Taxing smarter for prosperity
In its seventh working paper, Taxing smarter for prosperity, the Institute concludes that Ontario can and should tax smarter in order to close the prosperity gap with its peer group of US states. For businesses, this means shifting taxation away from productivity-enhancing investments. For individuals, it means removing high marginal tax burdens on families with low incomes.
“Smart taxation” creates the right balance between equity, when taxes are paid by those most able to afford them, and efficiency when the negative impact of taxation on decisions to work, save, and invest is limited.
The Institute draws on work by the federal Department of Finance and its own research to conclude that Ontario and Canada have opportunities to reduce taxation on business investment. For example through reforming of the provincial sales tax so that it is not levied on businesses’ investments and expenses, or eliminating the corporate income tax.
To replace revenue lost through reduced taxation 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. Research indicates that 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.
For individuals and families, the working paper focuses on the marginal tax burdens faced by lower income earners as they try to climb the economic ladder. The working paper proposes 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 a 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. People with lower incomes could face zero taxation for years and even decades. Those with higher incomes would face lower tax rates than currently. This would occur because the basic personal exemption, which costs the federal government about $23 billion annually in forgone revenue, would be eliminated. 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.”