By Rod Allen
As appeared on page A1
Tax hikes such as the package dropped on New Brunswick this year often spark fresh debate among citizens about changing the system but so far the hottest global trend in tax reform seems to have escaped the notice of many New Brunswickers.
“We’re aware of Alberta’s flat tax and perhaps there will be something on that next week when the Self Sufficiency Task Force publishes its report,” said government spokesperson Vicky Deschenes on behalf of Finance Minister Victor Boudreau Friday.
“We’re always looking at what’s going on in other jurisdictions and we don’t say ‘no’ to anything but we have not heard anything about this from any lobbyist or group.”
However, an article in a national newspaper this week by former New Brunswick newspaperman Neil Reynolds suggests the movement to a flat tax system is reaching ‘revolutionary’ proportions all over the world, though mainly among new nations.
Reynolds cites Macedonia, which upon gaining its status as an independent nation last year immediately instituted a 12 per cent tax rate for both personal and corporate income. Already that figure is one of the lowest tax rates in the world but next year Prime Minister Nikolai Gruevski intends to drop it again, to just 10 per cent.
The big advantage to a flat tax system in Gruevski’s view is compliance – with wealthier individuals and corporations now facing lower taxes there is less tax evasion and ultimately, more money going into government coffers.
But ‘youthful nationhood’ might be helpful factor in going with a flat tax system, suggests Ian Munro, director of research with the Atlantic Institute for Market Studies in Halifax.
So far in North America five U.S. States and one Canadian province have gone with a flat tax but from a purist’s point of view, none of them have what can properly be called a flat tax ‘system.’
In Macedonia, it’s one tax for all, but in Canada and the United States there are both federal and provincial/state taxes so a flat provincial income tax only does part of the job.
Alberta has the only flat tax on provincial income tax in the country (10 per cent) but Albertans still pay the federal rates – graduated upward for higher incomes.
Even if a widespread sentiment to flat tax emerged in Canada, says Munro, what he calls ‘historical inertia’ would make conversion challenging simply because of the massive bureaucracy that has built up around the tax system over the years.
The roots of Canada’s graduated tax rate system go back almost a century and there would be considerable cost and difficulty to throwing it out and starting over.
Indeed the Canadian tax system is a dog’s breakfast after federal taxes. There are a wide variety of rates going from the high of Newfoundland and Labrador’s 18.02 per cent and tiny threshold of $59,180, all the way down to Alberta’s ‘0.’
Every province also has its own provincial sales tax rate (including Alberta’s ‘0’) and most true flat systems also have either uniform consumers’ taxes or none.
But there are some strong selling points to a flat system, says Munro.
Some flat tax systems still have no taxes for individuals living below whatever is considered the ‘poverty line’ of the nation in question, but discourage many forms of tax exemption.
“A nice feature of the flat tax is that it eliminates specialized exemptions,” says Munro.
Around election time, governments are often tempted to target certain groups of voters with favourable tax exemptions but if flat tax thwarts that practice, it isn’t necessarily palatable to all parts of the Canadian demographic and some of those parts are big.
“Quite a few of our members have made quite a bit of money because they’ve worked hard all their lives and right now, we do get some breaks at tax time,” says Bertha Boyle, president of the Loyalist Chapter of the New Brunswick Senior Citizens Federation in Saint John.
“I think a flat tax would cost seniors because we might lose some of our exemptions and we’re not interested.”
Another selling point of flat tax is that it frees up more cash for corporations to invest in their businesses and stimulate the economy but in the view of the Canadian Federation of Independent Business that point is “arguable,” says Andreea Bourgeois, director of provincial affairs with CFIB’s New Brunswick branch in Moncton.
Targeted exemptions such as the business investment tax credit mean you have to prove you’ve made new investments while under flat tax you don’t.
Besides, at least from CFIB’s point of view there is also a question of fairness because “most of our members are small business owners who also pay personal income taxes.
“We’ve discussed this before and seen advantages to the simplicity of flat tax because we are very much in favour or reducing the cost of compliance in the tax system, but the flipside is the greater burden on middle income groups.
“If we assume government still wants the same amount of revenue, and will still want exemptions for low income earners, and higher income earners are now paying much less than their ability to pay, it’s obvious middle income earners will have to pay more and since our members are mainly in that category we don’t support a flat tax system.”
In fact, middle income earners do pay less tax under a flat system, but higher earners pay even less relative to their incomes.
For example New Brunswick’s four-tier graduated income tax rates apply the second lowest rate of 14.82 per cent on incomes between $34,188 and $42,786, and 17.84 per cent, the highest, on incomes above $111,161.
So, under that system you make $40,000, you pay $5,928; you make $140,000, you pay $24,976.
Under Macedonia’s flat 12 per cent rate you make $40,000 you pay $4,800 but if you make $140,000, you pay $16,800.