tax rate of 14.0 percent. As the person ages, the gap between the effective tax rate under the current system and that under the Clement plan increases. For example, the same person previously discussed, now aged 57 years old with annual income of $40,000 would face an effective federal tax rate of 13.2 percent under current tax rules and 27.0 percent under the Clement plan. These higher effective tax rates in the out years may pose a significant threat to an increased brain drain rather than achieving a decrease as outlined by the Clement proposal.

There are also a host of critical issues that have not been addressed or even developed under the Clement Plan. For instance, his plan would require seniors to pay the highest statutory tax rate (27%) since their lifetime earnings, if average or higher, would exceed the top threshold. Similarly, single-income families would face even further tax penalties than they do currently since the $250,000 exemption is offered to only those earning income. Other areas of critical importance were completely ignored, such as dividend income and capital gains as well as overall business taxation.

If the goal of tax reform and relief is to provide Canadians, especially young Canadians, with an incentive to remain in Canada then the focus must be on economic prosperity. To that end, the best way forward is an integrated flat-tax, where all types of income are taxed at one uniform rate. The economic effect of such reforms include improved incentives for work, increased entrepreneurial activity, and greater capital formation, all leading to a higher level of national output and standard of living. All Canadians, not just one group would gain from such a reform.