WILL A FLAT TAX WORK?

Now that we’ve all filled out tax forms for another year, might this be a good time to ask whether there is a better way to do it.

When Canada’s tax code was introduced in 1917, it was just 10 pages long. Now it’s more than 1100 pages in both languages. The code is loaded with additions, exemptions, deductions, foreign tax credits etc. It gets more complicated every year. So much so that more and more taxpayers need professional help just to figure out what’s going on. The Canada Revenue Agency needs 44,000 employees to joust with all the tax wizards who haggle over every loophole. The total cost associated with paying personal income taxes and the cost of tax software and accounting services amounts to nearly $3.9 billion a year.

There must be a better way. There is and it’s called the flat tax. Imagine, every one pays the same rate on every dollar earned so that you could do your taxes on a postcard.

At present the rate of federal income tax rises as your income does from 15 per cent on income of $38,000 to 26 per cent on income over $123,000. The flat tax would end all that and charge everyone the same rate (say 15 per cent). It would also close all loopholes, special deals, deductions and allowances that make the tax system so complicated and costly to administer. The 15 per cent flat tax would collect the same amount of revenue as the federal government now collects but would do so in a manner that is much less damaging and distorting.

Are there arguments against the flat tax? There are two main ones. First it violates the principle of progressivity i.e. making the rich pay more. In fact, the flat tax would cut taxes for the rich in theory, but not necessarily in practice. Few of the endless existing loopholes favour the needy; they almost all favour the rich. Set the exemption level at, say, $30,000 and the poorest would pay no tax at all while the richest would pay more than at present.

Second, what about all those social goals that the current code tries to embrace? Well, instead of allowing all those deductions and credits e.g. for caring for elderly parents, why not just send annual cheques to those we deem worth of support? When a tax break goes into the income tax act it vanishes from public view. If cheques were sent out it would be far more transparent since spending must be approved by Parliament every year.

Has the flat tax succeeded elsewhere? Indeed it has in more than 20 jurisdictions around the world most notably Hong Kong which has built itself into an economic powerhouse using the flat tax as its fiscal anchor. Similarly, Slovakia, which adopted a flat tax in 2004, has since become Europe’s fastest growing economy and a beacon for foreign investment? (Am I wrong in thinking the Alberta uses the flat tax?)

The flat tax can be simple, efficient, transparent, cheap to run and just as fair as the current system.

The flat tax is an idea whose time has come.

Do you agree?

5 Comments »

  1. 1
    Tony Kondaks Says:

    What happened to all our posts?

  2. 2

    Tony –

    Sorry. I was fooling around trying to delete some very old comments and by mistake I deleted the ones on the flat tax. Sorry.

  3. 3
    Tony Kondaks Says:

    Don’t worry…we’ve all had our share of computer faux-pas’s.

    I once accidentally erased about 20 pages of text a friend of mine had typed after I had given him permission to use my computer…the last image I had of him as I quickly exited the room was him standing in front of the wall slowly banging his head against it.

  4. 4
    Dez Says:

    Flat tax. Yes, I like the idea.

    Having never made as much as thirty grand in any given year, I would rejoice in never again paying income tax. Sweet.

  5. 5

    Dez:

    You seem to have a very good reason for supporting the flat tax.

    Great to hear from you.


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