A flat tax for fat cats

February 1, 2000

The latest mantra of the tax cut crusaders is "flat tax."

"Flat: usually has a negative connotation--like flat tires or flat beer--but somehow in the context of taxes the term appeals to conservatives. What could be more fair than taxing everyone's income at the same rate? It turns out there is lot more to this seemingly simple proposition than meets the eye.

While the idea hasn't generated much interest in the U.S. (witness Steve Forbes's poor presidential showing), Canada's neo-conservatives have embraced it. The 1999 Alberta budget announced that the province will move next year to a flat income tax of 11%. Now the flat tax is being touted for the federal level by the party formerly known as CCRAP (maybe the party should choose a symbol that denotes something flat, like a pancake, or a flat earth).

The flat tax represents a huge windfall for upper-income earners, since it removes progressivity from the income tax system (that is, the notion that tax rates should increase along with one's ability to pay).

Yet, even in Alberta, home of Canada's cowboy capitalism, polling reveals little appetite for tax cuts for the well-off. Thus, to make the flat tax more politically palatable, the government came up with a shrewd political maneuver. In addition to the flat tax, the basic threshold at which people begin to pay income tax will also be raised. This will lift 78,000 low-income people off the tax rolls, claims the government.

While raising the tax threshold is admirable, it acts as camouflage for the real objective: lowering taxes for upper-income earners. When this policy move is questioned, the tax cutters simply respond: but what about the 78,000? In a nutshell, 78,000 people are being used as a battering ram to push through tax cuts for those who need them least.

One argument advanced by the flat taxers is that the current system is somehow "punishing success" and "chasing away our entrepreneurs." But this idea is just plain wrong. Top marginal income tax rates were well over 80% in the 1950s and 1960s, the decades of the past century with the highest levels of GDP, income and productivity growth.

The flat tax of 17% being proposed by the new federal party would be of little benefit to the majority of Canadians, most of whom already pay only 17% (a majority of Canadian taxpayers make less than $30,000, the income at which the current second tax bracket kicks in). Moreover, in order to finance what amounts to a huge tax cut for Canada's wealthiest income earners, the flat tax would put many of the public programs Canadians cherish at serious risk.

Progressive taxation recognizes that the market, left to its own devices, does a poor job of distributing incomes. Given the fact that the market is producing more and more inequality, we need a progressive tax system to mitigate the growing gap between society's haves and have-nots more than ever before.

While dreams of flat taxes have conservatives frolicking with joy, something has been missed in the discussion so far. Research suggests that, when all taxes are considered, Canada already has a virtual flat tax. Most taxes other than income taxes are regressive in nature, meaning low-income people pay a greater share of their income than higher-income people. When sales, property, and payroll taxes are added to income taxes, Canadians at all income levels pay about the same share of their income in total taxes.

Any progressivity in the tax system stems from the structure of federal income taxes. Policy changes that move us toward a flat income tax would actually make the overall tax system regressive in nature, and would increase inequality. When all is said and done, the flat tax has one overall effect--it transfers more wealth and power to the already wealthy and powerful.