The Canadian Taxpayers Federation (CTF) released a tax proposal today urging the federal government to enact a multi-year tax reform/relief plan.

The proposal contained in “Lower, Simpler & Flatter – Towards a Single Tax Rate for Canada” was tested by the C.D. Howe Institute, which concluded that the plan can work provided the federal government undertakes modest spending restraint.

The report calls on Ottawa to reduce personal income taxes and cut the number of tax brackets from four to two. The report does not deal with corporate tax reform, nor does it redefine how investment income is taxed.

Authors Mark Milke and John Williamson say the first step the feds should take—by 2012— is to replace the four federal income tax rates of 29%, 26%, 22% and 15% with only two rates of 15% and 25%. And the ultimate goal of the plan is to move the country toward a single personal tax rate.

Milke and Williamson are in favour of maintaining only a handful of current deductions, such as RRSP and spousal and child allowances as well as those for charitable giving.

“Our immediate objective is to usher in two tax rates on personal income so no taxpayer will pay more tax and most will pay less,” said Williamson, CTF federal director. “The tax relief is substantial. If this two rate plan is implemented by the federal government it will mean a $25-billion annual personal income tax cut as of 2012.”

C.D. Howe’s director of research Finn Poschmann, concluded, “Restraining federal spending to 2.5% nominal growth per year, beginning in 2008, would produce planning surpluses of $21.9-billion and $28.1-billion [in fiscal 2011/12 and 2012/13]. This implies that personal tax relief of $25-billion per year is possible by 2012, while setting aside $3.0-billion annually for debt reduction and without running a fiscal deficit.”

The proposal sees the non-taxable income level raised to $15,000 from the current $9,600, which the authors say will remove 1.4 million Canadians from the income tax rolls. The plan also puts spousal exemptions at $15,000, up from the current $9600 and it calls for a per child exemption of $2,200.

As such, a two-parent family with two kids that is now subject to tax on income at $23,200 will not pay any federal income tax until their combined income exceeds $34,400.

“This tax relief is proportional. The more an individual or household earns the higher the tax savings will be. This is welcome because the middle class and high earners pay the majority of tax in Canada,” said Williamson. “Ottawa should stop punishing people for working hard.”

According to Statistics Canada, in 2002, the top 10% of taxpayers paid 52.6% of total federal income tax, up from 46% in 1990. Entrance to the “Elite 10% Club” began at $64,500 a year.

“Lowering tax rates sends the important signal that entrepreneurialism, risk taking and hard work are positive endeavours to be encouraged,” Williamson concluded. “This is something Canada’s current income system with punitive tax rates fails to do.”