Reduce reliance on personal income taxes in next round of federal tax reform , says

The next round of reform and cuts to federal taxes should focus on bringing down overall personal tax rates, so that the tax mix depends relatively more on consumption taxes rather than income taxes, says a study released today by the C.D. Howe Institute. And Ottawa should pay more attention to payroll tax design, the study suggests, since payroll taxes that are clearly seen to fund desired benefits contribute to a more smoothly functioning economy, with better outcomes for retired, current, and future Canadian workers. Duclos and Gingras note that the 1987 federal tax reform initiative was driven by evidence that consumption taxes compare well with income taxes in delivering growth and fairness, two sometimes conflicting goals of Canada's tax system. More than a decade later, however, the tax revenues of Canadian governments remain stubbornly weighted in favor of personal income tax (PIT). The Canadian tax system is, in fact, an outlier in international terms, Duclos and Gingras say. In an era marked by reform and reduction measures around the globe, Canadian govern-ments' overall income tax rates as well as marginal tax rates (the tax take on the next dollar a taxpayer earns) have remained high or have actually increased. The growth and persistence of federal and provincial surtaxes, rising provincial tax rates, and the insidious effect of inflation on a tax system that does not adjust properly for inflation have acted in concert to keep PIT revenues at historically high levels, despite recent action on some of these fronts. The authors argue that Canadian taxes on wage income, whether extracted through income taxes or payroll taxes, make an employer's cost of hiring workers significantly greater than the net wages those workers receive. The larger that difference, the greater is the cost to the economy in the form of lost income and growth. And because income taxes, unlike consumption taxes, also apply to the return from savings, the Canadian economy experiences less capital investment and lower productivity and income growth than it could. Duclos and Gingras also argue that the design of payroll taxes matters. Although nominally charged to employers, payroll taxes are shifted to employees, through lower wages, or to consumers, through higher prices. Either route involves economic adjustment costs that could