What if the Tax was Flat?

A flat tax rate has the potential to be a more efficient and economical system than the current progressive tax system we have in Canada.  Right now, Canadians pay taxes at a rate that is increases along with their income. Now this may seem like a reasonable and fair system, but looking a little closer at a flat tax system may cause some doubts.  A flat tax system would mean that every Canadian pays the same percentage of their income to the government. Some may find this unfair but the truth is that it’s just as fair or maybe even fairer, and more efficient.

Some argue that a flat tax system is unfair because taxing 15% of someone who makes $30,000 impacts them much more than taxing 15% off someone who makes, say, $150,000.  That may seem true but if you look at the average tax it balances itself out more.  A flat tax system theoretically has no deductions whatsoever but in practicality it can’t be entirely free of deductions. There must be some base deduction so that people who make a small amount of money don’t have to pay tax.  Let’s look at the average tax of a flat tax system to see how fair it seems.  Say the base deduction per person is $15,000, a deduction for a dependent is $7,000 or so, and the flat tax rate is 15%.  After the deduction, a single person making $30,000 would have a taxable income of only $15,000; meaning they would have to pay $2,250 in taxes.  That’s only 7.5% of their original $30,000 of income.  If you look at a person making $150,000, they have a taxable income of $135,000 meaning they would pay $20,250 in tax which is 13.5% of their gross income.  That seems fairly reasonable, or at least not as unfair as some would make you think.

The current system we have discourages people from behaviours that help boost the economy.  Working hard, investing, and entrepreneurship are discouraged by progressive tax systems.

Under our current tax system, working hard and making more money results in more paperwork, stress, and less gain.  Even though someone may work really hard and start making a significant amount more (pre-tax) than they did previously, once they jump up to the next tax bracket the amount of income after tax will not increase at the same rate as before.  This goes for businesses too:  Small businesses get so many tax breaks and benefits in the current system that it’s often not worth the trouble for them to expand and hire more employees which means less jobs are created than if it were a flat tax system.

Many agree that one disadvantage of the current system is its complexity.  In fact, the estimated collective cost for Canadians complying and submitting their taxes in 2005 was up to $30 billion.  This included the costs of obtaining receipts, filing taxes and hiring accountants and lawyers.  A flat tax rate could make filing your taxes as easy as filling out a form the size of a postcard.  Essentially, the only thing you would need to fill out is your wages minus your deduction, and then multiply that by the tax rate to get what income taxes you owe. It could be as simple as that. Any sources of income other than wages such as dividends and investments would be sorted out by the businesses on their tax return. This would also eliminate most of the loopholes and tax fraud that occurs which could save the government lots of money.

Obviously there are disadvantage to a system that tries to make everyone’s situation fit.  If the tax rate is too high, than a flat tax system becomes less feasible because there are no tax deductions or credits.  A flat tax system cannot adapt to peoples’ specific situations and needs and can result in overburdening certain groups such as the elderly or handicapped if taxes are too high.  However, all I’m saying is to consider the possibility of a flat tax system, as most of the former soviet states have adopted flat tax rates, contributing to their rapid economic growth. Some western countries have been considering it, why not Canada?