Innovation

From the editor: A compelling case for a flat tax

Written by Ian Portsmouth

It’s difficult to tell whether the air originating from this summer’s federal NDP convention was a breath of fresh or a blast of hot. Jack Layton and his band of do-right-by-almost-everyoners had placed a small-business tax cut worth $5.7 billion on the debate agenda. If passed, the resolution, submitted by Ontario MP Bruce Hyer, would have made abolition of the tax “on gross annual income of up to one million dollars” an official plank in the party’s platform. (Yes, the wording is ambiguous, but you get the gist.)

However, the convention ended before the resolution could be debated in plenary, squeezed out by such proposals as full medicare coverage for “gender reassignment” (huh?), giving workers the right to speak French in federally regulated companies (quoi?) and taking action against gun smuggling (duh!). As a result, the NDP lost a great opportunity to curry favour with Canada’s owner-managed companies and the people who invest in them. That’s bad for the NDP. Worse for business owners is that the federal Conservatives and Liberals lost some impetus to revise their own tax policies to prove they’re the parties of choice on both Bay Street and Main Street.

But as three of the millionaire entrepreneurs-turned-investors from television’s Dragons’ Den discuss in this issue, creating the optimum environment for Canadian business requires not only lower corporate tax rates — which would encourage business formation and improve startup survival rates — but also a restructuring of the capital gains tax to encourage investment in new companies. They’re great ideas, but not the ultimate solution. Canadian business also needs a flat tax.

Indeed, a big part of Canada’s tax problem is that rates rise alongside income, providing a disincentive to both growth and increased efficiency. Once an acceptable level of profit is achieved, why risk additional time, energy and capital in the pursuit of diminishing returns? Yes, the truly entrepreneurial will push forward regardless, but they shouldn’t be punished for their spirit and endeavour.

One alternative is a reverse graduated tax, in which rates drop as income rises. Such a scheme would encourage growth and risk-taking rather than suppress them. Too bad the thought of big corporations remitting less tax on the dollar than the little guy — even if his tax rate were reduced below current levels — is unpalatable to politicians and proprietors alike.

The only real alternative is a flat tax. It neutralizes the tax system’s impact on the appetite for risk, growth and increased efficiency; eliminates the tax-avoidance dance many companies do to bring their income below an arbitrary threshold; and, due to its relative ease of administration, reduces costs for companies and governments alike. Ottawa and the provinces could put those savings toward reducing the flat corporate tax rate to a level the small-business sector can stomach. Beauty.

Coincidentally, a flat tax treats all business owners the same — which should appeal to the equality-driven NDP. Let’s just hope we don’t have to wait till the next NDP convention for corporate tax reform to receive serious debate.

Originally appeared on PROFITguide.com