With a sweeping tax reform in place in the United States, the pressure has increased sharply for Canada to follow suit, though not necessarily in the same manner.
A recent speech on the question by Finance Minister Michael Wilson indicated that Canadians could expect important changes in their tax environment at the time of the next federal budget, expected in February.The overall thrust of the planned reform in Canada entails significant reductions in personal taxes, to be counterbalanced in part from higher corporate revenue and in part from a broadly-based consumption or Business Transfer Tax on all goods and services. The latter would constitute an adaptation of the European-style value-added tax.
Because of Canada's heavy reliance on the United States for its economic well-being (four-fifths of Canadian exports flow to the United States), this country cannot afford for long to be out of step with the U.S. fiscal regime.
On other hand, Canada cannot blindly follow the United States on tax reform. Extensive medical and other social programs in Canada demand higher personal taxes than in the United States.
The average Canadian pays more tax in absolute terms than the average American, even though U.S. citizens earn an estimated 16 percent more in income. Many Canadians envy Americans because they are able to reduce their tax burdens by deducting interest paid on mortgage payments and credit card
Whatever the size of the personal tax reduction in Canada, it will not likely match the dramatic 20-point reduction in the United States for most lower and middle income taxpayers. But Mr. Wilson is expected to clearly lighten the burden of Canadians in this bracket.
Another reason why the Ottawa authorities cannot simply copy the U.S. model is the existence in Canada in the past few years of a C$500,000 lifetime capital gains exemption. It is difficult to reconcile the notion of a comprehensive income tax with that of a zero capital gains tax rate.
According to the guidelines set out by Mr. Wilson, the central objective is to establish a fair, balanced and stable system that will strengthen Canada's ability to compete internationally and stimulate growth. The minister wants a system that will also meet social and regional requirements.
Generally speaking, Mr. Wilson wants to broaden the base on which personal, corporate and sales taxes are levied while simultaneously shaving marginal tax rates. This would involve cutting many existing exemptions, credits and other incentives eroding the present tax base.
Over the past two decades, personal income tax in Canada has increased markedly, both as a share of federal revenue and as a share of individual earnings.
Without tax reform, personal income taxes in Canada would account for more than half of federal revenue by 1990-91 compared with about 46 percent in this fiscal year.
Lowering personal taxes would win votes for the Conservative government, which is facing re-election in about two years, but Mr. Wilson will have to tread carefully in his treatment of the business community.
The minister's intention to shift the tax emphasis from the individual to corporations and a consumption tax raises concern in industry circles.
If our corporate taxation goes up, it makes our industry more costly, notes Roger Hamel, president of the Canadian Chamber of Commerce. He stresses that Canadian industry must not compare unfavorably with competition, particularly as we are moving into a more open trade situation.
There are signs, however, that the Ottawa authorities are aware of the danger of Canadian corporate taxes differing too much from U.S. levels. The Canadian government, it is understood, intends to move rapidly in 1987 to bridge the widening gap between U.S. and Canadian corporate tax rates.
Under changes announced last year, federal corporate rates are to decline
from 36 percent to 29 percent. But to keep up with the new U.S. reforms, Canadian federal rates may have to go down as low as 26 percent, analysts say. Combined with provincial taxes, corporations would end up with a total tax bill in the 36 percent-40 percent range - or roughly comparable to the new U.S. state-federal corporate tax burden of about 37 percent.
Without approximate parity, observers consider that Canadian companies operating in the United States will be tempted to transfer more of their activities - and the profits that go with them - south of the border.