From the moment we embarked on an era of budget surpluses, the tax debate has focussed not only on ways of relieving taxpayer burden, but on figuring out how to make the tax system fairer and more competitive. The current provincial government’s Commission parlementaire sur la réduction de l’impôt des particuliers has recently been considering this issue. The Institut économique de Montréal submitted a memorandum to the commission last October. The institute believes that the Alberta government’s recent announcement of a flat tax warrants the attention of all concerned with this matter. However, the Alberta decision has so far largely been ignored in Quebec.
According to the plan revealed last March by Alberta finance minister Stockwell Day, the incomes of all Alberta taxpayers would, starting in January 2002 (or possibly as early as January 2001), be uniformly taxed at 11%. By contrast, Quebec’s current provincial tax varies between 20% and 26%, depending on the bracket. Those earning $25,000 or less each year pay 20%. Those in the $25-$50,000 bracket hand over 23% and those earning more than $50,000 are levied 26%.
The Alberta plan means stripping the different income levels of their different tax brackets. The new tax scheme is simpler and more aboveboard than that of the past. It is also easier to understand and thus less costly (in terms of professional fees) for taxpayers preparing annual returns. According to a study by the American IRS, tax authorities could also achieve substantial savings administering this kind of system, as long as most special exemptions were also abolished.
Eliminating the top tax brackets suggests such reforms might only favour the rich. However, the reform is accompanied by a hike in personal exemptions to $11,620. Combined with additional exemptions for a spouse and dependent children, the taxable incomes of those with modest revenues are actually cut. The Alberta government claims income taxes of some 78,000 low-income families will be no higher following this reform. In fact, the reform will result in an across-the-board reduction of taxes for Albertans.
But benefits of the Stockwell Day project do not stop there. If incentives to work decline, the quantity of work – and thus the quantity of goods produced – will also diminish. The current “progressive” tax system imposes higher taxes on higher earnings and serves as a negative incentive to productivity. With a flat tax of 11% on all income, people are not likely to shun additional work for the reason usually given, to wit: “Because the government will take it all anyway.”
Under such circumstances, the productivity of each individual, and thus that of the economy as a whole, would likely rise.
Once this new tax system takes effect, Alberta will certainly be a more attractive site for the more mobile workers, thus reducing its costly brain drain.
Our institute recently considered the flat tax option (Fiscalité des Québécois et croissance, by Jean-Luc Migué and Michel Boucher, Institut économique de Montréal, October 1999, p. 37), and concluded that a flat tax would cut the political cost of taxation by removing one of the main sources of power for politicians; namely the power to sell the electorate special and discriminatory tax benefits. In other words, it would be better to have a low tax burden for everyone than a complicated system of loopholes and exemptions.
Whatever tax system we may decide to adopt in coming years, Quebec should still keep a close eye on whatever comes out of the Alberta model.
Michel Kelly-Gagnon is President of the MEI.