Social Policy in Ontario

Toward a single tax rate

Posted on January 18, 2008 in Governance Debates

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National Post – opinion/editorials
January 18, 2008
John Williamson and Mark Milke

Don’t believe the nattering nabobs who say Ottawa can’t lower taxes. The Conservative government can–and should– table significant personal income tax relief in the federal budget.

According to the Organization for Economic Co-operation and Development (OECD) and even the federal finance department, Canada’s personal income tax burden is the highest of all G7 nations. Canadians pay more income tax than the French and Italians, despite being neighbours with the lower-taxed United States. Income taxes in Canada are complex, relatively high and create significant economic distortions. There is an alternative.

Imagine a personal income tax form that could be easily completed without help from professional accountants or computer software. One that, in April of every year, allowed taxpayers to list their income; subtract basic, spousal and child deductions, and RRSP contributions, to calculate taxable income; apply a single rate to calculate tax owing; subtract the tax already paid; and pay the balance or collect any refund.

If Canadian taxpayers like the simplicity and fairness of this idea, they are not alone. Since the fall of the Berlin Wall in 1989, 15 eastern and central European countries have adopted variations of a flat-or single-tax model. In 2007, Iceland was the first western European nation to move to a single rate of income tax.

There are several reasons why Canada should aim for a single rate of tax. First, a single rate of tax if combined with vastly fewer deductions and credits would end complexity and thereby reduce compliance costs for taxpayers and administration costs for the federal government.

Second, the reality of fewer credits and deductions would allow for a lower overall single rate. Third, a single rate of tax is effectively progressive in a way that a multi-bracket system with multiple credits and deductions is not. The proponents of a multi-bracket system ignore the litany of exemptions that come with it. Those exemptions and deductions help to lower tax rates, especially for wealthy individuals.

In contrast, single-rate systems are progressive because the existence of a basic personal exemption means the higher one’s income, the higher the proportion of one’s income paid in tax. Consider Alberta, where the basic personal exemption was $15,435 in 2007 and where the provincial single-rate rate is 10%. At $20,000, the taxpayer paid out $456 in provincial income tax, representing 2.3% of income. At $100,000 of income, the tax paid was $8,456 and 8.5% of all income.

Two other benefits include reduced tax avoidance and superior incentives to work, save and invest under a flatter system.

To achieve such a model, the federal government will need to move in two steps. First, in stages between 2009 and 2012, the federal government should collapse the number of brackets from four to two rates of 15%, and 25% on income above $80,000. Canada currently has four income tax rates of 29%, 26%, 22% and 15%.

Over that same period, the basic personal and spousal exemptions should be raised to $15,000 each with the per child credit raised to $2,200. Concurrent with such a reform, most other deductions and tax credits should be eliminated with the exception of universal deductions and credits that pertain to charitable giving, RRSPs, seniors and a handful of disability amounts.

The tax relief is substantial. Adopting this two-rate plan will deliver $68.8-billion in personal income tax relief over four years. It is based on prudent assumptions and is achievable without running budgetary deficits.

And according to the Toronto-based C.D. Howe Institute, the federal government can accommodate such a tax regime merely by restraining federal spending to 2.5% growth per year starting in 2008. If it can slow annual spending increases, Ottawa could deliver the two-rate tax cut plan, run a surplus in 2012 and still have an additional $3-billion available for debt reduction that year.

It makes sense for Canadians to eventually pay one federal rate of tax. So the second stage, post-2012, would involve moving to a single rate as budgetary conditions allow.

This cannot be done overnight, but we should begin implementation as soon as possible. A fairer tax and a healthier economy will be the result when we do. – John Williamson is the federal director for the Canadian Taxpayers Federation. Mark Milke, a former provincial director with the CTF, lectures in political science at the University of Calgary. They are the authors of Lower, Simpler & Flatter –Towards a Single Tax Rate for Canada, available atwww.taxpayers.com.

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