The economy has been riding high in B.C. for about five years now, but that may soon come to an end - mainly because of a downturn in the US economy. Yet tax reform could cushion the blow. Governments have experimented with marginal tax rates for long enough now to give us a pretty good idea of what happens when they cut them. It's time to put that knowledge to use by lowering marginal tax rates to make the tax system less complicated and set the economy on a course of future growth.

A marginal tax rate is the tax rate paid on the last dollar earned. Here in B.C., we have a cumbersome system of five rates, starting at 5.35% and ending at 14.7%. So, the more a person makes, the more the government takes. Plenty of evidence shows high marginal tax rates distort peoples' willingness to work hard to improve the quality of life for themselves and their families. Why work so hard if the government is just going to take most of it away

Worse yet for B.C., neighbouring Alberta has a single income tax rate of 10%. No matter how much a person makes in Alberta, the government only takes 10% of their income. This can make moving to Alberta attractive for high income earners because the government won't punish them for trying to improve their standard of living.

If governments stop punishing success like they do here in B.C., they can generate higher tax revenues. In the U.S., the highest marginal income tax rate in 1980 was 70%. Today, it is 35%. Back then, the top 1% of income earners in the US paid 17.58% of all income taxes. In 2005, the top 1% paid 39.38% of all income taxes. Even here in B.C., marginal tax rates have fallen and the tax take from the highest income earners has increased. All those people with apartments in Alberta no longer have to claim Alberta residency to protect their hard-earned cash. We have a much fairer system here now, but it could be even better.

The Canadian Taxpayers Federation (CTF) recently released a proposal that collapses the four federal marginal tax rates to two. With an increase in the basic personal exemption and the elimination of most deductions and tax credits, Canadians would enjoy $68.8-billion in personal income tax relief over four years. An analysis of the plan by the CD Howe Institute shows this can happen without running budgetary deficits and by restraining federal spending to 2.5% growth per year starting in 2008. This would mean both an easier tax filing experience and a greater incentive to work and save. The B.C. government should follow suit.

The CTF's dual tax rate proposal is a stepping stone to a single tax rate federally.
Beyond a doubt, we have a complicated income tax system in Canada and here in B.C. Moreover, Canada has the highest income tax burden of any country in the G7. Higher then the French you ask Yes, even higher than the French.

The evidence is clear - when high marginal tax rates are cut, governments get more money from high income earners. By cutting high marginal tax rates now, the government can make future tax filing a lot easier and help cushion the blow of any upcoming economic slowdown. By encouraging the most entrepreneurial and hardest working people to work harder instead of punishing them, the government can boost its revenues without raising taxes. Let's face it, the last thing we need as we move into a period of slower economic growth is more taxes.