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Tuesday, March 23, 2010

A Tax By Any Other Name

Libertas Post, run by occasional Shotgun blogger Gerry Nicholls, has been somewhat dormant over the last few months. This was something of a disappointment after such as strong start late last year. With spring, however, comes a revived Libertas and Old Publius suggests you take a second look. Among the fresh offerings is a post by Gerry calling for a flat tax. Let me welcome Gerry back by eviscerating his post. Well, not really. I'm not opposed to a flat income tax in principle. I'd just prefer that if we are going to be taxed, a value added sales tax has the comparative advantage of being: 1) less intrusive 2) cheaper to administer 3) impacts consumption rather than savings 4) painfully obvious to consumers when buying, unlike PAYE income tax collection. 

Luckily we already have a value added sales tax, the Goods and Services Tax (GST), introduced by everybody's favourite Red Tory, Brian Mulroney. One of the nails in Mulroney's political coffin, the GST was actually a great improvement over the Manufacturers' Sales Tax, which it replaced in 1991. The MST was hidden to most Canadians and hurt the international competitiveness of our manufacturing industry. Its public nature reminded Canadians that big government has a price. Not a good thing for the Brian's political career, but the backlash against the GST was ever so useful fuel to the nascent Reform Party. In other words it was a sound public policy decision and lousy politics. People were outraged. They missed the essential act of the exercise; one tax, the cost of which was quietly passed onto the consumer, being replaced by another more obvious tax. Hiking the GST to the level where it can replace the income tax would probably meet the same sort of backlash as the old federal PCs encountered twenty years ago. Which makes it unlikely to get past the wonk stage of development, yet it has its positive points.

By way of comparison the flat tax has the downside of being inherently regressive. Gerry rightly points out that the current income tax system penalizes people for being successful, the more you earn, the more as a percentage of your income you pay. A flat tax would do the opposite, it would punish people for being poor. A flat tax of say 25% on a person who makes $20,000 would be $5000.00. A nasty bite for someone at that income level. As a percentage hit, 25% is far less damaging for someone making from the low six figures and up. Gerry suggests setting a basic personal exemption, as exists now, for a new flat tax. I'm assuming this means that if the threshold is, say $20,000, after that level you get taxed on every cent. This, unfortunately, recreates a current problem, having a distortion point around the exemption income point.

In effect you're punishing a low-income earner for trying to improve themselves, and providing an incentive for employers to provide increased benefits (rather than higher wages) at around that income level. This reduces revenue for the state from this income segment, and pushes the tax burden onto everyone else. It also reduces the choices available to low income earners. Without the distortion of the tax they may prefer cash to increased benefits. A sales tax would also be regressive, but this could be mitigated by excluding certain necessities like basic groceries. The choice between shifting to a flat tax regime or a higher sales tax may seem like picking between different flavoured poisons. My personal preference is to be fleeced at the cash register, rather than at the office. Chacun à son goût.

Posted by Richard Anderson on March 23, 2010 | Permalink


Both a flat tax and a value-added tax may have their drawbacks but both are superior to the convoluted system in place now where the majority of Canadians have no idea what the various loopholes are or what their actual tax bill will be.

Posted by: Liberty | 2010-03-23 9:00:54 AM

The biggest problem with a VAT is that it gets embedded at every level of production. I'd prefer a straight-up sales tax.

Posted by: Charles | 2010-03-23 11:33:01 AM

One of the most destructive aspects of exempting from income taxation the first $X of someone's income is: the higher the exemption, the greater the number of people who are "off the tax rolls".

Conservatives and Liberals alike usually trumpet this as a good thing. However, it's a very destructive thing...politically. Any person not paying a tax has NO incentive to see the rate of that tax reduced, and many incentives to see the rate of that tax INCREASED. If an income tax exempts the first $20k of annual income, the person making $20k or less is given the incentive to vote for tax and spend collectivists; and to demand greater government hand-outs, paid for by increasing rates on that tax.

It amazes me that so-called "fiscal conservatives" - including the likes of Jim Flaherty - do not realize that they are slitting their own political throats, right along with those of the taxpayers who still pay the tax in question.

No exemptions. No social planning via tax structures. One rate, imposed on each sale, whether it's a candy-bar, toilet paper, a book, an apple, medicine, a wheel chair, a tutor, or a mansion. Ones disadvantages in life are not a licence to put a gun to someone else's head and say "Pay my way".

Posted by: Paul McKeever | 2010-03-23 1:54:35 PM

Jim Flaherty's a fiscal conservative?

Posted by: Farmer Joe | 2010-03-23 2:24:15 PM

Paul, I hear what you're saying. But wouldn't a flat tax with a 20k exemption be a heck of a lot better than what we've got now?

Posted by: Farmer Joe | 2010-03-23 2:42:18 PM

"Jim Flaherty's a fiscal conservative?"


Posted by: Charles | 2010-03-23 2:51:46 PM

Farmer Joe wrote: "Jim Flaherty's a fiscal conservative?"

Clearly not. However, he was, for a time, Mike Harris' finance minister in Ontario. As such, he at least kept the budget near-balanced.

Farmer Joe wrote: "Paul, I hear what you're saying. But wouldn't a flat tax with a 20k exemption be a heck of a lot better than what we've got now?"

I'm not sure what the average exemption is at present. The exemption is more decisive than the rate, politically. If the exemption right now - in our system of progressive rates - is already $20k, then, yes, a switch to a flat rate system would be better. But if the switch to flat rate involved an increase of the exemption, I'd say no, politically, the current system is less bad than a flat rate system with an increased exemption.

Posted by: Paul McKeever | 2010-03-23 3:24:16 PM

Any form or type of income tax is actually a punishment for initiative and an encouragement not to be productive. The income tax should be eliminated and replaced by a consumer tax. Call it GST, Sales Tax or whatever. It would not penalise productive people and would be more fair. the wealthy naturally consuming more than the poor would pay more. It would at the same time remove the accountants, book keepers and lawyers from the taxation, since there would be no write-offs, exemptions or whatever.

Posted by: Alain | 2010-03-23 7:50:54 PM

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