Tax time looms and the annual frantic
search for documents to justify deductions is on. Executives
at financial institutions are in their counting houses
counting all the money they've received from RRSP contributions.
Physicians huddle with their accountants to ponder the
benefits and complications of incorporation with a single
question on their lips: Will it save taxes?
Perhaps it's time to say goodbye
to all that. Perhaps the time has come to dump our present
progressive tax system entirely in favour of a flat
What's that, you ask? A true flat
tax would apply the same tax rate to all forms of income
regardless of how that income was earned. Suppose, for
example, the tax rate was 20%. Companies would pay 20%
on their profits; wage earners would pay 20% on their
pay packet; the rate on interest, dividends, capital
gains and all other forms of income would likewise be
taxed at 20%.
One of the reasons the flat tax is again being discussed
in economic circles is that many countries in what was
the East Bloc have adopted a flat tax, including Russia,
and it appears to have given a boost to their economies.
Whether it actually has or not is a matter of debate.
Lithuania, for example, with a flat tax of 27% (down
from 33%) has a rising standard of living and low unemployment.
That said, the average monthly salary is about $600
Canadian, and the Ministry of Labour says that 360,000
workers have left the country for Western Europe since
2004, actually causing labour shortages. Estonia has
had a flat tax, currently at 26%, since 1994 and is
also doing well, but it's unclear whether it's due to
the flat tax or to a rising value added tax (VAT) leveled
on consumption and which economists call a "fair tax."
Let's leave that one aside for the time being, but we'll
come back to it later.
Opponents may question whether the scheme would help
economies, but they do agree on one thing: a flat tax
would make filing your income tax a heck of a lot easier
so simple in fact that anyone earning a regular
wage could file their taxes on a postcard. All you'd
need to do is mark down your total earnings, multiply
it by the tax rate and that would be that.
That's no small advantage. The
Canadian tax code runs to many millions of words; the
rules for a straight flat tax could be written on a
single sheet of paper. It would also save much of the
$8 billion dollars we spend every year to fund the collection
It's not time to celebrate yet
though. The chances of Canada or any other western country
adopting a simple flat tax are remote. It comes down
to what system is fairest. Those of a liberal bent argue
that the present progressive income tax system is the
only way to go because it's the fairer of the two. By
increasing the marginal rate of taxation as income rises,
the idea is that the wealthiest pay the highest taxes
because they can afford to do so, while the poorest
in society need most of their earnings to cover the
basic necessities. Flat taxers, on the other hand, say
their scheme is fairest because it treats each individual
in the same way, rich and poor alike.
They do recognize that not everyone might see it the
same way. To make flat taxes more palatable, most suggest
providing tax exemptions for the lowest earnings. For
example, some members of the US congress promote a flat
tax that exempts the first $30,000 in income for families
and $25,000 for individuals. One difficulty: such a
tax might discourage people from getting married. Indeed,
any tampering with a pure flat tax is fraught with difficulties
that open the scheme to criticism.
In the US, perhaps the best-known
flat taxer is Steve Forbes, heir to the eponymous business
magazine. Forbes made a flat tax the central plank in
his platform when he ran for president in 1996 and 2000.
The wrinkle was that he would exempt income earned from
interest, dividends and capital gains, which would benefit
the wealthy, especially those like Mr Forbes whose money
was inherited. To offset that obvious inequality, he
proposed a $42,000 exemption for a family of four before
his 17% flat tax kicked in.
And so it goes. Perhaps we should
go for that fair tax instead. That's one that taxes
consumption, not income. Hey, don't we have one of those
already? Something called the GST? So we do. Now suppose
we jacked the GST up to 30 or 40% and eliminated income