November 26, 2014 – Canada’s tax system needs a new blueprint to respond to challenges from global trends, according to a groundbreaking report released today. In “Tax Policy for a New Era: Promoting Economic Growth and Fairness,” author Kevin Milligan proposes a reformed tax system that would achieve both greater potential economic growth and enhanced tax fairness.
“Canada’s current system is being challenged by two global trends,” states Milligan. “For over 30 years, incomes have been growing fastest at the top. At the same time, it’s becoming easier for individuals to respond to higher tax rates with behavior that lowers the income subject to such high rates of tax. ”
The central problem, according to Milligan, is that if the benefits of economic growth and recent tax reforms, like reductions to corporate taxes, continues to be concentrated among those with the highest incomes, support will erode for such growth-enhancing tax reforms, which also enhance Canada’s international tax competitiveness. The solution is to reform income taxes
Milligan calls for a dual-income tax that continues to tax wages progressively but taxes investments at a flat rate in order to achieve fairness and competitiveness. Recognizing the aspirational nature of such a grand reform, the author lays out two preliminary tiers of reform that are practical and build the foundation for the full dual-income tax. These first two tiers would improve efficiency and enhance fairness by removing tax expenditures and simplifying the taxation of capital income.
Milligan concludes: “the aim of these reforms is to increase fairness which is important to many Canadians but it also helps build support for and make possible the second goal of the reform; re-optimizing the tax system to boost investment and growth.”
The report is published by the C.D. Howe Institute in partnership with the Chartered Professional Accountants of Canada as a way to stimulate discussion of tax policy in Canada and does not represent the official positions of either organization.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
Click here for the full report.
For more information contact: Kevin Milligan, Associate Professor, UBC Vancouver School of Economics, Fellow-In-Residence, C.D. Howe Institute: 416-865-1904 Ext. 9997; E-Mail: kmurphy@cdhowe.org.