U.S. tax reforms seen as a catalyst for Canada

(April 20, 2005) Tax reform is a sleeper issue — the United States will be looking closely at overhauling its system next year and Canada should follow suit, says Jack Mintz, president and CEO of the C.D. Howe Institute.

On a list of 20 different countries examined by the institute, Canadian businesses pay the third highest rates of taxation after China and Germany, says Mintz. Once Germany’s recently announced tax reforms are implemented he says Canada will be second only to China. Business investment is low and on top of that Canada faces a peak in labour force numbers within the next 15 years.

By 2040, health care and elder support will make up half of Canada’s economy and fewer people than ever will be paying into the system once baby boomers start retiring. For clients, efforts to maintain a decent standard of living in the face of this looming demographic shift are thwarted by the way personal income taxes are levied, Mintz claims.

“The tax system has a bias against savings,” Mintz told lunch delegates at a meeting of the Toronto CFA society this week. He says those who consume pay less tax in the long run relative to those who save, pay tax on their income and then pay tax on the income their savings generate. “It doesn’t take much imagination to understand that the saver pays more in tax.”

For individuals, he argued the government should increase limits for pension and RRSP limits in a significant way and allow clients to contribute up to 30% of their income to a registered plan. He also suggested raising the age limit at which Canadians must convert their registered plans to an annuity or a RIF to 75 from 69.

He says more business investment is also needed to promote economic growth. Although Mintz commended the government for promises made in the federal budget to lower corporate tax rates, he urged further reforms and more neutral policies so that taxation does not encourage one type of business over another. “Each decade a new industry comes along,” he says. “Governments can’t pick the winners and losers.”

He says the current income trust boom is an example of just how the tax system is hurting the economy. Businesses are not investing in machinery and equipment or capital structures. He says if Alberta is removed from the equation the numbers are particularly problematic. “Investment rates are very low,” he says. “These are significant issues that we need to think about.”

To improve business competitiveness and help the economy, he says Canadians are probably willing to accept government moves to lower corporate tax rates. He suggests making tax rates the same for both small and large businesses — “It’s smart industrial policy” — and moving towards a system that levies taxes on business value rather than income or capital expenditures.

“The public understands more and more that you can’t put pressure on companies,” he says. “Maintain a fair tax policy and there is a lot of room to make positive changes.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com