It is time to reboot Canada’s tax and benefit system

Canada has a rich history of innovation, but in the next few decades, powerful technological forces will transform the global economy. Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being. The Financial Post set out explore what is needed for businesses to flourish and grow. You can find all of our coverage here.

It is time to reboot Canada’s tax and benefit system: it discourages work effort; it is not equipped for looming demographic challenges; and it is not ready for the changing nature of work brought on by the “fourth industrial revolution” and artificial intelligence (AI). Most importantly, if this “revolution” increases inequality and people do not perceive they are getting value for their tax dollar, such as access to suitable benefits when they need them, then any ensuing rise in inequality is likely to create greater societal tensions.

Let’s take each in turn.

As you earn more, you work more. Right? Well, up to a point. Work effort is determined by a number of factors, including ability to control hours of work, job satisfaction, benefits, location, whether other family members are working, availability of child care, minimum wages and so on.

It also critically depends on income taxes and other payroll and social security charges.

Income taxes affect the net take home pay so will impact the decision on how much to work. Currently high income workers in Canada face very high marginal tax rates — over 50 per cent. This means that for each additional dollar earned, workers take home less than 50 cents. This not only discourages work effort, it encourages workers, especially the highly skilled, to seek jobs in lower tax jurisdictions. In other words, outside the country.

It is not just high-income earners who are affected, however: even though low earners pay lower taxes, the complex interaction between taxes, income and benefits can create “welfare walls” that also discourage work effort.

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