OTTAWA, JUNE 18 -- The Conservative Party government of Prime Minister Brian Mulroney tonight unveiled a sweeping plan to overhaul the Canadian tax system and bring it more closely in line with reforms in the United States.
The move was seen by observers here as critical to the political fate of the government, which has been dragged down in national polls by a series of scandals. The plan would bring tax relief to wage-earners by next year, but would put off a new sales tax -- thought certain to be controversial -- until after the next elections.
Although the government has a large majority in the House of Commons, tax revision is such a volatile issue that Mulroney cannot be sure of pushing it through Parliament. The plan's fate could determine Mulroney's chances for re-election, and its failure could cause the government to fall, veteran observers suggested.
Officials here said they felt compelled to act because of worries about an exodus of businesses to the United States, loss of competitiveness, a "brain drain" of well-to-do professionals to the relative tax haven south of the border and a possible tax revolt by those who stayed behind.
The proposed revisions to the Canadian tax code are similar to many of the changes in the United States. The poorest Canadians would be taken off tax rolls, the 10 personal income tax brackets would be compressed to three and top personal income tax rates would drop from 34 to 29 percent.
Finance Minister Michael Wilson, who announced the plan in a nationally televised address to the House of Commons, emphasized that corporations and wealthy individuals that have found loopholes would be forced to pay more taxes. Hardest hit in the first phase of the five-year reform plan, would be banks, brokerage houses, insurance companies and real estate firms.
To make up for lowered income taxes, the government proposed that Canada impose a broad national sales tax, probably after late 1989. The form of the sales tax was left vague, but officials conceded that it undoubtedly would prompt a surge in consumer prices and prove controversial.
Mulroney's large majority in the House of Commons -- combined with the strict party discipline of the Canadian system -- normally would ensure that measures introduced by the government are approved.
But all bets are off when it comes to tax reform. Former prime minister Pierre Trudeau was forced to retreat from tax reform plans in 1971 and 1981 by protests from interest groups.
Although Canada keeps its military spending low and has far fewer government costs associated with international responsibilities than the United States, the effective tax burden here has tended to be higher because of spending for an array of generous social programs, especially the government-financed universal system for health insurance.
As Mulroney's nearly three-year-old government labored to control large deficits, it raised taxes at a time when the Reagan administration and Congress were lowering them in the United States, increasing the gap in the tax burdens of the two countries.
Officials said they were worried that multinational corporations, a major force in the Canadian economy, would shift taxable income to the United States where the corporate tax advantage over Canada was calculated to increase from about 4 percent this year to about 8 or 9 percent next year.
The overall effect of the changes, officials said, will be to relieve about 850,000 low-income Canadians -- roughly 6 percent of all taxpayers -- from having to pay any federal tax. About 8.9 million other households will see their taxes cut by an average of about $350 annually.
About 1.5 million high-income households that now enjoy tax shelters and other loopholes are expected to see their taxes rise by an average of about $500 a year.