Five Single Rate Tax Thoughts

David Seymour, Poverty, Publications, Taxation

Executive Summary

The flat tax has risen from academic obscurity to the policy of choice for 25 nations over the last 15 years. Of the nations that adopted the flat tax, none has abandoned it despite spirited political challenges or changes of government. These countries have often been able to reduce their rates over time, reflecting the strong revenue-gathering function of the flat tax.

• While multi-rate tax structures are intended to collect proportionately more revenue from higher income earners, it is important to recognize that income tax burdens are partially passed on to the consumers of the goods and services which the income earner produces. Depending on the relative supply and demand elasticity of high-income earners who sell their labour and the low-income consumers who buy their products, the ironic result that progressive tax structures hit the poor hardest is theoretically possible and may well be a practical reality.

• While multi-rate taxation systems are partially intended to reduce inequalities caused by accidents of fortune or misfortune in life, it is worth noting that one of the biggest determinants of income is actually age. The average 45 to 54 year old in Saskatchewan earns $46,800, which is almost two-and-a-half times the $18,800 that the average 20 to 24 year old earns. Much of the income inequality that progressive taxation is designed to alleviate is between people at different life stages rather than between people with different life fortunes.

• While proponents of multi-rate taxation structures often claim it is more moral to take “from each according to his abilities [and give] to each according to his needs,” there is an alternative view: Because high-income earners account for a very small number of voters, progressive tax structures are in place simply as the result of a cynical political calculus. It is up to voters to decide whether singling people out for extra taxation because politicians can fits their sense of morality.

• Income is not wealth, so incremental income taxes are a poor mechanism for targeting wealth. This realization should be obvious but is often overlooked in the rhetoric of tax policy, for example “taxing the rich.” Clarifying the language to talk only about taxing income would not only be a more precise way to discuss tax structures, it would also sanitize the discussion of unhelpful class warfare type rhetoric.

View Full Study as PDF (17 pages)