The Fraser Institute

January 03, 2008 06:00 ET

The Fraser Institute: Tax Returns Could Be Done in Five Minutes on a Postcard-Size Form If Canada Adopts 15 Per Cent Flat Tax

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Jan. 3, 2008) - Most Canadian taxpayers could complete their personal tax returns in about five minutes using a postcard-size form if Canada adopted a 15 per cent flat tax proposed in a new report released today by independent research organization The Fraser Institute.

"Imagine being able to complete your taxes in about five minutes without having to wade through piles of receipts and pages of complicated forms or having to use the help of expensive accountants and lawyers," said Dr. Alvin Rabushka, an internationally renowned expert on tax reform with the Hoover Institution at Stanford University and co-author of A Flat Tax for Canada.

The complete study, along with an example of the possible postcard-size tax form, is available at www.fraserinstitute.org.

Canadians spend a significant amount of time, energy, and money complying with Canada's complicated tax system at an estimated cost of up to $30 billion annually. A large portion of these costs are due to the time and effort spent obtaining and providing receipts, preparing and submitting tax returns, and the services of professionals such as accountants and lawyers.

Reforming Canada's income tax system using a flat tax of 15 per cent will make the tax code simple and less costly, Rabushka said, adding that a flat tax eliminates nearly all deductions, exemptions, and credits that complicate the current tax system.

In A Flat Tax for Canada, Rabushka proposes an entirely new tax system based on a 15 per cent flat tax rate designed to collect the same amount of revenue as the government currently collects. Any reduction in government spending or restraint in future spending would allow for an even lower rate.

On the personal income tax side, the existing four federal income tax rates are reduced to one low rate of 15 per cent. The same rate would also be applied to business income.

Replacing the existing four federal income tax rates with one low rate removes barriers that discourage people from saving, investing or working harder to earn more money and improve their lives. Tax rates that increase as individuals earn more income through success, hard work, and entrepreneurship act as a powerful disincentive for these activities.

"Removing the tax penalties on success through a flat tax would unleash the efforts of hardworking, creative, and entrepreneurial Canadians," Rabushka said.

One of the most significant changes under the proposed flat tax is the full exemption of savings and investment from taxation. Income put back into the economy in the form of savings or investments would not be taxed under the flat tax, which would encourage more savings and investment and lead to a more vibrant and wealthier economy. The changes would also make Canada much more attractive and competitive internationally.

"The flat tax would revolutionize the incentives for savings and investment, making Canada a beacon for investment in the industrialized world," Rabushka said.

Rabushka also shows how the simplicity and fairness of the flat tax could easily be extended to the provinces. In order to maintain the same levels of revenue, provincial flat taxes would range from a low of 6.1 per cent in Newfoundland and Labrador to 15.5 per cent in Quebec. Western Canadian provinces would require some of the lowest provincial flat taxes with Alberta at 6.8 per cent, Saskatchewan at 7.5 per cent and British Columbia at 7.9 per cent. Ontario would require a flat tax rate of 9.2 per cent. The result would be combined federal-provincial flat taxes ranging from 21.1 per cent in Newfoundland and Labrador to 30.5 per cent in Quebec.

Rabushka points out that the economic benefits from a flat tax flow to all taxpayers, not just those with higher incomes. It would also create a more equitable tax system where households with similar incomes pay the same amount of tax, something that doesn't occur under the current system.

Under the flat tax proposal, all taxpayers receive a personal exemption, an amount of income they can earn tax free. Since the exemption constitutes a much higher portion of income for lower income earners, it results in only a small portion of their total income being taxed. As a result, average tax rates for lower income earners are substantially lower than for higher income earners with a flat tax.

"Replacing Canada's personal and business income tax systems with a flat tax will save money and make everyone's taxes easier to calculate," Rabushka concludes.

"But more significantly, it will strengthen the Canadian economy and lead to an improved standard of living for all Canadians."

A Flat Tax for Canada is a chapter from a forthcoming book on tax reform to be published later this year by The Fraser Institute.

The Fraser Institute is an independent research and educational organization based in Canada. Our mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. We do not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.