Flat Tax a Lose-Lose Proposition

July 8, 2009

On the surface, Enterprise Saskatchewan’s call for a 10 percent flat tax seems straightforward. Saskatchewan must engage in a “race-to-the-bottom” in order to compete with Alberta.

However, a cursory glance at other countries that have instituted their own flat tax proposals should be cause for concern.

The so-called “Baltic Tigers” – Latvia, Lithuania and Estonia – that were praised by conservative economists for their institution of a flat tax a decade ago are now mired in so much debt that they have been forced to gut social programs and fire off a mass of civil service workers. It is almost a certainty that the institution of a flat tax here in Saskatchewan will drastically reduce government revenues. This will inevitably result in a scaling back of government expenditures, whether in health, education or other social services.

As economist Hugh Mackenzie observes, Canadians get incredible value for their public services, reaping an average annual $15,000 benefit from the public services their taxes pay for. Any reduction in the quantity and or quality of public services caused by the institution of a flat tax must be factored into the overall costs of introducing such a tax.

Economic modeling of flat tax proposals in the United States demonstrates that flat tax proposals shift the tax burden predominantly to the middle class. Similar results have been identified in Alberta. In essence the middle class pays more and receives less, particularly as former exemptions and reductions are eliminated in the name of “simplicity.” Not exactly the model of “tax fairness” that flat tax proponents claim.

Of equal concern is the effect such a tax would have on income inequality. Saskatchewan is already experiencing growing income inequality as the CCPA’s Growing Gap Project demonstrates. Reducing the amount of tax that the richest among us pay would only exacerbate this troubling trend. The economic and social costs of reduced social cohesion that income inequality generates are immense. According to British epidemiologists Richard Wilkinson and Kate Pickett, the bigger the income gap, the worse the rates of mental illness, substance abuse, teen pregnancy, homicide, incarceration and reduced life expectancies. Conversely, more equal societies tend to display higher levels of trust, reduced levels of stress and greater attachment to community.

Once again, these social costs must be factored into any decision to introduce a flat tax in Saskatchewan. When all the costs and benefits are weighed, it is the opinion of the Saskatchewan CCPA that many in our province will find this policy wanting. Surely a province such as ours, built on progressive principles of equality and social justice, can do better.

Simon Enoch is the Director of the Saskatchewan Office of the Canadian Centre for Policy Alternatives. This editorial was published in the July 8th edition of the
Regina Leader Post.