Opinion: The Liberal government should stop using taxation as a tool to influence behavior.

Jeffrey Turner is a Toronto tax lawyer and adjunct professor at the University of Toronto Faculty of Law and Osgoode Hall Law School. He was the Conservative candidate for Etobicoke Center in the 2021 federal election.

The current federal government has adopted an activist approach to taxation, using it as a social engineering tool to influence behavior and advance the Liberal Party's progressive agenda. However, the downside of this interventionist strategy to our nation's tax system is becoming increasingly clear.

Ottawa's approach has muddled complexity, increased compliance and administrative burdens, and created a global perception that Canada is a less welcoming place to do business. Instead, we should pursue tax reforms that improve the business environment and make the country a more attractive investment destination.

Some taxes aimed at changing behavior are justified because they correct market imperfections. For example, so-called “sin taxes” on tobacco, alcohol, and cannabis aim to raise the prices of these goods and reduce their consumption and associated health effects. Similarly, the federal government's backstop carbon tax aims to reduce greenhouse gas emissions from fossil fuels.

Our income tax system has also long been used to encourage investment in certain activities. This includes the use of tax credits for mineral exploration, film production, scientific research and development, and, more recently, the provision of large new subsidies for low-emissions technologies.

However, while such taxes may be justified in some cases, the current government has gone too far, and even in the absence of market imperfections that would justify them, activist We are enthusiastically adopting tax policy measures.

Recent examples include denying deductions for expenses incurred on non-compliant short-term rental properties, a 1% unoccupied housing tax on the value of vacant properties owned by foreigners, and a 2% stock repurchase tax on foreigners. I can list it. Stock buybacks by listed companies.

The Liberals frame these as a means to achieve necessary ends, such as improving housing affordability and encouraging the reinvestment of business profits. But scapegoating foreigners and Airbnb hosts for higher housing costs won't build more housing, and telling companies how to allocate capital won't improve efficiency. Other policy tools may be more effective in achieving the objective without increasing tax compliance burdens or impairing market functioning.

Governments also impose punitive and discriminatory taxes on certain industries in pursuit of supposedly politically motivated equity objectives at the expense of competing tax policy goals of neutrality and simplicity. I've been using it. Examples include a 20 per cent luxury tax on motor vehicles, aircraft and ships, a permanent 1.5 per cent surtax on financial institutions, a one-off Canada Recovery Dividend Tax of 15 per cent on financial institutions, and recent threats. Masu. impose a “windfall” tax on grocery store profits;

In 2016, the government also increased the top personal marginal tax rate to promote “fairness”. This resulted in combined federal and state marginal tax rates exceeding 50% in most states. In 2024, an individual in Ontario will pay her 53.5 per cent on her income over $247,000.

Historically, Canadian corporate tax policy has primarily pursued neutrality. In the absence of market imperfections, tax systems should interfere as little as possible with commercial decisions. However, the reckless actions listed above violate the principles, exacerbate the complexity of the tax system, and impose unnecessary costs on taxpayers and the Canada Revenue Agency.

Governments should stop using too much targeted taxation and special incentives to influence behavior. Tax policy needs to refocus on its traditional goal of equitably generating revenue to fund government programs in a neutral manner that minimizes market-determined and administrative cost distortions. Tax reform should simplify the tax system, reduce the overall tax burden, and thereby encourage entrepreneurship. That should be the only form in which taxation influences behavior.

A bold reduction in the statutory corporate tax rate will encourage the expansion of domestic and international business activity in Canada. Rather than fine-tuning tax cuts according to targeted sectors, as the current government has done for zero-emission technology manufacturers, it is a broad and indiscriminate approach that decisively improves competitiveness to attract business investment. Corporate tax rates should be reduced.

The federal and state governments should lower the top personal marginal tax rate to below 50% nationwide. Additionally, the progressive tax rate structure needs to be expanded so that the top tax rate applies only to much higher income groups. This would reduce brain drain among mobile high-income earners and increase incentives for all Canadians to generate incremental income.

This back-to-basics approach to taxation will also help simplify an increasingly complex tax system. The stock repurchase tax, unoccupied housing tax, and luxury tax could be eliminated, reducing unnecessary compliance burdens. Lower corporate and individual tax rates would ease incentives to pursue avoidance deals and help streamline overly broad base protection rules.

In the pursuit of “fairness” and the excessive use of tax as a social and industrial policy tool, governments have ignored the equally important tax policy goals of neutrality and simplicity. Taxes should not be routinely used to manipulate behavior. Governments should resist the reflex to address our problems with more targeted measures that increase complexity and undermine tax neutrality.