Ottawa should reduce role of income tax in revenue stream

This year, the Trudeau government is on track to spend almost $500 billion (equivalent to almost 18 per cent of Canada’s GDP), with $447 billion for programs and services and the remainder for interest payments on the federal debt, which now stands at $1.9 trillion—approximately double the level a decade ago.

Federal spending has climbed significantly over time, with a dramatic jump under Justin Trudeau’s administration. Back in 2015-16, annual spending was running at $295 billion. Total federal expenditures have therefore risen by two-thirds in just eight years, comfortably outpacing the growth of Canada’s population and economy.

On the other side of the fiscal ledger, Ottawa expects to receive $457 billion in revenues in 2023-24, which is 56 per cent more than it collected in 2015-16.

Where does all this money come from?

Surprisingly, the national government relies heavily on a single revenue source—personal income tax (PIT). Indeed, depending on the year, 45 to 50 per cent of all federal revenues come from the PIT.

That represents a high degree of reliance on a single revenue stream. Compared to other advanced economies, the government sector in Canada (federal, provincial and local combined) is unusually dependent on PIT, according to data published by the Organisation for Economic Cooperation and Development. In many other developed countries, the national government is funded with a more diverse mix of revenue sources, including taxes on consumption, payrolls and property.

As the Chartered Professional Accountants of Canada and other prominent organizations have argued, Canada’s tax system has become creaky, inefficient and needlessly complicated. Tax compliance costs continue to escalate. To fashion a tax system suited for a 21st century economy, policymakers must retool and simplify our cumbersome and growth-inhibiting income tax system.

If a future federal government decides to pursue broad tax reform, it should commit to reduce the role of income tax in providing revenues. When provincial taxes are added to those levied by Ottawa, top combined marginal tax rates exceed 50 per cent in seven provinces; these top rates apply at income thresholds well below those in peer jurisdictions including the United States and the United Kingdom. In Canada, the income tax burden is excessive for skilled workers, managers, professionals, innovators, top researchers and entrepreneurs—in other words, the people we need to drive wealth creation, fuel business growth and build a more productive economy. Today, a growing number of talented individuals with these kinds of qualifications and experience are either leaving Canada or contemplating doing so, due in part to uncompetitive income taxes.

A reformed tax system should lower income tax rates for most households and reduce the role of tax preferences, loopholes and special rules that often serve to increase complexity. Most economists agree that lower tax rates and a broader tax base would be positive for economic growth in Canada. But the tax system also must provide the revenues needed to fund the government sector, which is why it’s important to keep spending in check and avoid the helter-skelter expansion of government programs seen under Mr. Trudeau’s watch.