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2008 OECD Economic Surveys: Canada 2008

image of OECD Economic Surveys: Canada 2008

OECD's periodic survey of Canada's economy.  After two chapters assessing the current economic situation and policy responses to new terms of trade, ageing, and climate change, additional articles are presented on tax reform, long-term sustainability in the energy sector, and modernising Canada's agricultural policies.

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Tax reform for efficiency and fairness

The Canadian government has set a high priority on reducing the economic burden of taxation. In a context of fiscal surpluses, it has been: markedly reducing corporate income and capital taxes; providing more personal tax relief especially at lower incomes and above all for saving; and cutting the federal value added tax (GST). While such measures, in particular income and capital tax cuts, reduce the economic damage caused by tax and improve business competitiveness, Canada should go further along this route with significant revenue-neutral reforms to achieve a more efficient tax mix that also retains its redistributive features. Numerous tax preferences to favoured activities, firm types, investments and savings vehicles narrow the tax base and create loopholes, keeping statutory rates higher than otherwise and distorting resource allocation. They should therefore be removed. It would also help to shift the tax mix toward more user fees and indirect taxes – including VAT, environmental levies and property taxes – which do not distort inter-temporal economic choices as income taxes do. Lower corporate and personal income taxes could improve the incentives for capital formation, FDI, innovation, entrepreneurship, labour-force participation, work effort, and the pursuit of higher education. The result would be higher standards of living.

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