After my two posts about the minimum wage laws (here and here), I guess I am on a political bent. Today I want to talk about killing off the progressive income tax system and replacing it with a flat income tax.
The current progressive tax setup is grossly unfair and serve as a disincentive to move ahead. The progressive system is based on the principle that taxpayers should pay more income tax as a percentage of their income as they earn more. This has been achieved, traditionally, using progressively higher income-tax rates applied on progressively higher incomes. Canada have four marginal tax rate while the US has six. The top rate kicks in at $120,887 in Canada and $336,551 in the US.
The Government Has It Backwards
The problem with progressive income tax is the government has it backwards. It shouldn’t be the more you make the more they take. It should the be more you make, the less they take! That is how businesses work. Many ad networks will give you a progressively bigger share of income as an incentive to produce more. Imagine how their business would do if they did it backward like the government.
The problems with increasing marginal tax rates are lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation, aggregate labor supply that is lower than expected, and reduced social welfare. In short, high and increasing marginal tax rates reduce economic growth by creating strong disincentives to hard work, savings, and investment. Why would you want to make that second $100,000 if the government is going to take half of it? A flat income tax would eliminate this disincentive.
Hall-Rabushka flat-tax reform
There are a number of well-known flat-tax proposals but the most discussed is that developed by Robert E. Hall and Alvin Rabushka of the Hoover Institution. It taxes all types of income once and at one rate. In their most recent analysis of the United States, Hall-Rabushka recommended replacing the personal federal rates and the various business tax rates with a 19 percent federal tax rate for both individuals and businesses.
People against a flat tax would say 19% is not enough to fund the operations of the country but they fail to take into account the increased incentive to make more money when people know that the government won’t be taking more when you make more. Would you try to make more if you only pay 19% tax instead of 50%?
I don’t expect to see Canada or the US go to a flat income tax anytime soon. However, if you are a Canadian living in Canada, there is a way to pay a flat 17% tax on your net income - as long as that income doesn’t exceed $400,000 in a year. I’ll talk about that in a future post.
Find out what I am doing right now by following me on Twitter! If you like this post then please consider subscribing to my full feed RSS. You can also subscribe by Email and have new posts sent directly to your inbox.
Make Money Online with John Chow's Ad Network - Join TTZ Media Now!
(24 votes, average: 2 out of 5)
Loading ...
Here's A Few More Related Posts
Sounds interesting. I know people in Canada who would be very interested in what you have to say.
One Man. One Year. $100,000 online. To pay Uncle Sam.
http://www.oneyeargoal.com
When are you going to get yourself an avatar? Even I have one now.
i think he’s too busy to get one while trying hard to make his target
Excuses, excuses.
Yeah a lot of excuses
I have an avatars suggestion. Give us a chart of where you’re at with your goal. You can update the picture each month.
I like that idea. I think he should do it.
I’ll third that idea. That’s an excellent suggestion!
Makes sense, but never expect politicians to do things that will make sense.
well, they always try their best, it’s just that sometimes the end product isn’t what you and I would like to see
They try their best to serve their own interests.
Yeah politicians dont have sense =(
Even in the US, it varies from state to state. For example, all states have federal tax, but most have their own sales tax and it varies. Some states have low sales tax, some have high. Where I am from, we don’t even have sales tax, but we have what’s called a state income tax. So instead of taxing you on how much you spend, its another percentage scale of how much you make.
We have a state sales tax and a state income tax. They get you any way they can!
Dang, John if I didn’t know any better you seem fairly conservative for a Canadian. This is why people America stays away from the John Kerry’s of the world, because he would be the last one to say what you have just said. It makes so much sense, but there are so many stupid politicians who either are stupid or pretend to be. They truly like to believe that middle class families pay too much tax and that upper class pays too little.
Everybody (who doesn’t cheat on their taxes!) pays too much tax. And, politicians largely waste tax dollars. Benjamin Franklin thought that a government that took 10% of a person’s income was considered harsh and excessive.
If you add up all the taxes Americans pay, I think (if I remember right) that it works out to be about 50% of our income going to taxes in one way or another.
Canadians pay that same 50% then add 6% GST on top of that!
Most Canadians don’t pay 50%…
That percentage also varies by province +/- a little. Also, don’t forget the PST
I’ve got a friend who moved to the US a few years ago and he doesn’t really notice a difference in the amount of money that disappears off his cheque once you factor in the costs of insurances.
I believe John would be considered radically conservative for a Canadian
I would like to hear more on your political views John. You should post more political stuff on this blog.
No! I don’t mind the odd post but I thought this was a “How To Make Money Online” blog.
Learning how to pay less tax helps you keep the more of the money you make.
Agreed, I’ll listen to your financially driven political views
Even if I will likely disagree with some of them 
By taxing the rich more it’s like the government is encouraging them to somehow hide their money illegally. A flat tax system would make it so everyone is paying their dues the same.
Uhh you don’t enforce tax collection with appeasement. You deal with ‘hiding money illegally’ with prosecution and penalty.
Prosecutions and penalties are easier to enforce when you have a simpler tax code with far fewer loopholes.
The rich don’t have to hide their money illegally. There are tons of legal ways to hide their money. I think I’ll do a post about it.
John please do!
That’s exactly why I don’t care about a 50% tax on the more affluent. None of them end up paying anywhere near 50%.
But won’t a flat rate tax make the gap between the rich and the poor even bigger?
I think a national sales tax would have that effect.
But, a flat rate tax would actually help the poor. It will make it easier for employers to hire people, as there would (hopefully!) be less red tape and “hidden” taxes and so on associated with hiring people. The wealthy could invest their money into productive use, rather than tax shelters and other schemes designed to reduce their (current) income taxes. All the loopholes that the wealthy use to reduce their tax rates would be gone. So, they’ll actually end up paying the full flat rate rather than getting their taxes reduced to the point where they pay less taxes than people with lower incomes.
And, then there is the money that will be saved by not having to pay tax professionals to figure out all the tax rules.
Why can’t the poor invest a greater portion of their income ‘into productive use’ beyond just putting food on the table?
I never said they couldn’t.
Obviously you’ve never been poor. Although I agree that many ‘poor people’ still find the money to smoke and drink, those who are truly unable to make ends meet can barely feed themselves much less invest in the market!
Yes, over the long term it would become much bigger. And over the long term, it will result in lower economic growth. The U.S. has already reached this point. That’s why we are dependent upon other countries to send the U.S. their most talented people. We do not have the social infrastructure to replenish the talent we require to run this country. This is all due to lack of investment in the social welfare and education of Americans. But hey, some people don’t care about that gap. They want more earings.
Go back to economics school dude, your comments on all these posts are counter-intuitive
this “talent” disconnect you speak of is simply do to the American education system catering to the old Industrial economy while recent RAPID developments (summarized most eloquently by the Internet) have rapidly revolutionized the economy with the education system slowly filling this disconnect.
There are many more social factors that account for this gap than what you’re accrediting from lingering discrimination to tracking in the education system to unupdated Reganomics policies.
But the biggest contributor to the GAP is the DISCONNECT of the people that come out of highschool with the revolutionized economy.
You’re right in that tax should be flat, but it should be a flat federal income tax. Problem solved.
Glad you figured it out for the rest of us.
Have fun passing that through Quebec…
Someone makes money and gets taxed (income tax). They buy property and get taxed (sales tax). The buy stuff to fill that property and get taxed (sales tax). They are charged yearly because they own that property (property/school tax). When they bough that property and that stuff, the seller had to pay tax on the sales (income tax). When our property owner dies, the money he leaves to someone is taxed (inheritance tax).
It’s too much. I say a straight property tax with breaks for low income families or persons who inherited property is a very good solution.
Or you can come to Pennsylvania, where we don’t tax clothing or groceries.
I don’t agree with you on property taxes. Property taxes are an assault on private ownership of property. With property taxes, you never truly own your property; you own it only so long as you can afford to pay the property taxes on it. That amounts to the government owning your property and merely renting it out to you.
Without property taxes, a person who buys a huge piece of land, lives off energy from the sun and wind and grows their own food would not support the country at all. I bet they would still expect emergency service, fire and police protection though.
That can be resolved with user fees, not taxes.
The country serves to support its citizens, not the other way around. It does need some level of income in order to do the things that citizens expect, but it does not need to be through property taxes.
What a red herring. The richest people make the bulk of their income through capital gains! Capital gains in the U.S. are taxed at a flat rate of 15%. So the rich already have a flat tax at a rate lower than the lowest income wage earners. Duh!
I repeat. The rich already have a flat tax rate.
John, you need to do a lot more research to get a clue, seriously. It’s not funny at all.
Flat taxes penalize the lowest earners since the bulk of their income goes to living expenses, they’re taxed at a proportionately higher rate because they have to spend most of their money on living expenses while wealthier people do not. The rich have the luxury of saving and investing a greater portion of their income.
I often hear the argument that flat taxes allow the rich to invest and grow the economy further. Well low income earners do the same. They invest in things too. I also resent the classist statement you made which assumes that people who work harder earn more money. That’s simply a false assumption.
How do you explain high GDP growth rates of highly taxed nations such as in Scandinavia?
A lot of us here are webpreneurs that make money off our capital gains. Are we rich?
You are correct in recognizing capital gains as one of the components of the growing stratification of income, but incorrect in rounding all investment holders into the “wealthy” class.
But to say that I’m only taxed 15% on my capital gains is amusing. I assure you the government is taking “a little” more than that.
I think you need to pull out the tax code and start with basic definitions.
“The richest people make the bulk of their income through capital gains!” In case you didn’t know, Capital gain is not classed as income for the tax act, and it’s not flat. Furthermore, if you are in the business of buying and selling real estate, you are no longer qualify for the capital gain exceptions.
When I say income, I’m speaking in the generic sense. Thank you for reinforcing my point. You are right, capital gains are not treated as income. So for all the rich people who make the bulk of their money through capital gains, they get the flat tax rate of 15% in the U.S.
Note to John: Capital gains on real estate are taxed at the capital gains rate of 15% in the U.S.
I won’t even begin to mention all the tax deferral mechanisms that exist. Unless you have investment capital, you probably don’t know they exist. As I read the comments above. I see a bunch of young guys who want to be rich, yet most probably never will be. All the while feeling good about giving people with much more money than they will ever have a nice big tax break, so they can all collectively make it up with their own contributions. I guess some guys like the feel of bending over and taking it hard.
Ah but the dream of making it big keep people motivated! No one ever wants to hear about a tax increase because ‘What if I become rich someday?’ As you mentioned only about 1% ever get there. Are you one Marc?
I’m anticipating the July 2007 income report
I’ve been advocating a flat tax for the past 10 years. It used to be that people like me were considered to be the “lunatic fringe”, the “gestapo right wingers”. I’m poor by all monetary standards and for the life of me I can’t get how the hell the tax system in place now can be considered fair.
It’s not fair at all as it is, but introducing a flat tax would n’t help you if you’re low income. If you are low income why in hell would you want a flat tax? Probably because it sounds so simple and fair. Trust me, it isn’t.