Reforming tax and regulatory policy in Canada - Research Paper Example

Reforming tax and regulatory policy in Canada Introduction Canada is undergoing many economic changes. There is need to put in place a suitable policy to make sure it compete efficiently on a global level. The world has changed tremendously which requires development in the growing economies. Demand for more commodities is on the rise. In addition, new technologies are being used all over the world aimed improving worlds economy. For the past few years, Canada has been one of the most celebrated economies of the world especially in resources sector. She has been very competitive in manufacturing industry but times have changed and there is need for Canadian economy to follow suit. Canadians are working people and they are ready to revamp their falling economy. In order to improve her productivity, financial capital must be accessible since for there to be high production, Canadians need to have modern technology (Seven Hills Publishers 56-61). Canadian companies are willing to move to that direction of high productivity only if they access cost efficient capital to help them become more productive. The cost of financial capital in Canada is too high, which has caused a great financial problem especially among small businesses. New technologies in Canada have led to shift in terms of trade in favour of services and production of higher value goods. Economic growth in Canada requires that technologically innovative activities to be generated and expanded in order to boost it to greater competitive advantage. Development of Canada’s economy is dependent on the increase in technology-intensive exports. Generation of new and improved products has demonstrated the indigenous technological capability. Accumulation of technological expertise within particular activities and regions has been fostered by inter-firm overtime transfer of knowledge, which has resulted to creation of positive personalities. Canada’s ability to export new, technology-based products has been generated by its capacity to innovate. Signing of the North American Free trade agreement (NAFTA) and Canada-United State Free Trade Agreement are some of the moves towards achieving Canada’s goal of securing trading conditions that would enable its technological strength to emerge and grow. Importation of industrial knowledge s been achieved through business alliances, market arrangements, or internal channels. Canadian firm increase in productivity has been achieved through importation of capital equipment and production system, sub-assemblies and parts, and production concepts. Canadian companies should try to secure a place in global markets, which in turn will earn the country opportunity to expand in terms of her telecommunications, resources, and environmental technologies. Small companies and business account for a larger employment percentage in the local economy. According to Carnoy (72), global markets aids in expanding these opportunities in the world economy. Such moves gives countries like Canada an opportunity to expand. For Canada to succeed in her economy, she must revise her tax and regulatory policies. For instance, federal tax is too high, which suppresses many small businesses. When these small companies start to expand, tax increase, which makes them, disappear from the market. Canada should adopt tax system that does not discourage financial capital expenditures. Not only is the taxation system killing the development and growth of her economy but also there is need to review the regulatory system for Canadian markets. There is an urgent need to establish a regulatory system that is suitable for Canadian future (Ingrid 45-51). The Canadian administrators and securities have tried to provide a common ground for all securities regulators to work in unison. For example, the passport system in Canada, which all the provinces have adopted, provides an opportunity for dealer and dealer registration. Such common regulation has reduced the costs as Canadians issuers and intermediaries pay once for the same rewards or benefits. It has reduced many costs including the compliance costs, which has allowed private businesses to comply with only one rulebook. The regulatory system has helped in responding to changing market conditions globally thereby providing a leeway for companies to explore new markets internationally (Brecher 66). Types of tax in Canada Canada has several types of taxes that it levies on its citizen, businesses and industrial sectors. Examples of these taxes include personal income taxes, sales taxes, corporate taxes, payroll taxes, estate taxes, excise taxes, and health and prescription insurance taxes. Personal income taxes These are tax imposed on individuals by the provincial and federal government. This is the most common source of Canada’s for those orders of government and it is estimated at 4 percent of the revenue tax. Lower percentage charges are leveraged on several provinces by the federal government except in the Quebec province. The percentage of income tax imposed on the citizens is in reference to their income. Nevertheless, studies that have been conducted on the allegation show that high income residents pay the lowest amount of tax. Calculations made on income earned in the type of capital gain are usually done on half of the gain. Tax and regulatory policies Tax and regulatory policies are essential in capital markets all over the world, as they will give companies chances to expand and explore international markets. In addition, the federal government should encourage investment in Canada, which must be supported by its tax and regulatory system. Canada’s economic future is directly linked to its international access. It is directly related to our engaging the new global economy (Hart 46-48). A new economy that is defined by well-paid and highly skilled employees who manufacture highly engineered products, often using computer assisted equipment. Products that are destined for international markets. The government of Canada has outlined strategies that have fostered its concentration on the structural reforms to boost its economy to a competitive level. The components outlined in this framework include tax advantage where it is designed to reduce tax for all citizens of Canada, entrepreneurial advantage, which is formulated to reduce unnecessary regulations thus increasing the market competition, and fiscal advantage, which is designed to eliminate the government net debt. A concrete understanding of tax reformation and regulatory policies is attained by reviewing the gross domestic product of Canada. Canada’s nominal gross domestic product growth According to studies that were conducted to analyse Canada’s nominal gross domestic product, there is expectations of annual growth of 4.2 percent. Expenditure on national programs and health care in the territorial or provincial budget are projected at 3.5 and 6 percent per annum respectively. In the fiscal year 2005-2006, 70 percent of the federal cash contributions were reserved for health care. With respect to these estimates, 3.5 percent would be the expected expenditure rate in the provincial budget. Elasticity in the personal income tax (PIT) of Canada’s GDP is presumed to be about 1.25 implying that increment in PIT would be 5.3 percent per annum. Therefore, PIT can be presumed to be the appropriate tax for the national programs cash transfers. Since the determination of the federal cash transfer is done in the base year, the tax points or rather the PIT revenue proportion can be calculated to find the appropriate amount to finance national programs. Canada’s economy has experienced both horizontal and vertical imbalances (Ingrid 57). Horizontal imbalances Population density, resource endowment, and region size in Canada are the main factors that contribute to differences in income distribution shape and disparities of average income. Canada addresses these phenomena through fiscal distribution and regional development policies that are delivered separately through program spending and taxation. These programs are financed by Canada’s federal government through its own programs, which generate inter-regional redistribution of resources by changing the economic position of families and individuals in different regions of the country though they are not directly linked to the fiscal federalism (Hart 101). Fiscal federalism has devised equalization policy that enables inter-regional redistribution of resources through the provincial governments. However, the amount to be equalized has already been predetermined by the federal government. In regards to research conducted by the federal department of finance reflecting the major federal transfers to provinces and territories in the fiscal year 2005-2006, the growth rate is at the low end of projections of territorial or provincial health care spending in a span of five years. A decline in the federal share is anticipated if the annual growth rate of expenditure is more than 5.5 percent. Social programs cash contribution by the federal reflects 42 percent of that made to health care. The annual contribution to finance national programs by the federal is estimated at 4.6 percent in a period of five years. However, growth of equalization is constrained by escalator imposed by the federal government. An increment of 3.3 percent is anticipated for payments made under fiscal arrangements. This reflects 60 percent of the projected growth rate of the Gross Domestic Product. Furthermore, the research shows that major transfers to provinces and territories are projected to undergo an annual growth rate of 4.7 in the same period of time (Taylor 83). An evaluation of the burden the federal cash transfer will have on the federal data on federal budgetary revenues shows that the budgetary revenues are exceeded by health care federal transfer. This implies that an upward trend will be inevitable in the share of transfers to revenues, though the increase will be quite small and gradual. A decline in the share of federal revenues will be claimed by the transfers thus decrease from 4.3 percent in the fiscal year 2005-2006 to 3.9 percent in 2010-2011 fiscal-years will be realized. A combination of two components showed Constance in average federal reserves (Urmetzer 137). Vertical imbalances Federal fiscal policy had developed unbalanced fiscal structure in the economy of Canada over a period of five years. Based on the projections that were incorporated in the fiscal update and annual economy by the federal minister of finance, the federal government was in a position to develop a fiscal structure that would lead to budgetary surpluses of escalating amounts. This was achieved by restricting the financing of national programs as it was in the traditional commitments. Difficulties in balancing provincial budgets has been associated with the obligations of these states to finance national programs as well as the inability to increase taxes in regards to taxpayers resistance and international pressure. Nevertheless, it is argued that the notion is an artificial creation since both orders of government are capable of addressing revenue needs by adjusting tax rates. According to policy analysts, the possibility is due to the broad access to tax revenues by these government orders (Brecher and Costello 51). However, this argument is subject to criticism because it misses the primary point of interdependence of two fiscal systems in addition to the provincial government constraints to raise all tax revenues. The under-lying principle in federal-provincial relations for the fast half of the federation’s life was disentanglement. The principle stated that each government order was responsible for its own expenditures. Canada’s total disentanglement policy comprised of two programs namely federal and provincial (Taylor 146). Provincial, federal and national programs Canada aims at reforming the tax system by regulating its policies. World War II eroded Canada’s principle of disentanglement through adoption of programs that were jointly financed by the provincial and the federal orders of governments. Therefore, three types of government programs characterised the post-war period. These included federal, provincial, and national programs (Barrow 43). Three more components of Canada’s national programs were established by the negotiations between federal and the provincial governments in order to upgrade its economy. Nevertheless, these programs have important implications for the country’s fiscal federalism. In the first place, the federal government commitment to finance these programs and the provincial government obligation to maintain certain standards constraints the independency that existed by these orders of governments in making budgetary decisions. Secondly, the national programs are controlled by predetermined national standards thus, the provincial governments flexibility with respect to national programs is limited even when there exists block grants federal cash transfers instead of cost sharing. Similarly, the existence of vertical imbalance indicates that the revenue collected by the federal government is misappropriated since the provinces are strained in its budgetary allocation. Moreover, the implication of national programs to fiscal federalism is manifested through the inability to treat federal revenue resources for the sole purpose of federal programs because they are collected to finance national programs (Wiseman 107). Canada’s tax collection agreements Canada’s equalization program was established in 1957 and it comprised of three revenue sources namely succession duties, corporate income taxes, and personal income taxes. To equalize these income sources, a high standard measure was employed which involved calculation of the weighted average of the British Columbia and Ontario provinces. The calculations were based on the tax rates that were established by the federal government. Addition of revenue resources to list of revenues to be equalized was established in 1962 after the Tax Collection Agreement replaced the Tax-sharing Agreement. In regards to this regulation, the representative national average standard was changed by ten provinces as opposed to the initial two provinces. The later reformulation of equalization entitlements led to increase in the revenue resources from four to sixteen and only actual incomes collected by the respective provinces ere equalized rather than the figures established by the federal government (Brecher and Costello 167). In order to cater for volatile oil incomes, adjustments were made on the formulations. Other regulations that were implemented in Canada’s economy included addition of property tax imposed for purposes of schools and drawing of a distinction between the revenue emanating from higher oil prices and basic oil incomes. In this case, the regulation policy that was adopted was to impose full equalization on basic oil incomes while a third equalization was calculated on higher oil prices revenues. Fifty percent revenue equalization was later assimilated; however, equalization formulae had been adulterated by higher oil prices. Incorporation of this policy in tax calculation caused an escalation of payments that resulted into fiscal problems in the country’s economy (Carnoy 72). Therefore, Representative Tax System emerged as a result of re-evaluation of the program by the federal government. Representative tax Systems This was a tax reforming and regulation policy that was proposed in 1967. It involved substantial expansion of the number of revenues to be equalized from 17 to 30. This was primarily achieved through subdivision of some of the revenues that were in existence. Health insurance premiums, race track taxes, lotteries, and payroll taxes were some of the new entries in the equalization list. Canada’s provincial revenues equalization formulae was based on the representative tax system and it an implicit assumption was that there would be uniformity across Canada in the per capita local government and provincial expenditures that were financed by the federal transfers. This system led to decrease in the provinces that averaged in the equalization process. The provinces that were incorporated comprised of Manitoba, Saskatchewan, Ontario, Quebec, and British Columbia. Representative tax system excluded the problem propagated by inclusion of natural resources in the equalization formulae. This is evidenced by omission of oil rich Albert province from the standards (Duffy 37). Similarly Atlantic province was excluded from the standards despite the absence of oil revenue as a counterbalance to Alberta omission. This was based on the offsetting a rich province by a similarly populated province but of less affluence. The formula has served Canada economy in tax calculation from 1982 to 2005 though several adjustments were incorporated (Barrow 151). These included limitation of “tax back” effect extent, total payments floor, and total payments ceiling adjustments. Ceiling enabled the Canada’s federal payments growth were limited to the nominal gross domestic product growth rate within a specified time. In order to relieve provinces from large and sudden increase in revenue, total payment floor was implemented in the formula to protect equalization from unusual changes in their economic conditions. “Tax back” effect limitation was aimed at controlling resource revenues since an increase in income from tax representing a large share of the province tax base may lead to even or total offset in equalization payment. The economic perspective for equalization rationale is based on two perspectives namely the equity and efficiency rationale. Economic distortions generated by fiscally-induced migration characterises the efficiency rationale. However, it is argued that efficiency rationale in evaluation of Canada’s economy shows that the gains are usually minimal (Wiseman 98). Conclusion In conclusion, unlike other countries, Canada does not have a formal system to consolidate the tax reporting of corporate groups or offset losses and profits of the member groups. Therefore, it should implement tax system that does not daunt financial capital expenditures. Not only is the taxation system hindering the progress and growth of her economy but also there is need to re-examine the dictatorial system for Canadian markets. Past years have seen adopt a solitary system. The federal and provincial government of Canada should embrace a new system of group taxation and group relief such as tax loss transfer system. Since technological advancement has been identified as a key factor in the Canada’s economic growth, taxes imposed and regulation policies on new technologies should be redefined. Innovative activities in the industrial sector should be encouraged and expanded in order to boost the countries competitive advantage Works Cited Barrow, William. Globalization, Trade Liberalization and Higher Education in Canada. The Emergency of New Markets. Chicago: Springer, 2003. Print. Brecher, Jeremy and Costello, Tim. Global Village or Global Pillage; Economic Reconstruction from Bottom up. New York: South End Press, 1999.Print. Carnoy, Martin. Sustaining the New Economy: Work, Family and Community in the Information Age. Massachusetts: Harvard University Press, 2002. Print. Duffy, Hazel. Competitive Cities: Succeeding in the Global Economy. New York: Routledge, 1995. Print. Hart, Michael. Whats Next: Canada, the Global Economy, and New Trade Policy. New York: Kindle Books, 1994. Print. Ingrid, Bryan. Canada in the New Global Economy. Problems and Policies. New York: John Wiley and Sons, 1994. Print. Taylor, Kenneth. 21st Century Economics: Perspectives of Socioeconomics for a Changing World. New York: Palgrave Macmillan, 1999. Print. Urmetzer, Peter. From Free Trade to Forced Trade: Canada in the Global Economy. Ontario: Penguin Canada, 2003. Print. Wiseman, John. Power in the Global Era: Grounding Globalization. New York: Palgrave Macmillan, 2000. Print. Read More