Ontario Premier Dalton McGuinty could learn a thing or two from his colleague in New Brunswick, Liberal Premier Shawn Graham.

In 2006, after defeating the incumbent Conservative government, the newly elected Graham took a page from McGuinty's playbook and increased personal and corporate taxes. However, unlike McGuinty, Premier Graham seems to have learned from his mistakes and is reversing course.

Earlier this week, his government released a discussion paper outlining options for overhauling New Brunswick's tax system to improve the province's economy. If the bolder options are implemented, New Brunswick would rival Alberta for the title of Canada's most positive investment climate.

The two primary objectives behind New Brunswick's tax review are to reduce the tax burden and change the tax mix to make the province a more attractive place to work, save, invest and engage in entrepreneurial activities. The guiding principle is to reduce the government's reliance on economically damaging income and business taxes.

While the paper presents numerous options for restructuring the tax system, superior solutions are notable throughout the paper.

For example, two options for reducing personal income taxes are proposed. The first would replace the province's four-rate system with a single 10% rate. The second, more timid option would see two rates of 9% and 12%.

Under the single-rate option, New Brunswick's top marginal personal income tax rate (currently 18%) would fall from one of the highest in Canada, to the lowest (with Alberta). As a result, the province's ability to attract and retain highly educated and skilled workers would significantly improve. In addition, a single rate would more effectively remove the current disincentive for people to engage in productive economic activities than would a multi-rate system. For these reasons, the government labeled the single-rate option as the one that would be most effective in making the province more attractive.

On the business side, the paper proposes to reduce the 13% corporate income tax rate to 10%, 7% or 5%. A 10% rate would again give New Brunswick the lowest rate in Canada (along with Alberta), but it was dismissed by the government as not being bold enough: The province must reduce corporate income taxes beyond the federal government's suggested [10%] rate.

The clear favourite is the 5% corporate income tax rate that would eliminate the tax penalty on growth by equating it with New Brunswick's small business rate. As a number of studies have shown, differential small business rates create an enormous disincentive for businesses to grow and develop.

Other proposed pro-growth reforms include a phase-out of industry specific tax credits and the elimination of the financial capital tax.

The paper also takes on property taxes, which are correctly labelled as a tax on capital and investment. Specifically, the paper recommends that New Brunswick reduce non-residential (business) property tax rates in order to remove the differential between non-residential and residential property taxes.

While a comprehensive costing of the tax reform is dependent on the specific options chosen, the government estimates that the personal and corporate income tax reductions would reduce funds available to the provincial treasury by about $500-million per year once fully implemented by 2013-14.

To mitigate the impact on revenue, the government proposes a two percentage point increase in the provincial sales tax that would bring in an extra $250-million per year. While unnecessary according to our calculations, it's certainly a trade-off any economist would applaud.

In addition, the paper suggests the introduction of a new carbon tax based on B. C.'s model to further offset the other reductions. While a New Brunswick carbon tax is estimated to raise $100-million per year, the additional seven cents a litre for gasoline will have almost no incremental effect on consumption (and emissions); especially since it comes with an automatic credit for low income earners who cannot afford to buy new, fuel efficient cars.

Rather than increase sales or gas taxes, the New Brunswick government can easily provide the resources necessary for significant tax relief through better control of government spending. Indeed, had the government limited the growth in spending to inflation plus population growth over the past five years, it would have had an average of more than $500-million per year for tax relief.

While presenting a discussion paper is much easier than actually delivering tax relief, the dramatic turnaround by New Brunswick's government is an extremely positive development. Premier McGuinty should follow New Brunswick's lead and repeal the economically damaging tax increases his government has implemented.