Federal Finance Minister Bill Morneau (pictured above) today proposed a series of tax changes intended to crackdown on tax-planning strategies involving the use of private corporations that can “result in high-income individuals gaining tax advantages that are not available to most Canadians.”

While getting rid of unfair loopholes in the tax system is a good thing, Morneau’s proposed changes do nothing to address the fundamental reason why some Canadians pursue tax planning strategies to begin with. Put differently, the federal government has yet again missed an opportunity to improve Canada’s economy and competitiveness as it searches for more revenues.

Fundamentally, tax planning occurs because there are differences in marginal rates within the tax system depending how income is earned. The greater the differentials, the greater incentive people have to reorganize their affairs and exploit loopholes in the system.

Ironically, since coming to power, the Trudeau government has increased the incentive for tax planning in one important way—by increasing the top federal personal income tax rate from 29 to 33 per cent. Importantly, this tax rate increase is layered on top of several provincial tax rate hikes, which exacerbate the federal change. The harsh reality, however, is that raising the top rate on upper-earners increases their incentive to tax plan and capitalize on loopholes.

Introducing rules to close loopholes, as the Trudeau government proposes to do, alone will not solve the underlying problem. They will simply incentivize accountants and lawyers to figure out new ways to get around the new rules for their clients. The solution is to concurrently eliminate, or at least reduce, the tax rate differentials that exist in the system. Doing so will reduce the incentive for tax planning in the first place.

And there is a model to follow. In 1987, the federal government enacted major reform to the personal income tax system. The principles underlying the reform were “lower tax rates and a broader, fairer tax base.” Ultimately, the government cut the top marginal tax rate from 34 to 29 per cent; reduced the number of federal tax brackets from 10 to three; and eliminated a number of exemptions and deductions or converted them into non-refundable tax credits in order to broaden the tax base.

In short, the government used the additional revenues from closing loopholes to cut tax rates, thereby reducing the incentive for tax planning.