In search of new revenue, Ottawa seems to be changing the tax system
Here’s some interesting information from the 2017 edition of the Federal Fiscal Reference Tables.
Total federal tax revenues in 2016-17 were $244.3 billion—up 0.7 per cent from the previous fiscal year. When the tax revenue is broken-up, it turns out that corporate income taxes were up 1.9 per cent, GST revenues were up 4.3 per cent and personal income tax revenues were—get ready—down 0.8 per cent. Indeed, the drop was from $144.8 billion in 2015-16 to $143.7 billion in 2016-17—about $1.2 billion.
Of course, one might argue that the economy has been growing slowly, thereby impacting personal income tax revenues, but that would make it a pretty odd slowdown given that corporate tax and sales tax revenues are up.
Of greater consequence is perhaps the new 33 per cent federal income tax bracket implemented in 2016. One might expect that more aggressive tax-planning strategies by affected earners are helping drive the revenue decline. Or perhaps it’s the incentive effects of higher income tax rates on work effort. Neither possibility should surprise. People respond to incentives.
And yet, rather than heed this cautionary tale of rapid implementation of ad hoc tax measures without full and thoughtful evidence-based scrutiny and consultation, the government is now pressing ahead with contentious proposals to reform small business taxation.
While the claim is that it’s about “fairness,” one must wonder if the move is really a response to the $1.2 billion personal income tax drop that has occurred. Ottawa wants more money—as total federal spending grew 5.7 per cent in 2015-16 and 5 per cent in 2016-17 while total revenues only grew 4.6 and -0.7 respectively.
In its search for new revenues, the federal government seems to be changing the tax system. Indeed, Canada’s modern federal tax system was cobbled together in haste during and after the First World War with the creation of the federal personal and corporate income tax as well as the sales tax. It was not until the Carter Commission of the 1960s that a systematic effort was made to review and reform the Canadian tax system, with mixed results.
It has been about 50 years since the appointment of the Carter Commission. It has been about 30 years since the White Papers of the late 1980s, which led to income tax reform and the introduction of the GST. We have not had a comprehensive and systematic review of the entire federal tax system in some time, and yet there have been additional changes to tax rates and policies, such as the lowering of the GST rate and reductions in corporate tax rates, and the recent new 33 per cent federal income tax bracket. And now Finance Minister Bill Morneau’s proposals for changing how incorporated small businesses are taxed.
Clearly, it’s time to step back and conduct a systematic evidence-based review of the federal tax system, given much has changed in the world since the 1980s from continued globalization and technological change and the greater importance of knowledge-based services.
However, one thing remains eternal. Given the incentive effects of taxation on work effort, saving and risk-taking, the focus of tax reform should be to broaden the base and lower the rates. Ottawa can help this along by reducing its expenditure growth rate to at least match—rather than exceed—revenue. It can also help implement reform by doing away with ineffective tax expenditures in exchange for broad tax rate reductions.