william Watson … Requiem for Alberta’s flat tax.
To conservatives everywhere, a sad part of latest Alberta budget was the extinguishing of the province’s flat tax, which Ralph Klein introduced in 2001. Albertans with taxable income have been paying 10% on any and all additions to their income. But in future those making $100,000 or more will pay 11.5%, while the 44,000 tax filers with taxable income over $250,000 — they’re the province’s top 1.5% — will pay 12%.
It’s not exactly soaking “the 1.5%.” More like a light rinse, though when you add a new “Health Care Contribution Levy” that starts at 5% for people with $50,000 of income and maxes out by dinging people making $132,800 or more a full grand (ka-ching!) the rinse becomes more of a drenching.
Five years out these two measures bring in $1.4 billion — though estimating future tax yields is always dicey: Are we completely sure we’ve incorporated the full disincentive effects on economic activity? That $1.4 billion is on projected total revenue of $54.4 billion and it assumes of course that the top rate doesn’t rise again, which may not be so sure a political bet now that the margin has been breached.
Maybe an extra 1.5 or 2% at the margin really isn’t worth worrying about. The budget argues that even with this and other new taxes the “Alberta Advantage” remains. For a four-person family with employment income of $200,000 — a most desirable immigrant package, presumably — it will still be $18,698 a year with respect to Quebec, though only $7,301 a year vis-a-vis Ontario and just $1,470 compared to BC.
But money isn’t everything. An additional cost, especially to those of us outside Alberta, is the snuffing out of an important policy beacon.
Everyone’s assumption is that flat-rate taxes can’t be progressive. That presumably bothers Alberta’s Conservatives, who, unlike Ottawa’s, are still at least nominally Progressive. But the assumption isn’t true, at least not in terms of average taxes. If some minimum amount of income is exempt from taxation — and in Alberta it can be over $18,000 — then the average rate of tax rises with income. For example, at a 10% rate the first $10 of income above $18,000 generates a $1 tax liability, which produces an average tax rate of $1/$18,010 or just 0.006%, a rate that rises — progressively — with every extra dollar of income and ap- proaches, even if it never quite reaches, 10%.
Some studies done by perfectly reputable economists, i.e., not “far-right” nutbars, suggest the best rate structure, even taking the interests of poor people into account, may by an umbrella, in which rates rise for a while but then, for the super-mobile highest earners, actually decline — though try selling that in the current inequality-obsessed political environment!
Fairness aside, there are all the terrific efficiency effects of a flat-rate tax.
If the marginal rate is low to begin with and doesn’t rise as you earn more income, why bother trying to evade it, either legally or illegally? If you’re being taxed at 50 cents on the dollar, it almost certainly pays you to hire smart tax lawyers to try to erode your taxable income. Every dollar they can make non-taxable or less taxable saves you up to 50 cents — though their fees will bite into that. They could be doctors or scientists or economists or entrepreneurs but your high marginal tax rates create a big profit opportunity for them in figuring ways for you to game the system. Most of the people involved are perfectly honourable, and we have a tax court to make sure they behave even if they aren’t, but at bottom it’s a social waste to devote so much high-quality brain power to searching for avenues for redefinition and arbitrage.
With a low, constant marginal rate, there’s also less payoff to government efforts to get people to alter, not just their accounting, but their actual economic behaviour. If the tax saving from engaging in government-preferred activity is 50 cents on the dollar, that grabs people’s attention much more than if it’s only ten cents. In fact, you sometimes here politicians argue, in unguarded or unusually lucid moments, that they can’t lower marginal tax rates because that would be bad for their ability to manipulate the economy, which they of course would characterize as “encourage socially beneficial activities.” But as most of this manipulation is of dubious value at best and economically costly to boot, it’s hard to believe we’d miss it.
Finally, with a 10% marginal rate, take-home pay is a juicy 90 cents on the dollar, unlike in more “progressive” jurisdictions, where it’s 50 cents or less. If you think government shouldn’t stand in the way of people working or investing more, whether because you believe people should decide their effort levels for themselves or because you actually prefer they work and invest as much as possible so the community can reap the benefits of having lots of worker-bees and investor-bees around, low marginal rates are what you need.
It’s true that 10 U.S. states still have single-rate income taxes, as do several dozen countries around the world. But having a shining beacon of tax clarity in our very own country, lit by people whose cultural and political assumptions we could understand if not, in the case of Toronto intellectuals, empathize with, at least gave hope the idea might catch on in other Canadian jurisdictions.
After last week’s budget, however, we eastern … well, just say we easterners, are freezing in the tax-policy dark again.
By ending its flat tax rate Alberta is snuffing out of an important policy beacon for all Canadians