Fraser Institute offers solution to economic stagnation and complex tax system

An idea for federal tax reform which looks at benefitting all Canadians by simplifying the system is the foundation for a recent Fraser Institute report publishing on March 19, 2024.

Authored by Jake Fuss, Director of Fiscal Studies and Milagros Palacios, Director of the Addington Centre for Measurement, the report offers great ideas that would positively impact taxpayers coast-to-coast.

The impetus to research and publish this report is two-fold explains Fuss. On one hand, a tax system review is “overdue” and on the other, the economy is stagnating, and solutions need to be found somewhere.

One of those areas to stimulate economic growth is by looking at the tax system.

“Most of the changes (to the tax system) have been incremental changes ad hoc over the years,” he says. “We’re overdue for some changes to the tax system.”

The proposed Fraser Institute pro-growth option is to get rid of the three middle income tax rates of 20.5 percent, 26.0 percent, and 29.0 percent. Each of those rates would be reduced to a standard 15 percent across the board.

Then, they would return the top earners tax rate to 29 percent, where it was from 1988 to 2016.  This year the top earning bracket in Canada is at $246,752 annually and above – they’re currently being taxed 33 percent.

This would reduce the system’s complexity by going down from five to two tax brackets, while improving economic incentives. Basically, more earnings stay with the people, who are then more likely to spend on wants rather than only needs.

“This way we can simplify and reform the tax rate,” says Fuss. “Using the lowest rate for nearly all Canadians and then reverting the rate for the top earners to what it was in 2016.”

These changes would establish a new tax landscape with just two federal personal income tax rates. Altogether, this package of tax reductions, fully implemented, would cost $37.7 billion.

According to the report, there are 49 different federal tax credits, deductions, and special preferences that should be eliminated. The elimination of these tax expenditures would give the federal government a total of $32.1 billion to use to lower personal income tax rates.

“We definitely evaluated it on which ones ultimately made sense and which ones are effective,” says Fuss. “We found that a lot of the tax credits and expenditures do little to improve economic incentives and spur growth. So, we were evaluating which ones were distorting the tax system or creating biases for individuals who were not eligible for special preferences and things like that.”

Even after the elimination of the 49 tax credits, deductions, and special preferences, there would be $5.6 billion remaining of suggested tax relief that could be covered through federal program spending reductions.

This was a general across the board number, they didn’t investigate those specifics, that could be addressed by reduced expenditures from several budget items, explains Fuss.

He notes that should these changes be implemented, it would give us the personal income tax competitiveness to be significantly more competitive and attractive when compared to the United States, as well as other comparable countries across the world, including several in Europe.

“Tax reform is huge for Canada as it allows us to attract and retain highly skilled individuals, professionals, entrepreneurs, and businesses owners,” says Fuss. “This is very important for economic growth, to improve living standards for all Canadians, and for job creation.”

The Fraser Institute is an independent, non-partisan research and educational organization based in Canada. We have offices in Calgary, Halifax, Montreal, Toronto, and Vancouver.

Though they occasionally will be asked to speak in front of parliamentary committees about their research and reports, their main goal is to find solutions and present them to the public.

Says Fuss, “Our main mission is to focus on everyday Canadians and communicate our results to them.”

If they like what they see, it’s up to everyday Canadians to write their Members of Parliament (MPs) and get the ideas turned into policy.