One Comment About Taxation – Canada Needs “Big Bang Personal Tax Reform”

 

Canada’s government relies heavily on personal taxation receipts in order to fund its operations / investments.  Compared to other OECD member countries, Canada relies more on personal taxation revenues than others.  Such percentages of total taxation revenues vary yearly but it generally falls in the 50% of overall government revenues range.  That’s a big number.

 

Given such heavy reliance, any decrease in personal taxation rates can cause a large reduction in overall tax revenues.  That’s why it’s very easy for governments to increase personal tax rates – like our infamous government did in 2016 when it introduced a new additional taxation bracket for the so-called wealthy when they asked them to “pay just a little bit more”.  However, it is a rare event when governments reduce personal tax rates given the large impact it has on overall government revenues.  In 2016, the purported rationale for the new high tax bracket was to fund a decrease in lower income tax brackets.  However, the plan turned out to be a revenue loser.  Not surprising.

 

It’s obvious Canada needs tax reform.  Practitioners like me have been beating this drum for years and years. Extremely poor taxation policy over the last 9 years has driven successful Canadians out of Canada.  It has driven extreme complexity in our taxing statute which has contributed to decreased administrative performance by the Canada Revenue Agency.  The average accountant and lawyer has a hard time giving proper tax advice because of the complexity.  And the average Canadian simply does not understand our taxing statute.

 

Some eminent economists, like Jack Mintz, have also been beating the drum that Canada needs tax reform. Dr. Mintz has been advocating “Big Bang” corporate tax reform in order to help improve Canada’s sagging economic growth and attract investment.  His Big Bang proposal is based upon the model of Estonia but modified for Canadian purposes.  It’s a bold recommendation that a new federal government should consider because clearly our current government will not. If the Conservatives win the next election, they have promised to convene a Tax Reform Task Force within 60 days of getting elected.  I’m hopeful this Task Force would consider Dr. Mintz’s proposal.

 

But what about a “Big Bang” personal tax reform?  I’m on record stating that Canada needs to have broad-based personal tax reductions, especially in light of the recent U.S. election results.  Our personal tax rates are simply too high.  While it’s not likely we can ever afford to compete head-on with the United States given our much smaller population and economy, we can certainly try to narrow the gap.  But given our country’s large reliance on personal taxation revenues, can we do that?

 

The most common thing I often hear from the average Canadian is we should have a flat personal income tax rate.  The benefits, conceptually, are obvious.  For example, it would be much simpler to calculate tax liabilities, especially if a lot of tax preference deductions / tax credits would be eliminated. Tax compliance would be simpler.

 

The problem with a flat tax, however, is that if it is not designed properly, it can be regressive.  For example, let’s say the flat personal income tax rate – in a single rate system – is 20%.  Well, 20% of income for a lower income taxpayer has a much more material impact than that of a higher income taxpayer.

 

The same can be said for the GST.  The 5% rate has a much greater impact on lower income taxpayers than the higher ones.  That is why the GST was originally designed to not apply to certain basic necessities of life like food, clothing and most housing (except new builds, for example).  Education and health care costs are also exempt.  Combine that with the GST rebate system and the regressive effects of the the GST have been sharply reduced.

 

With the example of the GST, could a flat rate personal tax system be designed that would eliminate / reduce the obvious regression associated with a flat rate tax system?  If so, should the flat rate be a single rate system?  Dual rate?  If it gets to a triple rate, why bother…this gets away from the simplicity principle of a flat rate.

 

Could the actual rate be set so as to enable Canada to be more competitive for talent resulting in all Canadians to keep more of their hard-earned dollars? And can this be done with a minimal net loss of personal taxation revenues?  I say “net” because a key consideration to answering these questions will be how much government expenditures could be cut to help pay for the taxation revenue loss. In my view, it wouldn’t be too hard to significantly reduce government bloat and waste.

 

A flat personal tax rate has been part of Estonia’s tax system since 1994. With Estonia’s economic success, the flat tax (and its corresponding simplified tax compliance) has certainly been a contributor to that success.  And if Canada adopts such a model, Estonia would be an obvious to look at for positive and negative experiences associated with such a system.

 

Personally, I like the elegant simplicity of a flat personal tax rate system.  However, I can already hear the naysayers.  Especially some left-leaning academics or so-called “think-tanks” who will be quick to produce the latest study about why a flat personal tax rate system is bad. When I hear such negativity, I always recall that the easiest thing in the world to do is to criticize or dismiss ideas.  The harder, but often more productive, thing to do is to consider ideas critically and look for solutions for the obvious downsides of such ideas.

 

As the famous writer, Dale Carnegie, once said: “Any fool can criticize, condemn and complain – and most fools do”.  And the famous former CEO of Apple, Steve Jobs said: “Innovation is the ability to see change as an opportunity – not a threat”.

 

I’m hopeful that should the Conservatives win the next election, the Tax Reform Task Force would also consider Big Bang personal tax reform.  It just might be a great opportunity for all Canadians.

 

One Comment About Leadership – Leaders, Are You Planting Trees?

 

Last week, I was chatting with one of my sons.  He mentioned a conversation he had with his cousin recently about leadership.  He mentioned a quote that they discussed that I had never heard of previously: Society grows great when old men plant trees whose shade they know they shall never sit in.

 

We chatted about the meaning of this quote and who said it.  Turns out that it is unclear who that quote is attributed to but is thought to be an Ancient Greek proverb and has been used in a number of movies.  I think that quote is brilliant in its wisdom and simplicity.  Good leaders know that their actions – planting trees – will often have impacts that they will not see during their tenure.

 

One of the key aspects of leadership is legacy. Your leadership legacy should provide positive impacts for years.  Such an approach is selfless and is intended to provide benefits for those that come after you.

 

Leaders, are you intentionally planting trees?

 

One Comment About Economics: Parliamentary Budget Officer Report on the Estimated Housing Gap After Recently Announced New Immigration Levels

 

After years of out-of-control increased immigration levels in Canada (and people finally feeling comfortable about voicing concerns about such levels without the fear of being labelled a racist), one of the results has been a self-inflicted national housing challenge.  After many interventionist housing tax measures that I have written a lot about over the last number of years (and my predictions coming true that none of the measures will have a material impact on our country’s housing challenges), the government finally introduced reduced immigration levels late last month.  We’ll see if such reductions make a meaningful difference in the overall challenges that high immigration levels bring.

 

Given such reductions, the Parliamentary Budget Officer was asked to update its estimates on what the housing gap will be.  It released the Report about such a matter on November 15, 2024.  It’s an interesting read.  The Key Findings are as follows:

• Assuming that the population evolves in line with the Government’s projection, we estimate that the 2025-2027 Immigration Levels Plan will reduce Canada’s housing gap in 2030 by 534,000 units (45 per cent). After accounting for the Government’s new immigration plan, we estimate Canada’s housing gap in 2030 to be 658,000 units. 
• Combined with our updated baseline outlook of 1.7 million net housing completions, closing the housing gap in Canada would require a total of 2.3 million housing completions by 2030, which would translate into 390,000 total units completed annually, on average, from 2025 to 2030. 
• We judge that there is significant risk to the demographic projection presented in the Government’s new immigration plan—particularly to the projected outflow of non-permanent residents. Our estimated reductions in household formation and the housing gap are uncertain and likely represent upper-bound estimates.

 

While the Liberal government has been crowing in the last week or so about the estimated reduction in the housing units gap because of the immigration reductions, let’s just think about that for even two seconds.  The crowing is simply all politics.  Again, the recent housing challenges have been largely self-inflicted.  A recent reduction in immigration levels is simply common sense.  And the remaining estimated gap is still large.

 

I’m hopeful to have adults running the room after the next federal election.

 

Bonus Comment – Quote From Howard Schultz – American Businessman and Former CEO of Starbucks –– About Leadership Transparency

 

“The creation of a thousand forests is in one acorn.”

 

Yep, totally agree.  Leaders, again, are you planting trees and helping to create forests?

 

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