A Six-Point Productivity Focused Tax Reform Plan

From: Alexandre Laurin and Nick Dahir 
To: Tax observers
Date: June 16, 2025
Re: A Six-Point Productivity Focused Tax Reform Plan

Strengthening the foundations for growth should be a top policy priority amid global trade disruptions. No single measure will fix Canada’s economic underperformance, but swift, practical tax reform could make a real difference.

We propose a bold shift in the tax mix, inspired by the C.D. Howe Institute’s recent Shadow Budget, which we outline more fully in the latest issue of Perspectives on Tax Law & Policy.

Our plan has six points:

• Reduce federal personal income tax (PIT) rates by 4 percentage points in the third, fourth, and fifth brackets.
• Reduce the federal corporate income tax (CIT) rate from 15 percent to 13 percent.
• Return the GST rate to 7 percent from 5 percent.
• Add $6,000 to the existing basic personal amount top-up, making it fully available to individuals in the first two tax brackets, with a gradual phaseout between the thresholds of the third and fifth brackets.
• Reduce the federal age credit (currently about $9,000) to $4,000.
• Enhance the medical expense tax credit by cutting the eligibility thresholds in half.

Taxes influence behaviour, and while some economic distortion is inevitable, not all taxes are equally damaging. Corporate and personal income taxes in particular, are more harmful to growth and more easily avoided than consumption taxes.

As economist Bev Dahlby and others have shown, different tax bases come with different marginal costs of public funds (MCFs) – the economic cost of raising an additional dollar of revenue. In general, corporate and personal income taxes have higher MCFs than consumption taxes, meaning they impose greater harm per dollar raised.

Corporate income taxes are particularly harmful to investment. Higher CIT rates reduce the after-tax return on new projects, lowering their appeal to foreigners and Canadians alike. Conversely, lower rates make Canada more attractive to investors, a crucial consideration given ongoing trade tensions with the United States

Quantifying the macro-level effects of taxation is complex, since taxes also fund growth-enhancing public services. However, firm-level and microeconomic studies – including OECD research and a 2010 World Bank/Harvard study – have shown clear negative impacts of corporate taxes on investment, entrepreneurial activity, and productivity.

On the personal income tax side, the most visible short-term effects often involve secondary earners and seniors. However, PITs also influence long-run earnings by affecting decisions related to job experience and skills development. And high-income earners also respond aggressively through tax planning and avoidance.

In contrast, consumption taxes – especially when underutilized relative to income taxes – tend to have smaller adverse effects on growth. Recent research confirms that shifting the tax burden toward consumption can support investment and economic activity with less distortion.

The key insight is that reforming the tax mix – reducing reliance on income taxes and increasing consumption-based taxes – can raise the same amount of revenue at a lower economic cost. We calculate that such a shift could improve long-term economic welfare by up to $15 billion annually.

To minimize the regressivity of the rate reductions, we propose the $6,000 increase in the basic personal amount top-up, targeted at the bottom two income tax brackets, to provide broad income tax relief while offsetting the two-point GST increase on lower-income earners.

Meanwhile, seniors, now the least likely age group in Canada to live in poverty, would lose some of their preferential tax treatment in the proposed reduction in the age credit base amount. But that would be offset by the enhanced basic personal amount, and the medical expense tax credit threshold would be lowered, increasing its value and providing targeted relief.

Our plan is broadly revenue-neutral, with estimates shown for 2027-28 to account for behavioural adjustments (see Table). Lower corporate rates would boost after-tax returns on investment, encouraging capital growth and potentially drawing multinational profits back to Canada. Reduced personal rates would lessen avoidance and strengthen incentives to work, save, and take risks. While the GST hike may also trigger behavioural changes, its broader base and limited avoidance opportunities suggest smaller economic distortions than those from income taxes.

Recent tax reforms have emphasized equity and redistribution. It’s time to refocus on economic efficiency. This proposal would give the economy the oxygen it needs to grow – without cutting public services or increasing the fiscal burden.

Baseline tax revenues are projected on the basis of GDP growth rates from the latest Public Accounts of Canada report. Initial revenue changes reflect static estimates—that is, they assume no behavioural response. PIT calculations are based on Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M), version 30.3. Behavioural responses for PIT are estimated by using a taxable income elasticity of 0.5, appropriate for higher income levels (see Department of Finance’s estimates in Tax Expenditures and Evaluations 2010). For CIT, an elasticity of 0.33 is applied, a weighted average based on findings from Tax Expenditures and Evaluations 2014. The elasticity of the GST base is set at half the PIT elasticity. We also assume that one-quarter of the increase in after-tax corporate profits will be distributed as eligible dividends, and that the gross-up and credit rates will be adjusted to preserve current levels of integration. Totals may not add because of rounding.

Al longer version of this article was originally published in Perspectives on Tax Law & Policy. Alexandre Laurin is Vice-President and Director of Research at the C.D. Howe Institute, where Nick Dahir is a Research Officer.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

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