By: Larry MacDonald
My previous post ended with the thought that a flat tax might be a better system than the monstrosity of the present. I was going to do a write-up on it but some readers wrote in recently and did a better job expounding on flat taxes than I would have (it seems this is a passionate topic with many people). So I’ll turn this post over to them. First up is Dave in B.C. Following him is John Wesson:
Dave in BC writes:
“Basically, under a personal flat tax system all income is taxed at one low rate, maybe 8-10% – no exceptions (subject to exemptions on income for single moms, people who are below the poverty line, handicapped people, etc).
All returns could be done on one page and the tax rules & guidelines would be simplified down to a small book – not the current messed up set of rules on rules. It can be done and as a revenue neutral project to government – but who will undertake this on our behalf??
As I see it … Canada must streamline its cumbersome & messy personal tax system. To me, the best way to really make it simpler, more efficient and, most importantly, as FAIR to all taxpayers as possible – the flat tax is far & away the best model I have ever seen….
In its purest form, income from all sources (employment salaries & commissions, bonuses, stock options, investments, etc) & of all types (capital gains, income, dividends, etc) is taxed from dollar 0 at one fixed rate. Really simple, isn’t it?
In the real world, one would expect to see some modifications to a flat tax structure; possibly as an exemption for a certain minimal earnings amount for folks with very low income, disabilities, students, the elderly etc. This would replicate the relief they get under the current system and would be seen as fair & equitable by most of my fellow citizens who are a charitable lot at the end of the day. Still, a one page tax return is totally doable!
Government could calculate what the flat tax rate should be tomorrow based on the revenue they currently get in the Great Canadian Tax Grab. TFSA’s & RRSP’s would remain the same as tax shelters.
A flat tax system is mainly about fairness and efficiencies – but there would be a few casualties. For instance, the tax dept would not need thousands of the employees they currently employ to process our returns annually. Also, tax return booths that spring up each tax year may not get as much business.
Think about the big picture for a minute though – a pure flat tax is ultra-efficient, it’s easy to calculate & administer, it’s going to encourage economic growth (and may encourage foreign investment but I need to chew on this one a bit more); and most of all – it’s FAIR.
Right now, there are office buildings where the cleaning staff pay more tax than the CEO & CFO. Honest. The cleaning staff have little or no tax dodges & loopholes.
In a flat tax plan, you pay a percentage tax on everything you earn in a year. So all of the corp. exec’s & hedge fund mgrs that are under the gun currently for huge bonuses & salaries would pay a flat tax on everything. We would no longer need the …“Robin Hood” mentality where government steals from the rich to pay the poor….
Don’t for a minute think this is a brand new idea, either folks. It’s already up & running in something like 24 countries. Because it is so successful in places like Russia (tax rate 13%), Lithuania (24%), Czech Republic, Latvia, Romania, Serbia, Slovakia, Iceland, Mongolia & others – many western European countries are currently considering a flat tax too. They feel they will be at a disadvantage if they do NOT install one as eastern European countries have higher economic growth rates now with it & they feel “left behind”.
John Wesson writes:
Larry you seem to be planning a flat tax feature soon, and I am very much in favour of that for many reasons, but I fear the lobby in favour of the status quo will crush it like a bug underfoot. Lobbyists representing accountants and tax firms will mount such an anti flat tax campaign that it might take years for parliament hill to recover. It would, however, be nice to dream about a flat tax system for personal taxation in Canada.
Think about all the time currently wasted by millions of Canadians wading through the annual tax time drudgery. And what about the unbelievable amount of money ordinary Canadians pay to tax accounting organizations in order to avoid the pain of filling out those wretched forms each year. The fact that the Canada Revenue Agency (CRA) has created such a complicated monster is reason enough to adopt a flat tax system.
A flat tax would bring a sudden halt to all the pain involved in trying to understand the special kind of geek speak found only on Canadian tax forms. A flat tax system would probably reduce, by a significant number, the depression patients seen by doctors at tax time. Canadians would easily be able to figure out what 18%, for example, of their taxable income is. In fact, I can use my desktop calculator to figure out that problem in just under two seconds. Think of the joy involved in doing your taxes under those circumstances. It’s especially gratifying when you compound that pleasure with the fact that you would also save the money normally spent employing a tax expert to relieve you of the anxiety formerly imposed by the CRA by virtue of their nauseating volumes of tax regulations.
CRA could still provide necessary exemptions to protect low income Canadians, but high income Canadians would certainly have to pay up, especially if they could no longer wriggle out of paying the flat tax rate applicable to their level of earnings.
Some European counties have switched to a flat tax without any adverse effects on their economies or individuals so it’s not like we would be inventing the process. We probably couldn’t change the tax code as it applies to corporations and small business immediately, so that should keep most of the accountants and tax specialists off the dole. For the few who do find their opportunities diminished I hear the Canadian Forces are still recruiting.
13 Responses to “ Unbearable heaviness of tax system (II) ”
I’m having a hard time making sense of the percentages mentioned. How would the government collect the same total amount of tax if the flat rate is 8-10%? Is the plan to tax all businesses on their revenues (as opposed to earnings) at this rate? Flat taxes always looks great when it seems like everyone would pay less tax, but it could never work this way.
By Michael James on Oct 27, 2009
Any discussion about taxes really focuses on what type of economy we want. The most notably successful flat tax jurisdictions (Hong Kong comes to mind) provide relatively small government benefits and the taxpayer tends to be more entrepreneurial and self-reliant as a result.
We can’t have our cake and eat it too. We can have lower taxes (which typically comes about in a flat tax regime) or more benefits. We can’t demand pension reforms, enhanced EI benefits and more health care funding on one hand and then ask for lower taxes on the other.
I don’t have the answers but I do note deafening silence on where we should be heading as a society from our leaders and, in such a vacuum, the bureaucrats will fill it with more regulation.
By Thicken My Wallet on Oct 27, 2009
“no exceptions (subject to exemptions…”
Those exemptions quickly make the system not a flat tax anymore, or a simple one. That is after all what we have now: a system that has accumulated various deductions and credits and exemptions over the years it has evolved. I can’t stand up and say the tax system we have now is perfect, but I’m pretty sure a flat tax system is even further from perfect — after all, how long would it take before the first exemption to a flat tax was passed? And from there, a tidal wave of exemptions and modifications until we get back to where we are now.
Maybe a reset of the tax system is a worthwhile exercise — jettison some of the accumulated detritus, close some loopholes, etc. But I don’t think a flat tax is the answer…
By Potato on Oct 27, 2009
Not sure who said it, and it might have been Adam Smith, but any income tax system in excess of 20% forces otherwise model citizens to avoid taxes wherever they can. It is just that simple and proven beyond doubt.
By Riverway on Oct 27, 2009
Thicken
I think you make a good point. A flat tax would probably require a different mindset concerning the function and scope of government.
By Larry MacDonald on Oct 27, 2009
Dave’s model isn’t flat, it’s convex. Rather let it be F-L-A-T. Exceptions: none whatsoever. Witholdings from every practical source including Gov’t handouts, lotteries, the works. Instead of “tax breaks” for the disadvantaged or sensitive constituencies, replace them with (tax-witheld) handouts – a happier & more vote-attractive function for Government. Follow the taxed-once rule & dividends enjoy the logical benefit. Tweak incentives to corporate growth/dividend alternatives by tweaking the discrepancy between personal/corporate tax rates.
Add a national/harmonized/single VAT replacing GST/HST/PST/SST. Tweak savings/expenditure behavior by varying the discrepancy between income/consumption taxes.
Enforcement: now simple – the Capone rule alone could substitute FMV subject to presumptive income tax where receipts and/or evidence of income “vanish”. Brings the grey & nether economies into income.
Schooner
By Schooner on Oct 28, 2009
I can’t believe the complexity of our tax system.
Please God someone in authority will champion a flat tax across the board that’s fair to all.
The system is actually tiring and against everything we all are trying to achieve in this life………..
so unproductive, it’s weighs business down and just keeps getting more complex.
At the end of your working life try estate planning if you want layers of confusion.Just trying to look after your affairs and your family as you get older and trying to share your $$$ and a cottage for example is nothing short of madness.
This system is badly flawed…..
By Gerald Boutcher on Oct 28, 2009
I have a newsflash for you. We already have a flat tax system that exists side by side with out progressive tax system. Its called Alternative Minimum Tax (AMT). It kicks in when the tax you would otherwise pay falls below the alternative minimum amount. It is calculated by replacing most of the tax breaks ( excluding RRSPs for example)you may have with a basic 40,000 exemption and then everything left over is taxed at the lowest merginal rate. So there you are, you have the best (or worst depending on your outlook) of both worlds.
By Tax doctor on Oct 28, 2009
I, too, am a huge supporter of a flat tax with the stated exclusions. There is a significant hit on our collective productivity at tax time (or longer) because of the sheer volume of reading that needs to be done each tax year to comprehend and actually take advantage of the deductions and non-deductions. What happens to the average Canadian who may not comprehend the tax system and leaves hundreds of dollars on the table because they do not know they can deduct etc? CRA does not go back to the tax payer and say – hey you overpaid here’s your money back! CRA usually justs stays silent and keeps the money on behalf of the government – I think this is fraudulent.
Given errors on the part of several accountants I have engaged, it seems they also have, in spite of their significant training, trouble with the tax system.
We must tame the monster called CRA -reign them in so that tax policy decisions etc are not allowed to kill the entreprenuerial spirit that is Canada – some decisions are even retroactive which kills businesses, investment and employment.
The reality is the consumer always pays the tax whether it is called corporate or not so lets revamp the whole system into one that is fair, equitable, easy to understand which would likely enjoy much less resistance, hiding taxes, errors etc – reduce the underground economy as well.
Then there are basic errors from CRA staff themselves which can take years and thousands of dollars to unwind… been there and still doing it!
How do we start a grassroots movement?
By Dawne Bringeland on Oct 28, 2009
Some excellent comments on the subject.
Schooner makes a good point that the personal flat tax system suggested is “convex” rather than “flat”. If one wanted to introduce a pure flat tax, it would be very easy to make handouts to those in need rather than exemptions or credits. It’s simply a matter of how the plan is put together & best perceived by taxpayers.
Any flat tax plan rate could easily be calculated by government to be revenue neutral at the time of start-up. The formula is simply – all revenue collected last tax year divided by income earned of all kinds (salaries, commissions, investment income, cap.gains, dividends,etc.). I have seen a guesstimate figure that a Canadian flat tax would need to be in the 10-12% area, but I haven’t seen any numbers to back this. So if all your income for the year was $100,000, then at 12% you’d send CRA a cheque for $12,000 with your 1 page return.
And wouldn’t it be easy for government to tweek the rate annually, up or down, as needed (rather than to write a book on how to implement a change due to the many ramifications of existing tax rules, exemptions,credits & other considerations). Currently every change, even the smallest alteration, impacts many other facets of the system due to the complexity of our current tax structure. This slows down publication of rules after they are passed into law, as well as the learning curve of tax professionals and finally taxpayers.
Looking at the current convoluted system, I’m at a loss to understand how anyone could mount a serious challenge to a well thought out flat system, but I know tax professionals wouldn’t like it.
Although I was only referring to the personal tax system; I expect that flat tax could also be adapted for businesses. However, there are some weighty considerations here. The personal system probably should be revamped first in my opinion.
By Dave in BC on Oct 28, 2009
The government would not bother to build a fair and productive system because the average Canadian just goes to work and gives up half their pay every two weeks and wines but does nothing. What will happen is nothing. The only problem I see the Canadian government needs lots of administration jobs because THEY are the people that do something. Those are the ones who know how to complain. The people who actually do the work do not have the skill to complain in the proper channels. Learn to speak up. Do not just go to work; make sure you get credit. If you are being cheated by anyone, quit working for them. What is so hard?
By Brian Pomeroy on Oct 29, 2009
There are some great responses to the flat tax issue that you have launched Larry. Perhaps I can complicate it by taking it to the next level.
First let me say that my version of a flat tax system would have to result in a revenue stream that replaces the current taxation income extracted from Canadian taxpayers at the time of change. In other words it would have to be, at most, revenue neutral for taxpayers to buy in at all.
My “next level” complication involves a simple, but gradual, tax swap.
Once the flat tax (stage one objective) is achieved we could more easily transition to a consumption tax system (stage two), that would, over perhaps a ten year period, replace personal income taxes completely. Yes I’m suggesting we swap our flat tax for a consumption tax.
Our present consumption tax would have to get a name change to make Canadians swallow the change without vomiting because it seems anything that sounds like GST, HST, or PST causes that reaction. I would call it the “NMPITT” which stands for No More Personal Income Taxes Tax. Unlike its predecessor the NMPITT would be the most popular tax in Canadian history. The responsible governing party would probably be voted in forever.
A tax such as the NMPITT would obviously have its detractors, but some limited exemptions and rebates for the low income citizens among us would certainly make the tax less harmful to that cohort. The rest of us would simply pay our taxes based on our ability to consume. Tax forms would disappear completely unless you have reason to apply for a rebate of the NMPITT.
By John Wesson on Oct 30, 2009
John Wesson NMPITT tax could cause a lot of shopping outside the country if it went too 20% I feel a flat tax plus a consumption tax of no more than 15% both Fed and Provincal would be more accetable. No exemtions may drop the savings rate and cause reduced pensions. unless the govt. increased the mandatory CPP to give at least $2500 per month pay out
By Robert Newhouse on Nov 3, 2009