Reforms to the tax regime in Canada should focus on enhancing productivity as a way of building the tax base and increasing tax revenues, argues a report released on Thursday from the Toronto-based C.D. Howe Institute.

“The focus on meeting Canada’s fiscal challenges should be on increasing the income pie so there is more fiscal room to maneuver,” says Craig Alexander, vice president of economic analysis at the C.D Howe Institute and co-author of the report, in a statement.

To achieve this, the report makes these key recommendations: target consumption, rather than income, to enhance economic efficiency; avoid hiking taxes on high earners and on businesses, which could hamper growth and entrepreneurial activity; and rebalance federal and provincial taxation so that the provinces are more independent, and accountable, for their own spending.

While it may not be politically popular, it is more economically efficient to tax consumption, rather than income, the report argues. “There is an important role for policymakers in educating voters and showing leadership in putting more emphasis on consumption taxes,” the report recommends.

Similarly, hiking taxes on high earners and businesses may be politically expedient, but it is not sound policy, the report argues. The new federal government’s plan to increase taxes on those earning more than $200,000 per year, and to cut taxes on the “middle class”, will have little impact on income inequality, says the report says, and could also discourage entrepreneurial activity, and weaken Canada’s ability to attract and retain high talent workers, it warns.

“The most effective way to address inequality is to remove barriers to opportunity, which would reduce income inequality in a constructive way,” the report says.

Similarly, higher corporate taxes would hamper investment, job creation and growth, the report adds. “As it stands, Canada has an internationally competitive corporate tax regime. Business taxes should be kept low to compete internationally, but efforts should be made to shift the tax system towards treating businesses more equally,” the report says.

Finally, the current system of raising federal taxes to pay for transfers to the provinces “is highly inefficient tax policy”, the report says. Instead, it argues that, “It would be more efficient and productive if federal business and personal taxes were cut, providing room for provinces to pick up the fiscal room to pay for the economic and social priorities they are responsible for.”