Flat Tax

[a_majoor]

Most modern flat tax schemes have fairly generous earnings exemptions which effectively remove poor people from taxation.

As for RRSP and RESP's, allowing savings to compound so people have resources to gain educations or retire without being a burden on the community are socially responsible. It seems odd that "Progressives" only see the generosity of the State as being the only means for people to make progress, the remark by the Liberals that people would spend their child care money on "beer and popcorn" exemplifies this attitude.

Consider the amount of time and effort that most people have to spend to do their income tax, the fact that a fairly sophisticated accounting industry exists to cater to poor and middle class people who are overwhelmed by the complexity of their tax forms (H&R Block etc.)you can see where a large portion of the estimated $30 billion dollars of compliance costs is going, and the contortions that more sophisticated people have to go through to minimize their taxes through deductions, tax planning and so on is another big cost. The vast mechanism of the Canada Revenue Agency absorbs much of the rest (and I suppose there is a fraction that is lost due to "friction").

Will we ever see a flat tax? Inertia and the huge benefits that favored groups can gain by manipulating the tax code make me think this will be a very long term battle, and may even need an external push like an economic meltdown or the realization that we are engaged in WW IV to shake the old system down.

 

[niceasdrhuxtable]

You're probably right about exemptions except that it is the inequality of progressive taxation systems that make people want to "cheat" or "evade" the system.  Think about it.  I've never heard anyone complain that they weren't eligible for deductions but I've often heard people complain about going into another tax bracket and loosing money because of it. This often affects the poor worst of all.

This doesn't actually happen although a lot of people seem to think it does. Tax brackets only apply to their individual ranges of income above the threshold from one bracket to another. That is to say, when you cross from one bracket to another, you're only taxed at the higher rate for the amount of income you make over the threshold. You never actually lose money while going from a lower bracket to a higher one.

 

[I_am_John_Galt]

Avoiding capital gains tax year over year is one benefit to RRSP's.  But income tax deferal is also a very significant reason. :

You don't know what you are talking about: capital gains and income are two examples of the types of taxes that are deferred under an RRSP.  How is this a benefit of (or related to) progressive taxation?

And by the way, the only Capital Gains benefit IS the deferral: RRSP/RRIF withdrawls are treated as Income, which receives less favourable tax treatment than Capital Gains (by far).

http://en.wikipedia.org/wiki/Registered_Retirement_Savings_Plan
1.Contributions to RRSPs, up to permitted limits described below, may be deducted from one's income before calculating income tax due.
2.Income earned within the account (interest, corporate dividends, trust distributions, capital gains) is not taxed until money is withdrawn from the plan, allowing the plan to grow faster than the same investments would grow if they were held outside the plan and thus subject to tax.
3.Money may be withdrawn from an RRSP in tax years when one is in a lower income-tax bracket because of lower income (due to retirement, unemployment, etc.) than tax years when one makes contributions.

I have a graduate degree in finance and several years work experience in the FIRE sector: you have a quote from wikipedia.  Anyway:

1. I don't know why you boldfaced this.  It sure as hell is nothing specific to progressive taxation;
2. Is what I have been trying to tell you (and rather confusingly, the subject of your second sentence, which I quoted at the top);
3. Can be a relatively minor benefit under progressive taxation, but pales in significance to #2, particularly as the time horizon increases.  It would be akin to saying a 9mm sidearm makes a hornet pilot more lethal: technically true, but only trivially so.  It is generally not even considered in calculations (e.g.: http://www.efficientmarket.ca/article/RRSP_vs_NON_REGISTERED )

 

[Infanteer]

I have a graduate degree in finance and several years work experience in the FIRE sector: you have a quote from wikipedia.

ZING!

 

[DBA]

You don't know what you are talking about: capital gains and income are two examples of the types of taxes that are deferred under an RRSP.  How is this a benefit of (or related to) progressive taxation?

You seem to have missed the flow of the discussion. A statement was made that an RRSP would be pointless under a flat tax. A response listed the advantages of an RRSP and some comments on which of them would still hold true under a flat tax.

 

[DBA]

You put money in an RRSP to defer income tax. That is the whole point. It only works if you have progressive tax brackets.  Unless you have an age over which you would pay less, or no, income tax. Then you could save your pre-tax dollars and remove them at the lower rate once you hit that age.  Sounds a little bit hippie/communist for my liking though.

There is the concept of the time value of money. Even if you pay out the exact same $ in tax 30 years from now as you would have paid today just having that money for 30 years is valuable. For example you save $300 in tax this year by making RRSP contributions, invested at 4%/year it will be $1296.58 in 30 years, after paying the $300 in tax your left with an extra $996.58.

 

[Bane]

"...I've stepped in it again mom."
I admit that I had forgotten about tax free invesment gains that one gets from an RRSP, but I was correct to point out that one of it's benefits is to lower a persons level of taxable income, bringing them into a lower bracket.  And yes,  “the most powerful force in the universe is compound interest”. Albert Einstein

I have a graduate degree in finance and several years work experience in the FIRE sector: you have a quote from wikipedia. 

ZING indeed! Very fancy!

Now lets get back to talking about the evils of a flat tax! :argument:

 

[I_am_John_Galt]

was correct to point out that one of it's benefits is to lower a persons level of taxable income, bringing them into a lower bracket.

It can be, but there are plenty of other vehicles to effect the same thing.  It defers the taxes you would have paid right now and allows you to invest at a tax-free rate: this is the principal benefit.  The fact that you might eventually pay at a nominally lower rate is of little consequence.  For example, a person who invests regularly through RRSPs from the time of their early 20's will probably pay taxes at a higher rate when they eventually withdraw it from their RRIF (i.e., their RRIF income is more than what they got paid flipping burgers); the 'progressive' tax system is working against them, however it still makes sense to invest in the RRSPs.

Now lets get back to talking about the evils of a flat tax!

I'm not a huge fan myself; while fairer and certainly more 'progressive' (insofar as it doesn't serve to reinforce social stratification) than what we have now, there would still be plenty of loopholes & complexities (think of single-owner businesses, for example).  It was suggested below that a pure consumption tax would be fairer and more efficient, and that makes a lot of sense to me.  Unfortunately, it is still ultimately destructive (though arguably less so that the others): there are no good taxes.

You seem to have missed the flow of the discussion. A statement was made that an RRSP would be pointless under a flat tax. A response listed the advantages of an RRSP and some comments on which of them would still hold true under a flat tax.

?

 

[Reccesoldier]

More from the Fraser Institute...

http://www.fraserinstitute.org/commerce.web/newsrelease.aspx?nID=5137

 

[geo]

Basham and Mitchell show how Canada could benefit from a flat tax by looking at the history of flat taxes in other nations and the impact on their economies. Hong Kong has had a flat tax since 1947 and remains the administrator of the world’s most efficient tax system. While the U.S. income tax system generates 66,000 pages of code and regulations, Hong Kong’s entire tax code is no more than 200 pages.

“Nowhere is the flat tax more prominent than in Hong Kong, which built itself into an economic giant using the flat tax as a fiscal anchor. The system is so successful, it even survived Hong Kong’s handover to China,” Mitchell said.

A tax act in 200 pages?  I like it!
Also, if I were to pay flat taxes, I can tell you I certainly wouldn't bother wasting my time with RRSPs and tax sheltering.... it wouldn't be worth the trouble - 15% now or 15% later... same thing & fewer limitations on how I can invest it.

Mind you - no more capital gains tax AND tax exemptions on the disposition of your principal residence.

 

[Bane]

      You can have a very simple tax code with a progressive tax system. You don't need a flat tax to elminate much of the red tape and garble in the tax code. (For those of you that are pro-flat tax, simplifiying the code in this manner would be a good first step to a flat system. Not my cup of tea but a good idea either way I think)  Also, I'd be cautious about drawing too many lessons from a place so vastly different from Canada as Hong Kong.  Aside from the Hong Kong example, pretty much every place listed has lower social mobility than exists in Canada, this is a critical indicator of how easy it is for an individual to hop on and climb the 'financial ladder'.  I'd argue for a more simplified tax system and lower rates, but stop short of a flat system. 

 

[Reccesoldier]

As stated in the article it is interesting to note that not a single Country that has changed to a flat tax system has gone back to a "progressive' system

 

[geo]

Hey... if the Gov't was satisfied taking 15% and ONLY 15% of my earnings each & every year, I'd "go for it"!

I jsut have serious doubts taht they'd be satisfied with that....

 

[a_majoor]

A tax act in 200 pages?  I like it!
Also, if I were to pay flat taxes, I can tell you I certainly wouldn't bother wasting my time with RRSPs and tax sheltering.... it wouldn't be worth the trouble - 15% now or 15% later... same thing & fewer limitations on how I can invest it.

The compound interest equations might change your mind; sheltered money compounding tax free for a period of 20+ years will provide a vastly greater ROI than the same investment where the earnings are subject to tax.

 

[geo]

I would be paying 15% regardless.... Past, present, future... there is no difference.

Sheltering income for later use is only necessary if you expect to pay taxes at a lesser rate in the future.
If it is always going to be 15% then Sheltered ROI bedamned - I end up with exactly the same amount in the end.

 

[Flip]

Discussion of a "flat tax" system in parliment would be worth it if only to see Jack Layton's head explode.  >

The only problems with a flat tax regime are how to deal with those at the lower end ( of whom there are many ) and loss of revenue from taxing the rich less ( of whom there are few).

I am absolutely in favor of a simpler tax code.
I am absolutely in favor of a flat(er) tax.
But the best thing they could do without much fuss is to get rid of the "bracket" system.
Yes, the equation becomes more complex, but many people use their computers anyway.

The GST is an interesting analogy though, it's 5% for everyone.
The cost to large businesses is reduced by economy of scale per dollar of revenue
and small businesses like mine do find it a burden.
So, in this case I could say I like the idea of a tax on consumption
but in practice - really really hate it.  :rage: I suspect that's where we might end up with flat tax.
Nice to talk about it though!  ;D

 

[a_majoor]

I would be paying 15% regardless.... Past, present, future... there is no difference.

Sheltering income for later use is only necessary if you expect to pay taxes at a lesser rate in the future.
If it is always going to be 15% then Sheltered ROI bedamned - I end up with exactly the same amount in the end.

Um, no. The end result of sheltered investment would be (at a minimum) tens of thousands of dollars greater. Since I have heard no proposals to make RRSP owners dump their investments at an arbitrary time, you can can controll the outflow (i.e. taxable income) knowing you have a much larger investment nest egg than otherwise.

 

[Inch]

I would be paying 15% regardless.... Past, present, future... there is no difference.

Sheltering income for later use is only necessary if you expect to pay taxes at a lesser rate in the future.
If it is always going to be 15% then Sheltered ROI bedamned - I end up with exactly the same amount in the end.

Doesn't exactly work that way. Think of it this way, 100% of your money is allowed to grow if you contribute to RRSPs, if you had to pay tax on the money you invested, only 85% (in the 15% flat tax scenario) would be compounded. You don't need to be an economist to figure out that 100% compounded for 20 years will yield a higher amount than 85% compounded for 20 years.

Yes you will be paying 15% percent later too, but you'll have more of a return to draw from.

 

[Inch]

I just did a quick calculation using ING Direct's calculator.

Here's how it breaks down...

100 dollars invested every month for 20 years at a 3.65% interest rate will yield $35,376.85, minus 15% and you're left with $30,070.32
85 dollars invested every month for 20 years at 3.65% will yield $30,070.32 ($9,670.32 in interest), subtract the tax on the interest and you're left with $28,619.78

So, even paying the exact same income tax on the same money later instead of now, you come out ahead by $1,450.54 by putting your money into an RRSP where it grows tax free.

 

[a_majoor]

Alternative routes to the same end:

http://choiceforchildcare.blogspot.com/2008/02/single-rate-tax.html

Single rate tax...

Taxpayers need a Valentine, Mr. Flaherty

NEIL REYNOLDS

February 13, 2008

OTTAWA -- Canada's first Income Tax Act, in 1917, was an 11-page document. It's now a 2,226-page document. Why do governments always choose income tax complexity over income tax simplicity? The persuasive explanation is that complexity enables them to give tax breaks to particular constituencies by treating them as separate and distinct from all other taxpayers. Thus self-employed tradespeople (who are entitled to deduct $500 a year to help them buy tools) are rewarded with exclusive tax literature of their own - for a mere $1.50-a-week tax cut for someone in the 15-per-cent tax bracket.

The irony is that most Canadians - according to an Environics poll (conducted last year for H&R Block) - are completely ignorant of the tax credits that governments add or adapt every year. The Environics poll indicated, for example, that only 5 per cent of people purported to know that full-time, post-secondary students are now entitled to deduct $65 a month for textbooks and that part-time students are now entitled to deduct $20 a month - which gives the full-time student a tax cut of $1.60 a week, the part-time student a tax cut equal to a half cup of coffee a week, again for those in the 15-per-cent bracket.

Most of the bribed, in other words, don't know that they've been bribed - which makes the extra complexity more or less pointless - even as it moves government further and further from the first principles of taxation: fairness, neutrality and simplicity. In what way exactly can we still be regarded as equal before the law when the law itself insists on making us unequal?

The Canadian Taxpayers Federation published a first-class report on tax reform a couple of weeks ago. Titled Lower, Simpler, Flatter, it sets forth a pragmatic program by which the federal government could reduce personal income taxes while simplifying the paying of them. The document is compelling. It shows that simplicity can be accomplished quite simply. It shows that tax reform need not be ideological. It concludes that lower tax rates need not imperil tax revenue.

In short, Lower, Simpler, Flatter (LSF) gives Finance Minister Jim Flaherty the dummies' guide that he seems to need - both to enhance the tax cuts that he has already delivered and to launch into the tax reforms that he has not yet started.

Written by John Williamson, Ottawa-based federal director of the Canadian Taxpayers Federation, and Mark Milke, a lecturer in political philosophy at the University of Calgary, LSF proposes that the four present federal income tax brackets (successively taxed at 15 per cent, 22 per cent, 26 per cent and 29 per cent) be reduced over a five-year period to two - 15 per cent and 25 per cent.

For 85 per cent of the people who file tax returns, LSF would permit a single-page tax return that could be completed in minutes and without professional help: (1) you list your income; (2) you subtract your three or four standard deductions; (3) you calculate your tax on the difference, using the 15-per-cent rate for taxable income less than $80,000, 25 per cent for taxable income above $80,000.

This bottom-line simplicity comes from getting rid of the "boutique" tax breaks that now litter tax return forms. In addition to the usual deduction for RRSP contributions, LSF establishes a universal deduction of $15,000 for every person and a child deduction of $2,200 per child. Thus, an individual earning less than $15,000 a year would pay no federal income tax - which, by itself, would exempt 1.4 million lower-income Canadians from federal income taxes.

In fairness, Mr. Flaherty has already started to move in this direction, having raised the universal deduction to $9,600 for this year, $10,200 for next year. But it wouldn't hurt to commit to a $15,000 deduction by 2012. It's quite outrageous that this compassionate nation taxes people with incomes as low as $200 a week.

With LSF, a two-parent family with two children pays no federal income tax until combined taxable family income exceeds $34,400. (This family now pays on all income in excess of $23,200.) Since 90 per cent of Canadians earn less than $80,000, LSF would mean that the vast majority of taxpayers would pay the low rate.

Mr. Flaherty has made a decent start on cutting taxes - which could accumulate to $190-billion by 2012. He has justified these cuts in strictly economic terms: "Canada needs a tax system that improves standards of living, fuels growth and encourages investment." He misses perhaps the most important reason of all: KISS. Remember this message on Valentine's Day, Mr. Flaherty: Keep It Simple, Sir.