Federal tax reform can reduce the top marginal income tax rate and eliminate middle income tax rates, leaving just two tax rates

Enhancing Economic Growth Through Federal Personal Income Tax Reform

Summary

• Economic growth in Canada remains sluggish, resulting in several negative consequences for Canadians, including slower growth in employment, incomes, and living standards.
• Reforming the federal personal income tax system through tax reductions, while eliminating several tax credits is one policy option that could boost economic growth and improve incentives for entrepreneurs.
• A simple pro-growth option would be to remove the three middle income tax rates of 20.5 percent, 26.0 percent, and 29.0 percent. This would reduce both the number of brackets and the system’s complexity, while improving economic incentives.
• The federal government should also reverse the increase in the top marginal tax rate introduced in 2016, lowering the rate from 33.0 to 29.0 percent.
• 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.
• There are 49 different federal tax credits, deductions, and special preferences that should be eliminated. In total, the elimination of these tax expenditures would give the federal government $32.1 billion with which to lower personal income tax rates.
• Removing these tax expenditures would not cover the entire cost of the tax reductions, but the remaining $5.6 billion of suggested tax relief could be covered through federal program spending reductions.
• Upon making these tax changes, Canadian provinces would be significantly more tax competitive with their counterparts in the United States.