Institute calls for overhaul of tax system to boost productivity
Ottawa Business Journal
By Ottawa Business Journal Staff
Ontario can close the productivity gap with its peer group of U.S. states by taxing smarter, says a report from the Ontario Institute for Competitiveness and Prosperity.
In its seventh working paper, the Institute says business taxation should be shifted away from productivity-enhancing investments, and for individuals it means removing high marginal tax burdens on low-income families.
“We know that many factors drive a province’s prosperity, but we think that taxing smarter is an important way to achieve higher productivity and prosperity. We focus here on the mix of taxation, not the level,” says Roger Martin, dean of the Joseph L. Rotman School of Management at the University of Toronto and chairman of the Institute.
“Our businesses aren’t investing at the same level as our US counterparts in machinery, equipment, and software. As a result our productivity is lower and our workers earn lower wages. Our tax rates on business investment in Ontario and Canada are among the highest in the world - even high-tax places like Sweden understand that taxing business investment at too high a rate isn’t smart taxation.”
For business, the Institute urges reform of the provincial sales tax so that it is not levied on their investments and expenses.
“Corporations don’t pay taxes, people do. Corporate income taxes are paid by workers through lower wages, by customers through higher prices, and by shareholders through lower returns. If you want to tax the wealthy, tax them directly, not the corporations,” Mr. Martin says.
To replace the revenue lost through reducing taxes on business investment, the institute recommends that the Ontario government consider converting the provincial sales tax to a GST and apply it to the same goods and services as the federal tax. The Institute claims the average family’s economic well- being would increase with this tax harmonization, as the additional investment that would ensue would create more high-paying jobs.
The paper outlines several options for governments, including closer integration of the tax and benefit system, new ways to encourage investment for retirement - as seniors also face high marginal effective tax burdens - and greater focus on taxation of consumption, instead of earnings or savings.
The Institute also encourages governments to investigate the benefits of shifting the basis of taxation away from annual incomes to lifetime earnings. Instead of giving taxpayers an annual exemption of around $10,000, as is currently the case, this approach would exempt the first $250,000 of lifetime earnings from taxation. Income taxes would be imposed after this hurdle is achieved, and the tax rate would rise as accumulated lifetime earnings passed other income levels. People with lower incomes could face zero taxation for years and even decades. Those with higher incomes would face lower tax rates than currently.
Mr. Martin acknowledged that this would be a significant departure from current approaches. “It would take careful, deep thinking and rigorous logic. But we ought not to be deterred and simply accept the current counter-productive, complicated, and confusing system we have now.”
