The Flat-Percentage Income Tax — The Least Unfair Way to Raise Revenue

Tax Collector

'Let's sit down and talk about taxes'.

Normally that phrase would be a great way to end a conversation.  Or start a fight, depending on what sort of company you happened to be keeping when you said it.  We all despise taxes, and people at all levels of income do what they can to reduce or avoid paying them. With the current system(s) of taxation, who can blame them?

Unfortunately, if we want to have government, even limited government, they have to raise revenue somehow.  The trick is finding a way to do it that causes the least amount of economic disruption and the least amount of financial hardship to individual citizens and legal residents.  We must find the least 'lousy' method of taxation.

We can immediately see that two ever-present types of taxation, property tax and sales/value-added/consumption taxes, come nowhere close to fairness.

Property taxes are entirely arbitrary, and are all too often (especially nowadays) levied at a nominal level completely disconnected from a property owner's actual income and ability to pay; we all know the story of eighty-plus year-old retirees whose property tax bill is almost as high as their annual pension income.  Not good!  Nor is it particularly moral either.

Sales taxes create a situation where the lowest-income households pay a far higher necessary tax rate than higher-income ones do, simply because they are compelled, by necessity, to spend a much higher percentage of their income simply to survive.  Grossly unfair, and again, immoral.  Sales taxes also pummel retailers, particularly smaller firms, something a fellow named Adam Smith pointed out back in the 1770's.  It's as true today as it was then.

As for our current graduated, multi-bracketed income tax regime, what more needs to be said?  it seems almost designed to beggar the poor and the middle class, while punishing hard work and innovation.  Again, not good!

What then, is the answer?  What system will allow governments to collect the revenue they need to finance public services, without hurting the poor, leaning too heavily on the middle class (what's left of it) or discouraging entrepreneurship and hard work?

I'm so glad you asked!  The answer is simple : a Cost-Of-Living Adjusted Flat-Percentage Income Tax.   It is the only method of taxation which is fair, simple to administer and relatively easy for taxpayers to plan for.  And it will be by far the least economically disruptive method, both for individuals at all income levels and for the general economy.  Here's how it works:

First off,  under the COLA F-PIT, the basic personal exemption reflects the basic cost of living -- the amount of cash in hand that a person needs just to keep a roof over his/her head, three square meals a day in his/her belly, and to keep the heat, lights and water on.

In other words, if the COLA F-PIT were being implemented today, no one would start paying taxes until they had earned $ 20,000.00. Everyone would then be allowed to deduct their CPP and EI contributions, their MSP and other medical insurance premiums, and a further amount for each dependent child or spouse.  After that, the remaining income is taxed at one flat percentage rate -- say 10%, as it was in Alberta until recently.   Simple as that.

This system meets all three of our criteria for the least lousy tax.  First of all, the basic exemption ensures that no one is forced to pay any tax at all until they have been able to provide for their own needs and those of their dependents, unlike our current tax system, which has people paying income tax (and sales tax and property tax) at income levels well below subsistence.

It allows every taxpayer the same deductions, helping us to avoid those embarrassing situations where the boss's secretary pays tax at a higher rate than he does (of course, he doesn't have to pay that lower rate ; he can always tell his accountant not to claim all those special deductions).  The COLA F-PIT is naturally progressive (the higher your income, the higher your actual percentage rate of tax is.  The math is very easy), tax increases as incomes climb are small enough that they will not penalize hard work, innovation and risk-taking the way our current graduated income tax system does.

Ideally, we would one day see the COLA F-PIT applied nationally, as the only tax collected from the citizenry ("One People, One Tax" has kind of a nice ring to it, don't you think?), to be split among all three levels of government.

That will not be easy to achieve, but in the meantime we can get a start by applying it at the provincial level.  It is not without precedence -until quite recently, Alberta had a flat tax very similar to what is being proposed here, and did very well under it, thank you very much.  There is no good reason not to switch to a flat tax as described in this article; we, the people must simply exert the necessary pressure on the political class to get it done.  Let's do it.

Ian Tribes, October 1, 2016

 

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