With the April 30th tax filing deadline looming, Canadians are grappling with the stress and anxiety of completing their tax returns. As we hunker down over our computers and wade through piles of receipts and pages of complicated forms, many will rightly question the complexity of Canada’s tax system.
Consider that the total costs associated with paying personal income taxes including the time Canadians spend preparing and filing taxes, and the cost of tax software and accounting services, amounts to upwards of $3.9 billion a year. It need not be this way. If Canada adopted a flat tax, Canadian taxpayers could complete and file their taxes in about five minutes on a simple, post card-size tax form.
A recent study, A Flat Tax for Canada by internationally renowned tax expert and University of Stanford Professor Alvin Rabushka, proposes just that: a 15 per cent flat tax and post card-size tax returns for both individuals and businesses. The 15 per cent flat tax would collect the same amount of revenue as the federal government currently collects but do so in a manner that is much less damaging and distorting.
The flat tax would simplify Canada’s tax code through the elimination of nearly all deductions, exemptions, and credits that complicate the current tax system. For individuals, only a few basic calculations would be needed to determine the amount of tax owing or refund due. Simply add up one’s income from wages, salaries, and retirement benefits; subtract the basic personal exemption (the amount of income individuals can earn tax free); and multiply the remainder by 15 per cent.
Gone are the numerous and interlinked tax forms of the present personal income tax system; gone are the myriad of tax credits and deductions; and gone is the complicated and time-consuming paperwork.
Individuals would no longer need to report income derived from such sources as dividends, capital gains, or interest, as these types of income would be taxed at their source – the business level. This means businesses would pay tax on all the income they generate except the income earned by workers.
For approximately 85 per cent of Canadian taxpayers, filling out a postcard tax return would be all that is required to pay their income taxes. The remaining 15 per cent of Canadian taxpayers who are self employed would need to fill out an equally simple, business tax form.
For businesses, all of the income derived from the sales of goods and services would be subject to the flat tax, minus a few deductions. These deductions are limited to the cost of materials, wages and salaries, and capital investments (buildings, equipment and land). The remainder of income would be taxed at the same rate as individuals.
Not only would a flat tax dramatically simplify the tax system, it would also have a significant impact on the Canadian economy. First, a flat tax would replace the existing four federal income tax rates with one low rate thereby eliminating the barrier that discourages Canadians from saving, investing or working harder to earn more money. Research clearly shows that tax rates that increase as individuals earn more money through hard work and success act as a disincentive for these activities.
In addition, a flat tax would have a significant impact on investment in Canada. Since businesses are permitted to deduct the full value of capital investments (buildings, equipment and land) in the year of purchase, the tax burden on investments would be significantly reduced and would increase the amount of investment undertaken by businesses.
International evidence clearly shows that Canada would benefit greatly from a flat tax. In fact, more than 20 jurisdictions around the world, most notably Hong Kong and more recently a number of former Soviet republics, have implemented flat taxes. Hong Kong built itself into an economic giant using the flat tax as its fiscal anchor. Similarly, Slovakia, which adopted a flat tax in 2004, has since become Europe’s fastest growing economy and a beacon for foreign investment.
At this time of year most Canadians become frustrated at just how unwieldy, complicated, and littered with exemptions for special interests our tax code has become. Replacing Canada’s personal and business income tax system with a flat tax will save money, make everyone’s taxes easier to calculate, and strengthen the Canadian economy. A few key strokes on a calculator, a minute or two to fill out a postcard return, and voila, off to Ottawa, with love.