THE BLOG
08/31/2011 05:12 EDT | Updated 10/31/2011 05:12 EDT

The Case For a Flat Tax

AP

Finance Minister Jim Flaherty says when (if?) he balances the budget, he will move next to "flatten" taxes.

As he recently put it, "I think we should be moving toward a flatter personal income tax system because it encourages economic activity ... it encourages entrepreneurial activity in Canada."

More specifically, Flaherty is talking about reducing the number of personal income tax categories for federal taxpayers.

And that would definitely be a move in the right direction.

But Flaherty should consider going even further in his efforts to promote economic activity. Rather than simply reducing the number of tax categories, why not scrap our current tax system and replace it with a flat tax.

What's a flat tax?

Well, essentially, under a flat tax instead of having different tax rates for different incomes, everybody (individuals and businesses) would pay the same marginal rate.

In other words, everybody would pay the same proportion of their income (say 15 per cent) in taxes. There would be no tax credits, no special deductions, no complicated forms.

And everybody would also claim the same basic personal tax exemption, which would mean if the exemption is made generous enough, many poorer families might pay little or no taxes at all.

Flat tax experts, for instance, suggest single adults would claim a $13,000 deduction; married couples would receive a $26,000 deduction.

Higher deductions could also be set for single-parent families.

The bottom line is under a flat tax system, people would pay less in income taxes. (Some wouldn't pay anything at all.)

So a flat tax, with a generous exemption, is a lower tax.

But what would the flat tax mean for government revenue? If people are paying less in taxes, would the government have to cut services for lack of money?

No and here's why.

Our current tax structure is based on the idea that the more money you make, the steeper your income tax bill.

Left-wingers and other pro-big government advocates call this sort of tax policy "progressive," but in reality such taxes actually retard progress.

Just think about it.

A higher tax rate for higher incomes and profits essentially means the government is financially punishing success.

Simply put, the government is making it harder for people to save money or to invest or to engage in wealth-producing entrepreneurial activities.

In fact, the Fraser Institute, an economic think tank, says business and personal income taxes "are the most inefficient taxes because they penalize productive economic activities."

A flat tax, on the other hand, is more like a consumption tax. You pay based on what you take out of the economy. What you put back in the economy -- in the form of investment and savings -- would go untaxed.

This would encourage more investment and more savings.

This in turn would boost economic productivity and at the same time increase the money government collects.

The Fraser Institute estimates that under a flat tax the government would collect just as much money as it does now.

Now besides being a lower tax, a flat tax is also a fairer tax.

It's fairer because everybody would pay exactly the same rate, meaning the more you earn, the more you pay.

If you earned $40,000 a year, a 15 per cent flat tax would mean you pay $3,000 in taxes; if you earned $100,000 you would pay $15,000.

Sounds good, right?

So a flat tax is lower and it's fairer, but wait's there's more. The flax tax is also much simpler.

Mind you, that's not much of a trick since taxes now are extremely complicated.

Every time you pay income taxes you must wind your way through a maze of complex codes and regulations, seeking deductions for this and credits for that.

Then there's all the time and effort we spend hunting down those crinkled, torn receipts hidden away in forgotten shoe boxes and let's not forget the emotional trauma associated with the fear of tax audits.

It's no wonder so many of us pay good money to hire experts like accountants or tax lawyers.

A flat tax would change all that.

With a flat tax in place, figuring out your tax bill would be a simple three-step process.

Step one: Figure out what percentage of your income you need pay.

Step two: Write out a cheque to the government.

Step three: Drop your cheque in a mailbox.

Now that's easy.

Imagine the joy of filing your income tax return in less than 15 minutes. Imagine not having to hire an accountant to figure out your taxes for you.

Nor is a flat tax a radical untried idea. Indeed, many countries in Europe and elsewhere are now employing a flat tax and it seems to be working quite well.

Why not try it in Canada?

What do we have to lose, except a tax system that's hindering economic growth?

Indeed, Ontario Progressive Conservative Leader Tim Hudak should make implementing a flat tax a part of his platform.

Imagine telling Ontarians he would introduce a tax that's lower, fairer and simpler.

Sounds like a vote-getter to me.