The Economists cited in the articles below believe that the cure to what ails Canadian productivity is a reduction in taxes. One such solution is the flat tax. The proponents of this system claim that it reduces taxation to the individual and corporations (but as my Finance Professor said, they are one and the same) while actually increasing the absolute amount of tax revenue collected by governments.
The case is for this is laid out at the Adam Smith Institute.
...It works on two levels. The single rate is set sufficiently low that compliance shoots up. It is less worthwhile to avoid tax by complicated tax shelters and less worthwhile to evade it by criminal failure to declare income. The second effect is that the low rate increases the reward of extra effort and risk-taking. Since people can now keep a higher proportion of what they earn, extra earning becomes more attractive.
Both the higher compliance and the expansion of economic activity contribute to broadening the tax base. This explains one of the most paradoxical features of flat tax: the fact that it rapidly brings in more revenue at the lower rate. It does so because the lower rate is charged on more income.
There is another paradox inherent in flat taxation, as both the Adam Smith Institute and Mark Milke, in todays National Post, point out. Flat taxation is actually a progressive tax system. Mr. Milke illustrates the point.
...To understand why, consider Alberta. The provincial personal income tax rate is 10% for all income above $14,523, the current basic personal exemption. To keep it simple, calculate the provincial income tax of a single person with no other deductions. At $10,000, the tax filer pays nothing, at $20,000 he pays 2.7% of his income, at $50,000 7.1%, and at $100,000 8.5%. Because of the basic exemption, the tax system is still progressive, just not steeply severe and punishing (which is perhaps why “single tax” might be a more accurate label than flat tax).
Futhermore flat tax systems are not tax cuts for the rich.
...A low rate of flat tax (with low earners exempted altogether) can rapidly lead to the rich paying not only more tax, but a higher proportion of the total. Something of this effect was seen following the UK’s tax cuts of the 1980s. The top 10 per cent of earners, who had contributed 32 per cent of income tax before the cuts, were contributing 45 per cent afterwards. US tax cuts have produced similar results.
Here is why Milke argues in favour of flat taxation.
...Flat taxes improve incentives, reduce complexity, and increase compliance. On the economic impact, Britain’s Adam Smith Institute noted last year that flat tax systems “boost the economy by considerably improving incentives to work, save, invest and take entrepreneurial risks.” This is almost unremarkably obvious given the flattening of steep, multiple brackets.
Another advantage is a reduction in the complexity of the tax code and an increase in compliance. A recent International Monetary Fund study looked at Russia’s 2001 switch to a single tax rate of 13% and noted that revenues rose by 26% in the first year of implementation.
The Adam Smith Institute expands the point.
...It is the high tax rates that motivate people to seek out those exemptions and to shelter some of their income behind them. This is one reason the current system has become so cumbersome and complex over the years. The change to a flat tax represents the chance to sweep away the accumulated debris that has built up within the tax system over generations, just as privatisation enabled distortions and bad practices to be discarded from our state industries.
...There will be huge competitive advantages to the first of the advanced European economies to follow this route. The low tax rate will prove a magnet for high flyers and for those setting up new businesses. It will certainly cost much less to administer, too. There is more to flat tax than its financial and commercial attractions, however. Simplicity itself is a virtue in taxation. It is better that people should understand their obligations than that they should not.
