Abstract:
Canadian federalism is currently under intense pressure for reform. This
paper evaluates several options and proposes a durable solution that would
see a rebalancing of the finances of the federation.
In particular, we estimate the static
fiscal impacts for all governments of the following proposal: Ottawa
lowers personal income tax rates by 3 percentage points and reduces the
Goods and Services Tax from 7 to 5 percent. Federal finances remain intact
through equivalent reductions in provincial transfers, and Ottawa
maintains
its role in addressing horizontal equity concerns through a reinvigorated
equalization program.
These changes set the stage for provincial
tax realignment that shifts to consumption-based value-added taxes and
away from less efficient retail sales taxes. With provinces taking more
responsibility for raising financial resources to meet their core spending
responsibilities, they would be more accountable to their
constituents. In addition, regional tastes gain more influence over how,
and how much, provinces tax and spend. Finally, with the overall tax mix
becoming smarter, Canadians' economic capacity is enhanced.