The Fraser Institute

The Fraser Institute

October 18, 2006 06:00 ET

The Fraser Institute: Media Release; Cut Federal Transfers and Taxes by $31 Billion and Boost Provincial Taxes to Solve Fiscal Imbalance

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Oct. 18, 2006) - Cutting federal taxes and eliminating more than $31 billion in federal transfers to the provinces while simultaneously raising provincial sales taxes would largely solve Canada's current fiscal imbalance, restore accountability, and improve the country's tax system according to a new publication by The Fraser Institute.

Fiscal Balance, The GST and Decentralization: an Opportunity for Reform is the first chapter from a forthcoming Fraser Institute book that explores Canada's equalization program from a number of perspectives including the issue of fiscal balance.

"Currently, the federal government collects taxes then transfers a significant portion back to the provinces with conditions attached. Having one level of government responsible for both raising revenues and providing programs and services would improve accountability and eliminate confusion and ambiguity about responsibilities." said Jason Clemens, Director of Fiscal Studies for The Institute and co-editor of the upcoming book.

The chapter released today outlines how the federal government has enjoyed increasing financial surpluses while neglecting core areas of federal responsibility such as defence and transportation. At the same time, the federal government has simultaneously become increasingly involved in areas of provincial jurisdiction such as healthcare and education.

"We've seen a blurring of responsibility between the federal government and the provinces when it comes to raising revenue and providing or financing programs," Clemens said.

Clemens and his co-authors outline a three-step plan for reform:

1. Eliminate transfers

The federal government should eliminate the Canada Health Transfer ($22.5 billion) and the Canada Social Transfer ($8.8 billion) to the provinces and territories as of the next fiscal year. This would decrease federal spending by $31.3 billion in 2007/08.

2. Reduce federal taxes

The federal government should concurrently reduce taxes. The focus of the federal tax cuts should be to improve the economic incentives to work, save, invest, and act entrepreneurially. Examples of these types of tax-relief measures would include reductions in middle- and upper-income personal income tax rates and business taxes.

3. Increase provincial taxes

The provinces must increase their own taxes to compensate for the loss of revenues from the elimination of the federal Canada Health Transfer and Canada Social Transfer payments. The provinces should increase, or adopt, the most efficient tax available, which is a provincial GST. The GST rates required to replace the revenues received from federal CHT and CST payments range from a low of 4.2 per cent in Alberta to a little over 7.1 per cent in Newfoundland and Labrador. This would result in greater use of the GST in aggregate but with no net tax increase for the country as a whole.

The chapter also recommends that provinces with independent provincial sales taxes (PST) harmonize their PST with the federal GST. Harmonization would mean one sales tax system for the country even though revenues would flow to two levels of government.

"These changes would re-establish clear lines of accountability and responsibility for critical areas such as health, education, and social assistance. They would improve the country's tax system by increasing reliance on efficient, low-cost, consumption taxes while reducing our use of less efficient, more costly, capital-based taxes. Finally, they would reduce costs for businesses and individuals that file sales taxes since the number of reporting and administrative requirements would be cut in half," Clemens said.

Established in 1974, The Fraser Institute is an independent public policy organization with offices in Vancouver, Calgary, and Toronto. The media release and study (in PDF) are available at www.fraserinstitute.ca.


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