Skip to main content

There are some obvious signs that the U.S. presidential race is under way. There is the frenetic fundraising, a rush of hopefuls to Iowa and New Hampshire, and of course, Republicans dusting off the idea of a flat tax.

"Imagine a simple flat tax that lets every American fill out his or her taxes on a post card," U.S. Senator Ted Cruz proposed this week as he launched his bid for the White House in 2016.

"Imagine abolishing the IRS."

It is an enticing notion, particularly now, during the dreaded tax filing season. Everyone – from Warren Buffett to Wal-Mart cashiers – would be taxed at the same rate, regardless of income. Simple as that.

But the debate isn't really, as Mr. Cruz suggests, about creating a system so uncomplicated you wouldn't need a tax collection agency.

The real fight is over how progressive, or regressive, a tax system should be. Since the Great Depression, most Western democracies have embraced the idea that wealthier people should pay a greater share of their income to help fund universal programs, such as welfare and education. So tax rates rise progressively as people move up through the various income brackets.

Many conservatives – in Canada as in the U.S. – have long chaffed about this apparent inequality.

Here's the problem. Flatter inevitably means that the rich would pay a lot less tax than they do now. Independent analysis of various flat tax schemes have concluded that the greatest beneficiaries are the wealthy, and not coincidentally, that they lead to an overall drop in government revenue.

In Canada, the Conservative government's so-called family tax cut is really a flat-tax-light. The break, available to Canadians in the 2014 tax year, allows couples with children under 18 to transfer up to $50,000 worth of income from a higher-earning spouse to the one making less to take advantage of their lower rate.

It's a move to a distinctly flatter tax, but only for some. And it's limited. Ottawa wisely capped the non-refundable benefit at $2,000 to avoid a raid on government coffers by the wealthiest of Canadians.

Imagine a less fair tax system. The family tax is inherently regressive because families in higher income brackets benefit the most. The non-partisan Parliamentary Budget Officer estimated recently that just 15 per cent of households will get a break, and the largest gains will flow to upper-income households, who arguably need it least.

Single-parent households, typically the most financially stressed, would get nothing.

And the tax break will drain federal coffers by $2.2-billion this year, and similar amounts in future years.

But there is a hint, in Alberta of all places, that maybe flat isn't best way to shape a tax regime after all. The province, which has long had a uniform 10-per-cent flat tax on all personal income, tweaked the tax in Thursday's budget so that higher income-earners will now pay a higher rate.

The collapse in oil royalties means Alberta must find new, more stable revenue sources to fund such services as schools and hospitals. Alberta Premier Jim Prentice recently highlighted the inherently regressive nature of the province's personal tax regime.

"I am concerned about … the working poor in our province, people who are struggling to make ends meet and have families and children in particular, and the effect of our tax system on those people," Mr. Prentice told the CBC recently. "It's quite clear that for people who are working poor, it is a [tax] system which bites them pretty hard, compared to the rest of the country."

Toronto-Dominion Bank deputy chief economist Derek Burleton echoed that view in a recent report.

"There is a growing body of research that shows the progressivity of the tax system does matter," he wrote. "Is the tax system progressive enough in Alberta? I think that relative to other jurisdictions it would appear to have less progressivity."

It's worth noting that Alberta – Mr. Harper's ideological home – is moving away from a flat tax at the same time as Ottawa inches closer.

Imagine that.

Report an error

Editorial code of conduct

Tickers mentioned in this story