Does Our Tax System Address Productivity, Sustainability, and the Future?

Brandon Sun, November 5, 2006 - David McConkey

Our income tax system reveals an interesting picture of societal changes and challenges. Taking an income tax preparation evening course this fall prompted this thought. Income taxes have changed since the last time I had taken the course, 15 years ago.

In my previous column, I commented on complexity and diversity. Now, I’ll look at productivity, sustainability, and the future.

Productivity: A problem with taxation relates to productivity. Taxing an activity tends to discourage it. Taxing income can lead to people working less, or not reporting their earnings, or moving to somewhere else that has lower taxes.

The Mulroney Conservatives introduced our current income tax system in 1988, in conjunction with the GST. The new Conservative government is changing the balance by lowering the GST.

Reducing that sales tax - instead of income taxes - could affect productivity. Many (especially those on the right of the political spectrum) think that we should tax consumption more, rather than income.

Income tax rates have been reduced in the last 15 years. More reductions for the future are promised. (Aren’t they always?)

The lowest federal taxation rate, for up to about $35,000 in income, has been reduced from 17% to 15.5%. This reduction, however, is blunted by the fact that this also shrinks the value of tax credits.

The biggest federal tax reductions have been for the next ranges of income. The taxation rate for about $35,000 to $70,000 of income has been reduced from 26% to 22%. The rate for about $70,000 to $115,000 of income has been dropped from 29% to 26%. (As well, there has been an additional reduction as the federal surtax has been phased out.)

As for provincial income tax rates, Manitobans can expect to hear more about those from Brandon’s Scott Smith, in his role as Minister of Competitiveness.

Sustainability: How will our income tax system support our society into the future? One specific example: will the Canada Pension Plan (CPP) be there for us?

CPP is supported by equal contributions from both employees and employers. Fifteen years ago, the contributions from both parties totaled 4.6% of pensionable earnings. Today, the total has more than doubled, to 9.9% of those earnings.

The increase was needed to support an aging society and ensure that the CPP will be sustainable for retired Baby Boomers.

The Future: What might we see 15 years from now? One change could reflect that more of our time could be occupied on the Internet, in role-playing games and other simulations. As technology improves, more people could well be spending a lot of their time – and money – in cyberspace.

Seven million people now participate in the online game World of Warcraft. In another simulation, called Second Life, one million people have created alternative identities for themselves.

Virtual goods and services are often bought and sold in these fantasy worlds, sometimes with real money.

Depending on various methods of calculating exchange rates, transactions in this virtual economy may already total hundreds of millions of dollars a year. The US Congress is now looking at how this money can be taxed.

You may be able to escape your ordinary life through the Internet, but you may not be able to escape taxation!

“Certainty?” asked Benjamin Franklin when he summed it up 250 years ago. “In this world nothing is certain but death and taxes.”