With a federal election just a failed non-confidence vote away, the Canadian Taxpayers Federation has presented some possible campaign fodder should the governing Tories be forced to drop the writ.

The Ottawa-based advocacy outfit released a report on Jan. 17 calling on the federal government to move from four income tax rates down to two. The study, entitled Lower, Simpler & Flatter — Toward a Single Tax Rate for Canada, recommends replacing the current rates of 29%, 26%, 22% and 15% with two rates of 25% and 15% — the former on income of more than $80,000 — by 2012. The aim is to eventually adopt a single personal tax rate.

Under the CTF model, Canadians earning $15,000 or less — about 1.4 million people — would be wiped off federal tax rolls. That is up from the current personal exemption of $9,600. The spousal exemption would also be $15,000 and there would be a per-child amount of $2,200, as well.

That means dual-income families with two children wouldn’t pay any tax until their combined income exceeds $34,000, up from $23,200 under the current regime.

With about 90% of Canadians earning less than $80,000 annually, the CTF model would mean a single rate for the vast majority of taxpayers.

The CTF’s members have had discussions with the federal government regarding its proposal after it was delivered to the offices of both the prime minister and the finance minister. John Williamson, federal director of the CTF, says it was well received.

“It was viewed as a serious document, which contained some good research,” he says. “The government keeps its cards very close to the vest, particularly before a budget.”

The notion of a single income tax rate got a boost from the Vancouver-basedFraser Institute in a late January report. It suggests that a flat tax — more than 20 jurisdictions around the world have adopted such a tax — would turn Canada into a magnet for investors and entrepreneurs.

Retain Receipts

Williamson says the time has come for some serious tax reform. The “boutique” tax cuts that have recently been brought in have only “cluttered” the tax code and made the whole system more confusing for Canadians to deal with and more expensive for the government to administer.

The problem with tax credits for having a child in a sports program or taking public transit to work is,if you don’t know about the tax benefit and tick the right box on your tax return, you lose out, he says.

“You have to retain receipts for tools, books and sports programs,” Williamson says. “It makes it more cumbersome for individuals and requires them to turn to professionals to get the benefits.”

The CTF recommends sweeping away 80% of personal income tax credits. “You’d end up with a better system,” he says, “that doesn’t require the hoop-jumping to receive tax relief.”

The CTF proposal is financially feasible if Ottawa is able to reduce its expenditure growth to about 2.5% annually from the current level of 4.3%, Williamson says.

That stipulation raises the ire of Hugh Mackenzie, research associate at the Canadian Centre for Policy Alternatives and executive director of the Ontario Fair Tax Commission in Toronto. The CTF plan calls for a more than a 10% cut in total federal government program spending right off the top, he says. The cuts certainly wouldn’t be found in old-age security, the guaranteed income supplement, employment insurance or military spending.

“In this kind of scenario, you’re looking at pretty large and painful cuts in public spending,” he says, “and a radically different and less capable federal government.”

Mackenzie is concerned about the growing inequality in terms of income and taxation in Canada. He points to a Statistics Canada study that found the income tax rate for the average Canadian went down two percentage points from 1992 to 2004, while the rate for people in the top 1% of taxpayers went down by a whopping 10 percentage points.

“The data show all the action in the growing income inequality in Canada is taking place at incomes well above $100,000,” Mackenzie says. “The income tax system is completely flat over that range. People in that income bracket have seen massive growth in their incomes while the average Canadian hasn’t seen any real growth.”

@page_break@Another problem Mackenzie has with such proposals is they’re presented as if the tax cuts are free, which is certainly not the case.

“There’s no such thing as a free lunch. You can’t cut taxes and not have any consequences,” he says. “There were lots of people around selling ideas as the CTF is doing in the late 19th century. They were called ‘snake oil salesmen,’ people who sold things without telling the whole story. That’s what we have here. We have to stop having these one-armed debates.”

Tax Burden

Advocates of tax cuts are never prepared to own up to the implications of what they’re calling for, he says, including the government’s ability to provide services, improve the quality of infrastructure, increase investment in education and secure the future of the health-care system — which are all important things.

John McCallum, a finance professor at the I.H. Asper School of Business at the University of Manitoba and a former advisor to Michael Wilson, the finance minister during Brian Mulroney’s governments, says that while simplifying the Canadian tax system is an admirable goal, the biggest issue is the magnitude of the tax burden, particularly on the middle class.

“The goal of any tax system should be fairness,” he says. “It should provide the right incentives in the sense of encouraging people to be self-reliant and motivated to save. Those things make an economy work.

“I would cheer on anything that got taxes on Canadians and especially the middle class down, because we are very heavily taxed,” he adds, noting that the CTF proposal “sounds like at least a step in that direction.”

The ideal time to cut taxes, McCallum says, is when a country is heading into a slowing economy because it provides a much-needed boost to people’s pocketbooks and gets things moving again. But the reality is governments have difficulty following that timetable because of the double-whammy that tax cuts and a slower economy have on government coffers.

“Governments have a terrible time getting over the hump of what tax cuts will do to their revenue,” he says. “It’s a tough environment in which to persuade governments to cut taxes. But if you really want to make this economy cook, take the burden off the middle class.”

For his part, Mackenzie feels the current level and growth of income inequality in Canada is “unhealthy” for the country and the federal government should consider measures that alleviate the problem, not make it worse.

At the top of his list is adding a couple of new tax brackets that tap into those in the “stratosphere” income range. He says policy makers also need to revisit how capital gains are taxed.

“We tax that at half the rate of ordinary income; that’s one reason why the effective rate of tax for people at the top has come down,” he says, adding that capital gains taxation “makes no distinction between quick-flip gains and long-term gains.” IE