Flat Tax Rate of 15% For All Canadians Says Researcher

Friday, January 04, 2008 03:54 AM

Independent researcers at the Fraser Institute say most Canadian taxpayers could complete their personal tax returns in about five minutes using a postcard-size form if Canada adopted a 15 per cent flat tax.

“Imagine being able to complete your taxes in about five minutes without having to wade through piles of receipts and pages of complicated forms or having to use the help of expensive accountants and lawyers,” said Dr. Alvin Rabushka, an internationally renowned expert on tax reform with the Hoover Institution at Stanford University and co-author of A Flat Tax for Canada.

Reforming Canada’s income tax system using a flat tax of 15 per cent for individuals and businesses will make the tax code simple and less costly, Rabushka says, adding that a flat tax eliminates nearly all deductions, exemptions, and credits that complicate the current tax system.

Replacing the existing four federal income tax rates with one low rate removes barriers that discourage people from saving, investing or working harder to earn more money and improve their lives. Tax rates that increase as individuals earn more income through success, hard work, and entrepreneurship act as a powerful disincentive for these activities says Rabushka “Removing the tax penalties on success through a flat tax would unleash the efforts of hardworking, creative, and entrepreneurial Canadians.”

One of the most significant changes under the proposed flat tax is the full exemption of savings and investment from taxation. Income put back into the economy in the form of savings or investments would not be taxed under the flat tax, which would encourage more savings and investment and lead to a more vibrant and wealthier economy. The changes would also make Canada much more attractive and competitive internationally.

“The flat tax would revolutionize the incentives for savings and investment, making Canada a beacon for investment in the industrialized world,” Rabushka said.

Rabushka also shows how the simplicity and fairness of the flat tax could easily be extended to the provinces.

In order to maintain the same levels of revenue, provincial flat taxes would range from a low of 6.1 per cent in Newfoundland and Labrador to 15.5 per cent in Quebec. Western Canadian provinces would require some of the lowest provincial flat taxes with Alberta at 6.8 per cent, Saskatchewan at 7.5 per cent and British Columbia at 7.9 per cent. Ontario would require a flat tax rate of 9.2 per cent. The result would be combined federal-provincial flat taxes ranging from 21.1 per cent in Newfoundland and Labrador to 30.5 per cent in Quebec.

Under the flat tax proposal, all taxpayers receive a personal exemption, an amount of income they can earn tax free. Since the exemption constitutes a much higher portion of income for lower income earners, it results in only a small portion of their total income being taxed. As a result, average tax rates for lower income earners are substantially lower than for higher income earners with a flat tax.

A Flat Tax for Canada is a chapter from a forthcoming book on tax reform to be published later this year by The Fraser Institute.

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Posted on Friday, January 04, 2008 03:54 AM in News by 250 News

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Comments

Posted by: thereasonableman on January 4 2008 4:01 AM

It'll never happen. It has already been cleverly devised to get the right people paying and the right people not paying.

The people not paying are the ones making the rules.

Posted by: Eagleone on January 4 2008 5:00 AM

I agree with the above statement, but I also fully agree 100% with the flat tax proposal as a way to make Canada an economy based on savings and investment rather then debt and obligations; as well as the obvious benefits of creating a more fair taxations system.

The current 'Canadian Income Tax Act with Regualtions' 77th edition that I use as a paper weight is 3049 pages (very small print two columns) not including the many pages of reference tables, supplements, and amendments.

I would argue that very few tax accountants could ever possibly know all the in's and out's of the current tax act with all its loop holes and exemptions detailed in nearly 10,000 regulations each with their own ammendments and sub-amendments ad infinium....

The cost in lost productivity to meet the requirments to the act is in the tens of billions of dollars to both business and citizens. That savings alone would be one of the bigget tax cuts that government could be making.

Posted by: ammonra on January 4 2008 8:03 AM

"Independent researcers (sic) at the Fraser Institute ", now there's an oxymoron if there ever was one. Everything the Fraser Institute does is coloured by their fundamental viewpoints of less taxation, less spending, less social support. There is nothing independent about anything they do.

The effect of a single tax rate for everybody is that higher income earners will pay less. Lower income earners, including those who pay nothing now because they are at or below the poverty line, will have to pay 15% of their income as a tax. So much for a 2% GST reduction, eh?

An equitable income tax system requires more than one rate, so that those who do not earn enough money to be able to pay taxes should not have to do so. Their income should be spent on whatever food and housing they can afford.

Those at the top of the income tower, however, who have much greater political and economic influence should pay at a higher rate. We are a Nation, not isolated individuals living independently of each other.

On the other hand, the rules really are complex. I remember many years ago we were promised they would be simplified. When the changes came they were even more complicated than before (take your deductions multiply by 17% and enter in line 1234 etc). However, rules for deductions have nothing to do with fairness in tax rates.

Posted by: socredible on January 4 2008 8:05 AM

You might want to think very carefully just what's entailed in making Canada an economy based on savings and investment. Especially without making some other necessary changes to our financial system first.

It is indeed a very laudable goal, with which I fully agree, as do I with the idea of a flat tax on income. Which is long overdue.

But under the current monetary/accounting arrangements what any of us would be saving and investing is a dollar that's still ultimately rooted in debt. It originated as a Bank loan, a creation of credit, "out of nothing", as the saying goes. And it eventually will return to that "nothing" from whence it came, when the loan is repaid.

It is a dollar that's already been COSTED into some production on its journey from the Bank through the production system on its way back to the Bank as that production disappears into final consumption after its PRICE has been met.

When you save and invest that dollar you are leaving an equivalent dollar in product PRICES incapable of being liquidated. Unless someone borrows another dollar. Which creates another COST which will have to be liquidated in the future.

The investment of 'your' dollar ALSO creates another COST, (just the same as if it were the "Bank's" dollar, which ultimately, it still is.) But it DOESN'T create any more purchasing power to liquidate that COST. And each time that original dollar is saved and invested, (under the current flawed system of national accountancy), yet another COST is created with no way, except further Bank lending and conseqent debt growth, to liquidate it.

I believe the Fraser Institute, and those wealthy "Canadians" who fund its activities are well aware of this. It is a proposal designed to ensnare an already debt ridden populace into still further Bank debt, and, more importantly to its proponents, tighten the increasingly centralised control they have over all of us.

The problem is easily correctable by having a proper set of National Accounts which properly reflects what's in fact a far greater appreciation of real wealth in our economy than there ever is a consumption or depreciation of it over any given time period. The public should be 'credited' with the difference. Some of which could indeed be saved and invested, and lead us all to a country that can realize its full potential without the dead weight of ever increasing Bank debt and elitist control.

Posted by: diplomat on January 4 2008 8:58 AM

Canada's production and consumption is not a closed system. The dollars earned here are often enough spent to liquidate the cost of products that were produced elsewhere, like in China, the USA or some other country.

The above equation is a hypothetical situation only. As soon as the theoretical closed loop is opened by export and import activity it is no longer applicable in this simplified *one liquidates the other* scenario.

Not only products are subject to import and export, but money and services are too.

Posted by: jarodl on January 4 2008 10:52 AM

If we eliminate deductions for charitable donations, I think that would greatly reduce the amount that people contribute to them. That is one deduction that should be kept.

Posted by: Andyfreeze on January 4 2008 12:15 PM

It will never happen, even though I like the idea for the most part.
Politicians cater to the rich and to big business, and they are the ones who usually pay the least.
And make big campain contributions.
Why would our fearless leaders want to screw that up?

Posted by: socredible on January 4 2008 1:06 PM

Diplomat, every dollar spent on the acquisition of a foreign made import or service provided is a dollar that's no longer available in the whole economy of Canada to liquidate an existing bank loan.

While at the same time it represents a dollar, or its foreign equivalent, injected into the exporting country's economy "debt" free.

It is certainly true that by running a 'favourable' trade balance ourselves we can liquidate debt that can not otherwise be liquidated.

But no country can always have a 'favourable' trade balance. And national currencies do not circulate internationally, they must be 'bought' and 'sold', and are open to speculation and manipulation by those who make a business of money trading.

And there are serious consequences, some of which we're witnessing right now, even when we have had a short period when we do have a so-called 'favourable trade balance.

Our dollar, for example, rises in ratio to other currencies, making our products more expensive and difficult to sell in foreign markets.

And the loss of those sales results in unemployment, and ultimately a further increase in overall indebtedness in our economy. Since employment incomes are currently the only way most people access the money necessary to continue servicing and/or liquidating existing debts.

Posted by: diplomat on January 4 2008 1:10 PM

You are on the right track, Andyfreeze!

Besides, look at all the jobs that would be eliminated with a simple flat tax which starts at an income above a certain low number: thousands at Revenue Canada, dozens of lawyers working on the behalf of Revenue Canada, hundreds of lawyers who are working on behalf of companies and individuals who are needed to wade through the labyrinth of regulations and their interpretations, thousands of income tax preparers who are hired by taxpayers who are unable to make sense of the required steps...

The flat tax has been promised for many decades as has been the simplification of the income tax return forms!

Every time they have been *simplified* they are more difficult and complicated than before!

If they would ever bring in a real flat tax it would soon be mutilated by so many amendments and exemptions that in no time at all it would look like the system we have now.

Posted by: Andyfreeze on January 4 2008 3:50 PM

Good point Diplomat!
If you want something screwed up,give it to a lawyer or a politician!

Posted by: NMG on January 4 2008 5:32 PM

It all sounds good, but the simple fact of the matter is that the tax rates have virtually nothing to do with the complexities within the income tax system.

Posted by: Chester on January 6 2008 3:07 PM

What's wrong with simplifying our tax system? Absolutely nothing. Unless you are an Accountant, a Lawyer or someone who does tax preparation.

I would gladly pay a flat tax and forget all about the strategies, the schemes, the games created to reduce, defer, eliminate or avoid taxes(illegal). How much of our existing economy is already underground because of the burdens of tax? (illegal)

Step #2 should be to completely replace our currency. All of that old, illegal currency would surface or be worth nothing over a certain period of time. (6 months)

Seems to me that a large percentage of our politicians used to be lawyers. And aren't they responsible for creating the existing tax system we have? I'm not going to hold my breath. But I support a flat tax for everyone. (I also support the idea that a certain amount of income would be earned tax free for everyone) ($15,000 to $20,000) This would look after all of the low income folks. And it would be fair. Chester