Flat Tax
Principles and Issues
Notes
1 The 2000 Federal Budget reduced the middle-income statutory tax rate from 26% to 23% over two years beginning with a reduction of 2 percentage points (26% to 24%) effective July 2000; the rate for 2000 is, therefore, 25%.
2 Computation of federal income tax: $30,004 minus $7,231 multiplied by applicable tax rate (17%) = $3,871.
3 "Values," in this context, means how much weight the government places on a dollar of income for a person in a particular income bracket in assessing the well-being of society through a social-welfare calculation.
4 Even if the government does not value the incomes of the rich, it should still value the revenue it can generate from them. This is why, even in the "progressive" case, the optimal tax rate is declining, because the rich have much greater behavioural responses to changes in the tax rate than do the rest of the population. A government with these preferences would attempt to maximize the tax revenue obtained from this group without concern for their level of social welfare while collecting revenue as necessary from the other groups, balancing the value of this revenue versus the cost in terms of social welfare.
5 Other proposals for flat-tax reform include: Steuerle 1998; Mitchell 1997a; Boessenkool, Grubel, and Silye 1995; American Enterprise Institute 1996; and Monte Solberg 2000 (Canadian Alliance). Note that the proposal from the Canadian Alliance is a single-rate tax rather than a comprehensive flat-tax reform.
6 This particular change poses significant problems for the financial services industry that are specifically addressed in Hall-Rabushka but are too detailed to include in this summary.
7 Disclaimer This analysis is based on Statistics Canada's Social Policy Simulation Database and Model. The assumptions and calculations underlying the simulation results were prepared by The Fraser Institute and the responsibility for the use and interpretation of these data is entirely that of the authors.
8 For further information on differences in the treatment of single-income and dual-income families and penalties for marriage embedded in the tax code, please see Zelder and Basham 2000 and the references included in that article.
9 Several countries, including New Zealand, do not have personal exemptions in their tax systems.
10 The personal exemption is our model's equivalent to the "Basic Personal Amount" familiar from the "Non-refundable tax credits" section of the personal income tax form. The personal exemption in our model, like the Basic Personal Amount, functions as a tax credit. Specifically, the amount of the exemption is multiplied by some tax rate to arrive at the value of the tax credit. In the current tax system, this rate is 17%. In our model, the federal flat-tax rate for the relevant case is used.
11 Podder and English (1999) note that the present system exempts 75% of domestic savings.
12 According to the Tax Statistics on Individuals for the 1997 tax year, 92.7% of tax-filers earned incomes less than $70,000, allowing them the opportunity to make full use of their RRSP/RPP contributions up to the 18% maximum without being affected by the cap of $13,500.
13 In 1995, less than half the receipts issued by charitable organizations in Canada were actually claimed. Similarly, only 29% of Americans who filed tax statements choose to itemize their tax returns and claim charitable donations. That such a small percentage use the charitable donation tax credit further weakens the argument that tax incentives explain charitable donations.
14 In 1999/2000 alone, some $7.2 billions were spent on regional development programs and subsidies to crown corporations; these make up 54% of the total spending reductions proposed. No spending or tax reductions are implemented at the provincial level. The provinces will collect and spend the same amount as under previous cases.
15 One of the limitations of the SPSD/M is that is uses data from a single year only. It is, therefore, not designed to provide dynamic or multi-year analyses. Our analysis, which is based on the SPSD/M, includes reductions in expenditure and related taxes in a single year although such reductions can be enacted over a number of years.
16 Note that a corresponding spending and tax reduction at the provincial level would have reduced or reversed the single-rate tax (SRT) rate increases at the provincial level.
17 It is interesting to note that increasing university enrollments would tend to increase traditional measures of poverty. Ironically, this may be the result of greater general affluence.
18 One quintile represents 20% of the population. For example, when looking at income quintiles, the bottom quintile is that 20% of the population earning the least income.
19 Note that the data will only cover a six-year period according to current research plans since, though the Survey of Labour Income and Dynamics (SLID) will continue indefinitely, any one group of families will be surveyed for six years only. The survey of the second group, for instance, started at the mid-point in the six-year survey cycle of the first group; this process will continue and the survey of each new group will begin at the mid-point of the previous group's cycle.
20 This is confirmed by a net present-value calculation using appropriate discount rates.
21 This assumes that the average individual follows the average time trend of income and that there is no behavioural response from the tax reform.
22 Those who are now retired may be adversely affected by a change in the tax system as described thus far. This effect is the result of the transition from one tax regime to another since those who are already retired, unlike individuals currently working, could not receive the offsetting benefit of reduced taxes during their prime working period.
23 High marginal tax rates mean lower returns to education. Since education is an investment, these lower returns imply a smaller investment in education. One would expect that reducing the marginal tax rate at the top end would encourage more people to enroll in educational programs.
24 For a brief history of Hong Kong's experience with the flat tax, and a detailed examination of its current tax system, see Reynolds 1999.
25 This is a 1999 statistic.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.