Ontario must tax smarter: Study
Sweden held up as model regime
Cutting costs for corporations key
The Toronto Star
By Steven Theobald
If Ontario wants to prosper in the years ahead, it needs to gut its tax system, and it can look to Sweden for inspiration, a new study concludes.
The Institute for Competitiveness & Prosperity, partly funded by Queen’s Park, makes a number of recommendations, including the elimination of corporate income taxes and a move to a personal income tax system based on lifetime, not annual, earnings.
While Taxing Smarter for Prosperity is largely aimed at easing the tax burden on businesses, it praises a country best known for its generous social welfare system.
“Some may balk at the high tax burden in Sweden, but it is hard to argue against the proposition that Sweden has a smart tax system.”
The world’s biggest economy, on the other hand, doesn’t have it right, the paper added.
“The United States does not have a particularly `smart’ tax system; this disadvantage is less important because its taxes are among the lowest in the industrialized world.”
The single most important policy change needed to boost Ontario’s economy would be to ease up on the taxes corporations must pay, starting with allowing firms to immediately write off new capital investments instead of spreading the depreciation across several years, the paper argues.
It also proposes provincial sales tax no longer be charged on business inputs, noting that nearly half of total PST revenues are from capital investments and business expenditures such as office supplies. Perhaps the most contentious suggestion is the complete removal of corporate income taxes, though the paper’s own research shows that lowering corporate tax rates would be among the least effective options to spur economic growth and job creation.
The problem is the economic model used for testing the options is designed for tweaking elements, not wholesale policy changes, said Jim Milway, the institute’s executive director and one of the report’s authors.
But the point remains that governments should be exploring such options, he added.
“We haven’t had any fresh thinking in taxation in Canada for two or three decades.”
While the paper spends a great deal of time trying to make life easier for businesses, it stresses that the overall goal is increased prosperity for society.
It bolsters its case by citing the fact that Sweden has corporate tax rates below both Canada and the United States.
“We are not making the case for higher or lower taxes. If this is the tax level we want, how can we make it smarter,” Milway said.
Reforming Ontario’s sales tax would offer the biggest boost to the province’s economy, the paper contends.
Eliminating PST on capital investments would boost per capita economic growth by 0.4 percentage points a year after 10 years. Harmonizing PST and GST would produce an identical benefit.
Personal taxes are also in dire need of reform, Milway said.
The paper cites an example of a single-income couple with two children. At $31,000 in annual income, the effective marginal tax rate is 60 per cent because transfers such as GST credits and federal and provincial child benefits get clawed back.
It gets worse.
At $36,000, the family gets to keep only a dime for every additional dollar of earned income.
While the current tax system contains disincentives for people in certain groups to earn more income, there is no simple solution and Milway’s paper doesn’t offer any, said Jon Kesselman, professor at Simon Fraser University’s graduate program in public policy.
Fixing the above problem would involve raising taxes for other people, possibly those with even lower income, said Kesselman.
“There is no magic, no matter how much you slice, dice or rename things.”
The paper also proposes that:
Governments scrap basic income tax exemptions, roughly $8,000 in Ontario, reduce all marginal income tax rates and find better ways to help low income earners.
Lower taxes on investment income to promote saving. One option is eliminating limits on RRSP contributions and introducing a system that is less punitive when funds are withdrawn from RRSPs.
Increase taxes on consumption, not savings, by converting the PST to a GST-like value added tax, harmonize it with the GST and possibly expand its coverage and rates.
A particularly unconventional policy option the paper puts forth is the idea of taxing people’s income based on a life cycle of earnings, not by year. For example, the first $250,000 of total income is tax-free and as income rises, so does the tax rate.
This idea has been around for a while and has shortcomings, the most obvious being a taxpayer’s ability to move from Canada as taxes rise, said SFU’s Kesselman. “In this report, we see that proposal being advanced again, but without further elaboration. That is disappointing.”
Kesselman agrees that saving ought to be encouraged, and cites the fact Sweden taxes investment income at a much lower rate than employment income — a flat 30 per cent. The country also makes life less tax onerous for business, which has benefited its economy, he said, adding that Sweden is worth studying.
