Even though Canada goes to the polls today, there has been little real debate on the fiscal policies needed to improve Canada's economic growth and productivity performance. What Canada needs is a fiscal plan focused on economic prosperity that creates and strengthens the incentives for individuals and businesses to engage in productive economic activity.

First and foremost, a prosperity-based fiscal plan would control the growth of federal spending. Consider that since the federal government balanced its books in 1997-98, program spending has increased by an average of 5.9% per year, faster than the average rate of economic growth (5.7%).

In recent years, the federal government's spending problem has worsened. For example, federal program spending increased by an average of 7.1% annually under prime minister Paul Martin. Since 2005-06, the Conservative government has increased program spending by an average of 7.2% per year. This from a government that promised to hold spending increases to the annual rate of population plus inflation growth, just 3.1% year since 2005-06.

Whoever forms the next government must apply the brakes to spending in order to create the fiscal room needed to provide tax relief.

This brings us to the second essential ingredient of a prosperity-based fiscal plan: promoting investment, hard work, risk taking and entrepreneurship through tax relief that changes incentives.

The key to improving incentives for productive behaviour is reducing marginal tax rates -- the rate people and businesses pay on the last dollar of income earned. To that end, Canada's next federal government should do the following:

• Reduce middle and upper personal income tax rates. Canada maintains among the highest marginal personal income tax rates on middle and upper income earners among the G7 countries. The new federal government should reduce the personal income tax burden on these Canadians to harness the productive energies of skilled workers, business owners and entrepreneurs across the country. Regardless of the specific proposal, the federal government's aim should be to move toward a single-rate personal income tax. A good first step would be to eliminate the middle two personal income tax brackets, and reduce the top rate from 29% to 25%. Incomes between the basic personal exemption ($9,600) and $150,000 would be taxed at 15% and income over $150,000 would be taxed at 25%.
• Eliminate the capital gains tax. This is one of the most damaging taxes in Canada. It encourages the owners of capital to hold on to their investments and prevents them from taking advantage of more profitable investment opportunities. In addition, capital gains taxation has a detrimental impact on entrepreneurship by reducing the return that entrepreneurs, venture capitalists and other investors receive from risk-taking, innovation and work effort.
• Reduce the corporate income tax. The new federal government should build on the corporate income tax cuts implemented by the Conservative government in October, 2007 -- the reduction in corporate income tax rates to 15% over the next four years. Despite these reductions, Canada's marginal effective tax rate on investment will still be the 10th-highest among OECD countries in 2012.

Specifically, the new government should further reduce the corporate income tax rate from 15% to 11% by 2012. Doing so would eliminate the difference between the small business tax rate (11% in 2008) and the general corporate income tax rate. As a number of studies have shown, the enormous increase in the tax rate borne by businesses as they grow results in a significant barrier to growth.

• The federal government should facilitate the harmonization of provincial sales taxes with the GST in British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island. Harmonization with the GST would exempt business inputs from provincial sales taxes, reduce the marginal effective tax rate on investment and improve the incentives for business to invest in productivity-enhancing machinery and equipment.
• Eliminate the capital tax on financial institutions. While the federal government has completely phased-out the general corporate capital tax, a sector-specific capital tax remains on financial institutions. These capital taxes artificially penalize firms in the financial services sector and raise costs for anyone using financial services. It is a counter-productive public policy to maintain this tax distortion on an industry that is a large employer of Canadians and in an area with very mobile capital resources.

Canada needs a fiscal plan aimed at improving our economic performance. A prosperity-based plan would decrease the size of government and reduce taxes to provide the necessary incentives for individuals and businesses to engage in productive activities. Such a plan would result in higher levels of investment, increased productivity and higher incomes -- benefits all Canadians can enjoy.