A roadmap for federal tax reform

The new fiscal leeway arising from the federal budgetary surplus offers an important opportunity for significant reforms that could enhance both the efficiency and the equity of personal taxation. The first step should be to reduce the high marginal and average tax rates on personal income, including the high marginal tax rates that low- to middle-income families face as a result of high benefit clawback rates. The 2nd step should be to strengthen the link between payroll contributions and benefits. This could be in the form of reductions in employment insurance contributions for firms with a good record of employment stability. The level of employees' contributions for the Canada and Quebec pension plans should move in line with expected government liabilities for the pension entitlements of the current generation of contributors. Unfunded pension liabilities should be financed from general tax revenues, or possibly through a new uncapped and broadly based payroll tax.