The solution to Canada’s tax complexity is simple: Simplify the system
Filed your taxes yet? You’ve got until midnight on May 2.
Unfortunately, due to Canada’s increasingly complex tax system, Canadians today can face great challenges when filing their taxes. Things have gotten a lot more complicated.
First, consider the actual legislation—the federal Income Tax Act—which is literally growing in size.
A recent Fraser Institute study found that, between 1971 and 2014, the Act’s text area (the number of pages multiplied by the size of the pages) increased by 355 per cent.
Currently, the Act measures 1,575,537 cm2. If we laid out all the pages side-by-side, they would cover 51 queen-size beds.
More growth: From 1981 to 2014, the number of federal personal income tax expenditures increased to 128 from 101—an increase of 27 per cent.
Tax expenditures, which are special tax breaks for particular individuals or activities (including tax credits, deductions, exemptions and exclusions) now cost the federal government $165 billion a year in foregone revenue—more than it collects in personal income tax revenue ($135.7 billion).
The problem of increased tax complexity isn’t confined to the federal government. From 2000 to 2015, the number of total lines in the tax forms of every province also increased. For example, Ontario’s tax forms now have a total of 194 lines, up from 77.
And in addition to adding complexity with more rules and tax expenditures, governments across the country have been further complicating their tax systems by adding new tax rates in recent years. From 2008 to 2016, five provinces and the federal government increased the number of tax brackets in their personal income system. Most notably, Ontario went to seven tax brackets from five; Alberta, which had a single-bracket until October 2015, jumped to five income tax brackets.
Why are these numbers important?
Because each new additional tax law, credit, line or rate 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 to merely comply with the tax system. They spend time and money collecting and organizing tax receipts, and working with accountants. Many Canadians, feeling overwhelmed by the tax system, buy computer software programs to help them weave through Canada’s tax maze.
And these costs add no value to society. They don’t pay for new factories or new machines. 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 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. Indeed, 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 denser, the government can spend more time and money administering 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. Instead of littering the tax code with “boutique credits,” governments across the country should eliminate or at least reduce tax expenditures while cutting tax rates broadly.
If you’re a taxpayer, this would lighten your load, reducing the amount of time and money required to meet that looming deadline. The added benefit is improved economic incentives for work, saving, investment and entrepreneurship.
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.
If policymakers are genuinely interested in simplifying the tax code—something the federal government has recently expressed interest in—now is a good time to act. Next year’s deadline is only 12 months away.
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