Canada’s tax system requires swift simplification
Filed your taxes yet? You’ve got until Thursday at midnight. After that, according to the federal government, you’re officially in arrears.
Unfortunately, due to Canada’s increasingly complex tax system, Canadians today face greater challenges filing their taxes than they did just 20 years ago. Things have gotten a lot more complicated.
For instance, consider the actual legislation—the federal Income Tax Act—which is literally growing in size.
As noted in a recent Fraser Institute study, between 1990 and 2014, the Act’s text area (the number of pages multiplied by the size of the pages) increased by 62 per cent—from 974,050 cm2 to 1,575,537 cm2.
It’s important to consider text area because, while the number of pages declined slightly (by 4 per cent), the size of the pages increased 69 per cent over the same period.
Here’s an idea. If you were to lay out all the pages of the Act side-by-side, you’d cover the same area as 40 king-size beds. Or 38 ping pong tables.
More growth. From 1991 to 2011, the number of federal personal income tax expenditures (credits, deductions, exemptions, exclusions) increased to 123 from 105. At the same time, the number of corporate tax expenditures rose to 64 from 48.
A better and simpler alternative to littering the tax code with boutique credits is to cut tax rates broadly. The added benefit, of course, is improved economic incentives for work, saving, investment and entrepreneurship.
But it doesn’t stop there. From 2001 to 2011, the federal personal income tax guide, which includes information and instruction intended to help tax preparers, actually increased in size by 25 per cent—to 70 from 56 pages.
Why are these numbers important?
Because each new page, each new addition, can add to the complexity of Canada’s tax system. And the more complex the system, the more difficult—and often, more costly—that system is to navigate.
Today, Canadian families and businesses incur significant costs, above and beyond what they already pay in taxes, to merely comply with the tax system. They spend time and money collecting and organizing tax receipts, and working with accountants. If necessary, they hire lawyers. (In 2011, there were 499 court cases related to the Goods and Services Tax (GST)—up from 320 in 1993.)
Many Canadians, feeling overwhelmed by the tax system, buy computer software programs to help them weave through Canada’s tax maze.
And remember, these costs add no value to society. They don’t pay for new factories or new machinery or new jobs. They don’t improve lives through investments in education or training. And they certainly don’t increase living standards—in fact, they reduce incomes and the time available for family and friends.
Most disturbing, perhaps, is that Canada’s tax compliance costs fall disproportionately on lower-income Canadians who pay the highest share of their income to comply with the tax system.
Similarly, on the business front, smaller businesses pay a higher cost (as a share of revenues) to comply with the tax system than larger Canadian businesses.
In short, our complex tax system imposes costs on those least able to afford them.
Paradoxically, there’s also an increased cost to government. As the tax system grows more dense, the government can spend more time and money managing it, which, of course, may translate into more costs for taxpayers.
So what’s the solution?
Simply put, simplify it. Make the tax system easier to understand and less expensive. If you’re a taxpayer, this would lighten your load, reducing the amount of time and money required to meet that looming April 30 deadline.
And if you’re the government, you’ll free up resources, currently dedicated to Canada’s tax web, that could be used for other priorities including pro-growth tax relief for individual Canadians and businesses.
In the United Kingdom, they have an Office of Tax Simplification, which measures tax complexity with an eye on reducing it. There’s nothing like that in Canada. If policymakers are genuinely interested in helping Canadians keep more of their money—a common claim made during budget season—they should act now. Next year’s deadline is only 12 months away.
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