In a recent article in the Financial Post, Ted Rechtshaffen, (“‘Tax the rich’ may be a rallying cry, but it’s hardly a fair system”, May 15) looked at three different tax schemes:
- Progressive Tax Rates
- Flat Percentage Tax
- Flat Dollar Amount per Adult
I will take these in reverse order.
The “Flat Dollar Amount” system takes the total tax required by the government, divides it by the number of people of working age and then everyone pays the same. In Canada, I believe, this would be about $10000 per person. The author sees some difficulties with this, but claims this is the “fairest” system. He likens it to a grocery store, where everyone pays the same for any item. If this is fair, then surely everyone should be paid the same as well. The absurdity of this is obvious.
The “Flat Percentage Tax” is popular with conservatives/right wingers – everyone pays the same fraction of their pay as tax. This results in no “penalty” for success and incentivises people to work more. A common variation of this is that there is an amount which is allowed tax-free i.e. creating a progressive tax with only two levels. This seems fair, but in practice puts a greater strain on the low-earning/low capability people. For a low earner, the higher effective tax has a major effect on their lifestyle; it may mean their children cannot enrol in hockey, they may not be able to afford a car, vacations are at the in-laws. For a high earner, the taxes have marginal effect on their lifestyle (personal experience – when my bonus was re-classified as “employment income” instead of “capital gain” and my tax went up by several tens of thousands of dollars, my lifestyle was not affected at all, only my savings rate went down).
Progressive tax rates are the norm in all advanced economies. The argument against higher rates for higher incomes is that the higher rates act as a disincentive to work (those who make this argument, are usually the same people who argue that the low income people should get less, to incentivise them to work!). The “Laffer Curve” is frequently used to show that higher tax rates actually decrease government revenue since more people spend time to avoid taxes or emigrate to a more tax-friendly state as “tax exiles”. The Laffer Curve is very much a theoretical construct. The difficulty is in calibrating it – at what point does the revenue go down? In the 1970’s, top marginal tax rates in Britain were 97.5%, in the US they were 70%. Clearly these were excessive and were reduced by Margaret Thatcher and Ronald Reagan respectively.
All tax regimes in practice have many exemptions, loop-holes and considerations for different personal circumstances. Whether it would be possible to have the Flat Percentage Tax or Flat Dollar Amount in their idealised pure form has not been put to the test and I very much doubt it, especially in the US where the influence of lobbyists (almost universally for the rich) would distort them.
Even in an ideal world, a progressive tax system has real benefits to the economy. By leaving (relatively) more money with the lower paid, consumption is increased, growing the economy. Savings and investments are necessary for the future, but currently there is no lack of capital. Much of the stagnation that has afflicted the developed world is due to a lack of consumption. Put another way, in an era of mass production, you need mass consumption.