Finance Minister Jim Flaherty needs to broaden the corporate tax base to make taxes more neutral and fair and to enable future reductions, according to a report from the C.D. Howe Institute.

The report “Flaherty’s Missed Opportunity,” says the minister’s tax relief goals are a start, but cautions that even with the reductions promised in October, Canada’s tax rate on most services will still be the highest among the 30 OECD member countries.

The report’s author, Duanjie Chen, George Weston analyst in tax policy, says the federal government’s economic statement did make good progress in October by promising a reduction in federal business tax rates from 22.1% to 15% by 2012.

More comprehensive tax reform is needed in Canada however, says Chen, adding that the most critical step is broadening the corporate tax system to treat taxpayers equally, regardless of industry sector or activity.

Provincial retail sales taxes are a big part of the problem, says the report. If the five provinces that still have provincial sales taxes were harmonized with the federal GST the overall effective tax rate would drop from 25.2% to 18.6% by 2012.

This type of sweeping sales tax harmonization would put Canada somewhere in the middle of the pack on the ranking of effective tax rates among the OECD countries.

The federal government missed an opportunity to make important changes to what and how we tax, not just at what rate, says Chen, and future tax initiatives should not repeat the oversight.