In the April 14, 2010 edition of the National Post, an op-ed piece was published in support of enacting a flat tax. Although the piece appears to be written for a US audience, its argument is applicable to Canada. The author begins by calling for a “simple and fair flat tax”. He then proceeds to generally outline how the income tax would be calculated for individuals and businesses. However, while the author believes that such a system would simplify the income tax system, I argue that that is not the case.
The author suggests that individuals would be taxed as follows: take their labour income, subtract an allowance based on family size, and tax the difference. The author suggests that businesses would be taxed by subtracting wage costs, input costs, and investments costs from revenue and taxing the remaining amount. What the author does not do is explain how to calculate “labour income”, “wage costs”, “input costs”, and “investment costs” and this is the flaw in his argument.
A great deal of the Income Tax Act and its regulations (the Act) explains how to calculate these terms. These provisions are not simplified by moving from a graduated tax rate to a flat tax rate. Further, the Act also contains provisions regarding items such as RRSPs, pensions, the Canada Child Tax Benefit that make it more complicated. However, these provisions are not made any simpler through the implementation of a flat tax.
While a flat tax may simplify the tax rate to be applied to a taxpayer’s income, it doesn’t address the complicated question of what is that taxpayer’s income in the year.