Policy Forum: Piecemeal Tax Reform Ideas for Canada--Lessons from Principles and Practice

The basic structure of the Canadian personal and corporate tax system is informed by principles that were prevalent at the time of the Carter report. These principles include taxation based on the ability to pay, which supports comprehensive income taxation as the ideal base, accompanied by a corporate tax designed to withhold shareholders' income at source to prevent unlimited sheltering within corporations. Various piecemeal reforms have occurred since then, many of which move the base toward personal consumption. Yet, vestiges of the comprehensive income approach remain, such as a single-rate structure and a corporate tax base that is meant to reflect shareholder income. Ideas about optimal tax design and economic circumstances have evolved considerably since the Carter report. Initially, comprehensive income as an ideal base was challenged by progressive consumption taxation. This was later supplanted by an approach that emphasized individual well-being or welfarism. This in turn has recently been challenged by equality-of-opportunity ideas, which emphasize the opportunities that taxpayers enjoy, rather than the outcomes that they achieve. Additionally, the corporate tax has increasingly come to be seen as a device for taxing corporate rents, rather than for withholding shareholders' income at source. The author recounts the literature that has informed these changes and some of the practices that have emerged in other countries. Key elements of the literature include recent tax reform commissions in the United Kingdom, the United States, and Australia, each of which has relevance for Canada. Innovative practices include the dual income tax systems introduced in the Nordic countries and rent tax systems, such as the allowance for corporate equity and the resource rent tax. The author draws on these ideas and practices to offer some recommendations for tax reform in Canada.