It's also hard to get the self-employed to pay taxes, because they can write-off home office and other everyday expenses against income. And the number of self-employed has been growing more quickly than the labour force as a whole .

The most reliable payers of income taxes are middle-class salaried employees. It's hard to get the poor to pay taxes, because they don't have much money, and it's hard to get the rich to pay taxes, because they are mobile, and can take advantage of tax planning opportunities. But income inequality in Canada has risen , and relatively more income - thus relatively more of Canada's tax base - is in the hands of the elusive 1%. This income concentration partly reflects an increase in the share of Canada's GDP going to capital - and capital income is much harder to tax than labour income.

The heavy duty engines of tax revenue generation are the personal income tax and the federal and provincial sales taxes. Federally, personal income taxes raise about half of all tax revenues. Provincial sales taxes raise considerably more revenue than provincial corporate income taxes. Yet these bases are eroding.

The most pressing issue in Canadian tax policy today is that people don't like paying taxes, and it is increasingly hard to persuade them to do so.

Back in the day some foresighted person in the federal government came up with a brilliant plan to ease the budget crunch that would inevitably accompany population aging: the Registered Retirement Savings Plan. Basically RRSPs allow people to defer their tax liabilities until the time that they retire - and start costing the government money. The money that the baby-boomers have sitting in RRSPs should be a revenue bonanza for federal and provincial governments - except that this is what happens when someone tries to remove a nest egg:

(For more on this, see my post RRSPs: brilliant economics, lousy psychology).

Just as changes in the way that people earn income threaten to erode the income tax base, changes in the way that people consume present challenges for consumption or sales taxes. Cross-border shopping and on-line shopping are tractable issues as long as physical goods are changing hands - with appropriate enforcement, taxes could be collected. The real challenge is the world of virtual commodities. With the right brower extension, one's computer can appear to be in the US. Then what prevents one from buying virtual goods like games or apps or books at US rates paying US tax, completely by-passing the Canadian tax system? (something might, I honestly have no idea).

The world of virtual commodities poses another more subtle, yet I think even greater, challenge to Canadian tax policy. Ultimately, people work so that they can afford to buy stuff. When things that people care about - music, books, movies, friends - are available for free on-line, people don't need to work so hard (the price of housing is a solid objection to this argument). Still, if labour elasticities are increasing, governments will find it hard to resolve their fiscal crises by raising taxes on workers.

I haven't said much about capital taxation, not because it doesn't matter, but because it's so complicated. The OECD's base erosion and profit shifting project (BEPS - for a Canadian take on the BEPS, see this Canadian Tax Journal symposium) is one of the more interesting developments here. Corporate tax design matters for investment, and for economic efficiency. But federally, corporate income taxes only account for one out of every seven tax dollars, and much of that revenue comes from small businesses, rather than multinationals. From a revenue point of view, there's just not that much at stake in the corporate income tax world.

This post is written in response to a query from a friend, who has no doubt read to this point and thought "nothing on income splitting? really?" I see income splitting as a manifestation of people's desire to pay lower taxes. The self-employed have opportunities to split income by employing spouses or other family members; the salaried want in on the deal. There is, perhaps, a socially conservative faction of the Conservative Party of Canada that has worked out that income splitting would create incentives for mothers to stay at home full-time, and figures this is a good thing.

On income splitting, my position has always been that the best way to give money to families with children is to give money to families with children. It's that simple.