Reforming the Tax Mix in Canada
DOI:
https://doi.org/10.11575/sppp.v5i0.42383Abstract
Periodically, tax systems need major reforms to remove the “barnacles” that accumulate under the short-term pressures of political expediency and to adapt to the long-term forces of technological and economic change. The current fiscal and economic problems that confront the provinces require an assessment of much-needed reforms. Raising tax revenue imposes large costs on our society, not only because of the administration and compliance costs of collecting taxes, but because taxes distort economic decisions in the private sector. This is especially true of provincial corporate income taxes. Taxing highly mobile corporate capital and corporate profits encourages firms to shift their investments and profits across provincial and international boundaries. The provinces would enjoy significant boosts to economic growth and efficiency gains by enacting a revenue-neutral switch from corporate to sales or personal income taxes. For Alberta, such a shift would yield up to $40 per dollar of tax revenue shifted from corporate to personal income taxes; for fiscal year 2011-12, this would amount to a percapita welfare gain of roughly $19,000. Other options for tax reform are also discussed in this paper, including the adoption of a penny tax to the GST to fund infrastructure spending by municipalities. However, we think this would saddle the private sector with significant compliance costs and create major economic distortions between neighbouring municipalities by creating an incentive to shop where the penny tax proposal was not adopted. In surveying the most pressing tax reform issues facing Canada, we offer policymakers a firm basis for coming to grips with them, so they can treat tax dollars with the care and foresight Canadians expect.References
Arnold, J. 2008. “Do Tax Structures Affect Aggregate Economic Growth? Empirical Evidence from a Panel of OECD Countries,” OECD Economics Department Working Paper 643. Paris: Organisation for Economic Co-operation and Development.
Atkinson, A.B. and A. Sandmo. 1980. “Welfare Implications of the Taxation of Savings,” Economic Journal 90: 529-549.
Atkinson, A.B. and J.E. Stiglitz. 1976. “The Design of Tax Structure: Direct versus Indirect Taxation,” Journal of Public Economics 6: 55-75.
Baylor, M. and L. Beauséjour. 2004. “Taxation and Economic Efficiency: Results from a Canadian CGE Model,” Working Paper 2004-10. Ottawa: Department of Finance.
Bird, R. M. and J.M. Mintz. 2000. “Tax Assignment in Canada: A Modest Proposal,” in Harvey Lazar, ed., Canada: The State and the Federation 1999/2000, 263-92.
Bird, R. M. and K. J. McKenzie. 2001. “Taxing Business: A Provincial Affair?” Commentary No. 154.C.D. Howe Institute
Bird, R.M. 2003. “A New Look at Local Business Taxes,” Tax Notes International (May):695-711.
Bird, R.M. and P-P. Gendron (1998) “Dual VATs and Cross-Border Trade: Two Problems, One Solution?” International Tax and Public Finance, 5: 429-442.
Bleaney, M., Gemmell, N., Kneller, R., 2001. “Testing the Endogenous Growth Model: Public Expenditure, Taxation and Growth over the Long Run,” Canadian Journal of Economics 34: 36-57.
Boessenkool, K. 2010. “Fixing the Fiscal Imbalance Turning GST Revenues Over to the Provinces in Exchange for Lower Transfers,” SPP Research Papers 3 (December), The School of Public Policy, University of Calgary.
Breton, A. 1996. Competitive Governments. Cambridge: Cambridge University Press.
Bruce, N. 1992. “A Note on the Taxation of International Capital Income Flows,” Economic Record 68: 217–21.
Busby, C., B. Dachis, and B. Dahlby. 2011. “Rethinking Royalty Rates: Why There is a Better Way to Tax Oil and Gas Development,” Commentary No. 333, C.D. Howe Institute, Toronto,
Busby, C., B. Dachis, and B.Dahlby. 2011. “Rethinking Royalty Rates: Why There is a Better Way to Tax Oil and Gas Development,” Commentary No. 333, C.D. Howe Institute, Toronto http://www.cdhowe.org/pdf/commentary_333.pdf
Chamley, Ch. 1986. “Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives,” Economics, 54: 607-622.
Chen, D. and J.M. Mintz. 2011 “Small Business Taxation: Revamping Incentives To Encourage Growth,” SPP Research Papers 4 (May), The School of Public Policy, University of Calgary.
Cnossen, S. 2011. “Taxing Consumption or Income: Plus la Même Chose?” paper presented at the 2nd Symposium in Tax and Economic Growth, The School of Public Policy, University of Calgary, November 2-3, 2011.
Cremer, H. and P. Pestieau. 2010. “Wealth and Wealth Transfer Taxation: A Survey,” Working Paper 1017, International Studies Program, Andrew Young School of Policy Studies, Georgia State University.
Cullen, J.B., Gordon, R., 2007. “Taxes and Entrepreneurial Risk-Taking: Theory and Evidence for the U.S.,” Journal of Public Economics 91: 1479-1505.
Da Rin, M., M. Di Giacomo, and A. Sembenelli. 2011. “Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe,” Journal of Public Economics, 95: 1048–1066.
Dachis, B, G. Duranton, and M.A. Turner. 2008. “Sand in the Gears: Evaluating the Effects of Toronto’s Land Transfer Tax,” Commentary 277, C.D. Howe Institute.
Dahlby, B. 1994. "The Distortionary Effect of Rising Taxes," in Deficit Reduction: What Pain; What Gain? edited by R. Robson and W. Scarth, The C.D. Howe Institute, 44-72.
Dahlby, B. 2005. “Dealing with the Fiscal Imbalances: Vertical, Horizontal, and Structural,” C.D. Howe Institute Working Paper.
Dahlby, B. 2008. The Marginal Cost of Public Funds: Theory and Applications. Cambridge, MA: MIT Press.
Dahlby, B. 2011. “An Optimal Taxation Approach to Intergovernmental Grants,” Working Paper, Department of Economics, University of Alberta.
Dahlby, B. and E. Ferede. forthcoming. “The Effects of Tax Rate Changes on Tax Bases and the Marginal Cost of Public Funds for Canadian Provincial Governments,” International Tax and Public Finance.
Dahlby, B. and E. Ferede. 2011a “The Marginal Cost of Raising Tax Revenue: Implications for Tax Policy Options in Alberta,” Working Paper, Department of Economics, University of Alberta.
Dahlby, B. and E. Ferede. 2011b. “What Does It Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds,” Commentary No. 324, C.D. Howe Institute.
Djankov, S., Ganser, T., McLiesh, C., Ramalho, R., Shleifer, A., 2010. “The effect of corporate taxes on investment and entrepreneurship,” American Economic Journal: Macroeconomics 2: 31–64
Ferede, E. and B. Dahlby. forthcoming. “The Impact of Tax Cuts on Economic Growth: Evidence From Canadian Provinces,” National Tax Journal.
Firth, M. and K. McKenzie. 2011.“The GST and Financial Services: Pausing for Perspective,” Paper presented a the 2nd Symposium on Tax and Economic Growth, The School of Public Policy, University of Calgary, November 2-3, 2011.
Gentry, W. M. and R.G. Hubbard. 2000. “Tax Policy and Entrepreneurial Entry,” American Economic Review 90: 283-287.
Gordon, R. 1986. “Taxation of Investment and Saving in a World Economy,” Quarterly Journal of Economics 97: 567-86.
Government of Saskatchewan (2012), Keeping the Saskatchewan Advantage, Provincial Budget Summary 2012-13, Regina, Saskatchewan.
Huizinga, H. and S. Nielsen. 1997. “Capital Income and Profit Taxation with Foreign Ownership of Firms,” Journal of International Economics 42: 149-165.
Keen, M. and M. Marchand. 1997. “Fiscal competition and the pattern of public spending,” Journal of Public Economics 66: 33-53.
Johansson, A., C. Heady, J. Arnold, B. Brys, and L. Vartia. 2008. “Tax and Economic Growth,” OECD Economics Department Working Paper 620. Paris: Organisation for Economic Co-operation and Development.
Judd, K.L. 1985. Redistributive Taxation in a Simple Perfect Foresight Model,” Journal of Public Economics 28: 59-83.
Keen, M, and J.M. Mintz. 2004. “The Optimal Threshold for a Value-Added Tax,” Journal of Public Economics 88: 559– 576.
Kneller, R., M. Bleaney, and N. Gemmell. 1999. “Fiscal Policy and Growth: Evidence from OECD Countries,” Journal of Public Economics 74: 171-190.
Lee, Y., Gordon, R., 2005. “Tax Structure and Economic Growth,” Journal of Public Economics 89(56), 1027-1043.
Manzo, M. and M.T. Monteduro. 2010. “From IRAP To CBIT: Tax Distortions and Redistributive Effects,” Working Paper, University of Pavia
McKenzie, K.J. 2009. “Business Taxation in Western Canada: Settling for a Personal Best?” Going For Gold: The Western Canadian Economy in The International Arena, The Canada West Foundation, Calgary.
McKenzie, K.J. 2011. “Plucking the Golden Goose: Higher Royalty Rates on the Oil Sands Generate Significant Increases in Government Revenue,” SPP Research Papers 3 (September), The School of Public Policy, University of Calgary.
McKenzie, K.J., J.M. Mintz and K.A. Scharf. 1997. “Measuring Effective Tax Rates in the Presence of Multiple Inputs: A Production Based Approach,” International Tax and Public Finance 4: 337-359.
Mintz, J.M. 2011. “Municipal Mythologies,” Financial Post, December 5, 2011.
Mintz, J.M. 2007 “Tax Competitiveness Report: A Call for Comprehensive Tax Reform,” Commentary No. 254, C.D. Howe Institute.
Mintz, J and M. Smart. 2004. “Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada,” Journal of Public Economics 88 (6): 1149–68.
Mintz, J. and H. Tulkens. 1996. “Optimality Properties of Alternative Systems of Taxation of Foreign Capital Income” Journal of Public Economics 60: 373-99
OECD. 2007. “Fiscal Equalisation in OECD Countries,” Working Paper COM/CTPA/ECO/GOVERNMENT/WP(2007)4, OECD, Paris.
OECD. 2010. Tax Policy Reform and Economic Growth, OECD Tax Policy Studies No. 20, OECD Publishing, Paris.
Parsons, M. 2008. “The Effect of Corporate Taxes on Canadian Investment: An Empirical Investigation,” Department of Finance Working Paper, 2008-01.
PWC. 2011. Paying Taxes 2011: The Global Picture. www.pwc.com/payingtaxes.
Reed, R., 2008. “The Robust Relationship between Taxes and US State Income Growth,” National Tax Journal 61(1), 57-80.
Skinner, J. 1996. “The Dynamic Efficiency Cost of Not Taxing Housing,” Journal of Public Economics 59: 397-417.
Smart, M. 2011. “Departures from Neutrality in Canada’s Goods and Services Tax,” paper presented at the 2nd Symposium in Tax and Economic Growth, The School of Public Policy, University of Calgary, November 2-3, 2011.
Smart, M. 2010. “The Evolution of Federal Transfers Since the O’Brien Report,” in The 2009 Federal Budget: Challenge, Response, and Retrospect edited by C.M. Beach, B. Dahlby, and P. Hobson, J.D.I. Institute, Queen’s University, 199-221.
Smart, M. and R. Bird. 2009. “The Impact on Investment of Replacing a Retail Sales Tax with a ValueAdded Tax: Evidence from Canadian Experience,” National Tax Journal 62: 591–609.
Snoddon, T. and P. Hobson. 2010. “Cost Sharing and Federal-Provincial Fiscal Relations” in The 2009 Federal Budget: Challenge, Response, and Retrospect edited by C.M. Beach, B. Dahlby, and P. Hobson, J.D.I. Institute, Queen’s University, 181-198.
Vander Ploeg, C.G. 2011. “The Penny Tax: A Timely Tax Innovation to Boost Our Civic Investments,” Canada West Foundation Economic Research Series.
Vander Ploeg, C.G. 2008. “Problematic Property Tax: Why the Property Tax Fails to Measure Up and What to Do About It,” Western Cities Project, Canada West Foundation.
Downloads
Published
Issue
Section
License
The following is the copyright statement of SPPP.
Copyright © <Author name> <year>. This is an open-access paper distributed under the terms of the Creative Commons license CC BY-NC 4.0, which allows non-commercial sharing and redistribution so long as the original author and publisher are credited.
Publication Copyright and Licensing
The following guidelines and information, provided in six sections, are intended for authors (the “Author”) who are invited to write a paper (the “Work”) for The School of Public Policy Publications (the “Publisher”). The rights and responsibilities conveyed in the SPP Author Agreement will only apply once your paper is accepted for publication. At that point in the publication process, you will be asked to download the form and return a signed copy via e-mail to spppublications@ucalgary.ca. Please review the below information to ensure agreement with SPPP policies.
Section 1: Author’s Grant of Rights
In consideration of the Publisher’s agreeing to publish the Work in The School of Public Policy Publications, the Author hereby grants to the Publisher the following:
1.1 The irrevocable, royalty-free right to publish, reproduce, publicly display, publicly perform and distribute the Work in perpetuity throughout the world in all means of expression by any method or media now known or hereafter developed, including electronic format;
1.2 The irrevocable, royalty-free right to use the Author’s name and likeness in association with the Work in published form and in advertising and promotional materials related to the Work; and
1.3 The irrevocable, royalty-free right to license others to do any or all of the above.
Section 2: Prior Publication & Publication by Others
2.1 The Author agrees not to publish the Work, or authorize any third party to publish the Work, either in print or electronically, prior to publication of the Work by the Publisher.
2.2 The Author agrees not to publish the Work in any publication outlet which is substantially similar to The School of Public Policy Publications for a period of six (6) months after publication of the Work in The School of Public Policy Publications. Substantially similar is defined as a non-subscription, open-access publication outlet with a similar mandate/vision and intended audience.
2.3 Should the Author publish or distribute the Work elsewhere at any time or in any alternate format, the Author agrees to contact The School of Public Policy Publications to inform them of the subsequent publication.
2.4 Should the Author publish or distribute the Work elsewhere at any time or in any alternate format, the Author agrees to make reasonable efforts to ensure that any such additional publication cites the publication in The School of Public Policy Publications by author, title, and publisher, through a tagline, author bibliography, or similar means. A sample acknowledgement would be:
“Reprinted with permission from the author. Originally published in the The School of Public Policy Publications, http://www.policyschool.ca/publications/.”
Section 3: Editing and Formatting
The Author authorizes the Publisher to edit the Work and to make such modifications as are technically necessary or desirable to exercise the rights in Section 1 in differing media and formats. The Publisher will make no material modification to the content of the Work without the Author’s consent.
Section 4: Author’s Ownership of Copyright and Reservation of Rights
4.1 Nothing in this agreement constitutes a transfer of the copyright by the Author, and the copyright in the Work is subject to the rights granted by this agreement.
4.2 The Author retains the following rights, including but not limited to, the right:
4.2.1 To reproduce and distribute the Work, and to authorize others to reproduce and distribute the Work, in any format;
4.2.2 To post a version of the Work in an institutional repository or the Author’s personal or departmental web page so long as The School of Public Policy Publications is cited as the source of first publication of the Work (see sample acknowledgement above).
4.2.3 To include the Work, in whole or in part, in another work, subject to Section 2 above and provided that The School of Public Policy Publications is cited as the source of first publication of the Work (see sample acknowledgement above).
4.3 The Editors and Editorial Board of The School of Public Policy Publications requires authors to publish the Work under a Creative Commons Attribution-NonCommercial 4.0 International licence (CC BY-NC 4.0). This license allows others to distribute, remix, tweak, and build upon the Work for noncommercial purposes, and ensures the Author is credited for the original creation. This onward licensing is subject to section 2.4 of this agreement, which further ensures that the original publisher is credited.
Section 5: Author’s Warranties and Undertakings
The Author warrants that:
5.1 The Author is the sole author of the Work, or if a joint author, the Author has identified within the Work the other authors, and holds the copyright, either solely or jointly, and has the power to convey the rights granted in this agreement.
5.2 The Work has not previously been published, in whole or in part, except as follows:
5.3 Any textual, graphic or multimedia material included in the Work that is the property or work of another is either explicitly identified by source and cited in the Work or is otherwise identified as follows:
5.4 To the best of the Author’s knowledge, the Work does not contain matter that is obscene, libelous, or defamatory; it does not violate another’s civil right, right of privacy, right of publicity, or other legal right; and it is otherwise not unlawful.
5.5 To the best of the Author’s knowledge, the Work does not infringe the copyright or other intellectual property or literary rights of another.
5.6 The Author will indemnify and hold Publisher harmless against loss, damages, expenses, awards, and judgments arising from breach of any such warranties.
Section 6: The Reuse of Third-Party Works
The Publisher requires that the Author determine, prior to publication, whether it is necessary to obtain permissions from any third party who holds rights with respect to any photographs, illustrations, drawings, text, or any other material (“third-party work”) to be published with or in connection with your Work. Copyright permission will not be necessary if the use is determined to be fair dealing, if the work is in the public domain, or if the rights-holder has granted a Creative Commons or other licence. If either the Author or Publisher determines for any reason that permission is required to include any thirdparty work, the Author will obtain written permission from the rightsholder.
