Two federal income tax rates of 15% & 25%

- Slow Ottawa’s annual spending growth to 2.5% and it is possible by 2012
- A pro-growth plan that will deliver nearly $70-B in personal tax relief

Budget impact costed by the C.D. Howe Institute

OTTAWA – The Canadian Taxpayers Federation (CTF) today released a groundbreaking study urging the federal government to enact a multi-year tax reform/relief plan. The report calls on Ottawa to reduce personal income taxes and cut the number of tax brackets from four to two while maintaining only a handful of deductions like RRSP, spousal and child allowances. The goal is to both simplify the tax code while lowering the personal income tax burden in a manner that strengthens the Canadian economy. The report does not deal with corporate tax reform, nor does it redefine how investment income is taxed.

The study, entitled Lower, Simpler & Flatter – Towards a Single Tax Rate for Canada, authored by Mark Milke and John Williamson, argues the federal government should embark on comprehensive tax reform with the ambition of adopting a single personal tax rate. As an immediate first step, the authors recommend that Canada move to two federal income tax rates of 15% and 25% by 2012. There are currently four tax rates of 29%, 26%, 22% and 15%.

“Our immediate objective is to usher in two tax rates on personal income so no taxpayer will pay more tax and most will pay less,” CTF federal director John Williamson said today at a news conference on Parliament Hill. “The tax relief is substantial. If this two rate plan is implemented by the federal government it will mean a $25-billion annual personal income tax cut as of 2012.”

The C.D. Howe Institute conducted an independent analysis of this plan’s fiscal impact on government revenues and its affordability by 2012. The think tank also calculated the positive tax relief generated on households that result from adopting two income tax rates while eliminating many tax credits.

Finn Poschmann, the Institute’s director of research, concluded, “The tax relief proposed by the CTF is readily affordable by 2012, provided modest spending restraint is undertaken by the federal government … Restraining federal spending to 2.5% nominal growth per year, beginning in 2008, would produce planning surpluses of $21.9-billion and $28.1-billion [in fiscal 2011/12 and 2012/13]. This implies that personal tax relief of $25-billion per year is possible by 2012, while setting aside $3.0-billion annually for debt reduction and without running a fiscal deficit.” (The C.D. Howe’s Impact of Fiscal Measures is included in the report.)

“The decisions Finance Minister Jim Flaherty makes in the upcoming budget will determine the size of tomorrow’s income tax cut,” noted Williamson. “If the Conservatives exercise modest spending restraint they will finally be able to deliver meaningful personal income tax relief. We must not forget that Canada has the highest personal income tax burden of G7 nations, yes even higher than the French.”

Under the two rate model proposed by the CTF, by 2012:

Approximately 1.4 million low-income Canadians will be removed from the tax rolls as a result of all individuals earning $15,000 or less not paying any federal income tax. Income over $9,600 is currently subject to federal income tax under Ottawa’s existing tax system;

Every category of taxpayers – one-earner and two-earner households, married people with or without children, unattached singles with or without children, and seniors – representing 30 million Canadians, will pay less income tax or the same amount;

The basic and spousal exemptions are each $15,000 and there is also a per child exemption of $2,200. As such, two-parent families with two kids will not pay any federal income tax until their combined income exceeds $34,400. Today, this household is subject to tax on income at $23,200. A single parent with three children will pay no federal tax on the household’s first $21,600 of income. Federal tax is currently applied to this family’s income above $15,600;

To ensure low- and moderate-income senior citizens pay no additional income tax there is an age credit; and

RRSP deductions remain intact along with those for charitable giving.

“This tax relief is proportional. The more an individual or household earns the higher the tax savings will be. This is welcome because the middle class and high earners pay the majority of tax in Canada,” said Mr. Williamson. “Ottawa should stop punishing people for working hard.”

According to Statistics Canada, in 2002, the top 10% of taxpayers paid 52.6% of total federal income tax, up from 46% in 1990. Entrance to the “Elite 10% Club” began at $64,500 a year.

“The system also remains progressive as a result of generous personal and family exemptions. As a result, an individual’s or household’s share of taxes rises as more income is earned,” noted Williamson. “A common economic fallacy is that only tax systems with steep multi-tax rates are progressive when a single-rate tax with generous allowances can accomplish the same objective.”

Williamson concluded, “Lowering tax rates sends the important signal that entrepreneurialism, risk taking and hard work are positive endeavours to be encouraged. This is something Canada’s current income system with punitive tax rates fails to do. This two rate tax proposal is a pro-growth plan that will deliver nearly $70-billion in personal income tax relief over the next four years. It is based on prudent assumptions and is achievable without running budgetary deficits.”

An electronic copy of Lower, Simpler & Flatter – Towards a Single Tax Rate for Canada is available at: http://www.taxpayer.com/pdf/flat_tax_2008.pdf

John Williamson
Federal Director
Canadian Taxpayers Federation