Flat Income Tax for Nova Scotia?



If Nova Scotia is to survive it must become a province that more people want to come to than leave. The Atlantica Party is focused on policies to achieve this goal and a flat income tax could be a great benefit. A flat tax is one tax rate for everyone with few if any deductions, it would reduce administrative expenses and save money for provincial tax payers. 

With a flat tax rate the negative impact of people not seeking more income due to the larger share of their income the government would take would be gone, therefore a flat tax rate would strengthen incentives to establish small businesses, encourage entrepreneurships and attract high skilled workers from other provinces.

While Americans and Canadians have been talking about it, flat tax rates have already been implemented in a number of European countries. In 1994 Estonia became the first country in Europe to introduce a so-called “flat tax”, replacing three tax rates on personal income, and another on corporate profits, with one uniform rate of 26%. Simplicity itself. At the stroke of a pen, this tiny Baltic nation transformed itself from backwater to bellwether, emulated by its neighbors and envied by others who long to flatten their own income taxes. While the Federal income tax is out reach the Atlantica Party is starting a debate on a flat Nova Scotian provincial income tax.

Latvia and Lithuania, Estonia's Baltic neighbors, promptly followed its example. In 2001, Russia too moved to a flat tax on personal income. Three years later, Slovakia imposed a uniform 19% rate on personal and corporate income, and set the same rate for its value-added tax (VAT) too, for the sake of symmetry rather than economic logic, it seems. In Poland, Civic Platform, an opposition party, wants to mirror Slovakia, only at the lower rate of 15%. In all, eight countries have now followed Estonia.

Fewer brackets are simpler to administer, but one bracket is simplest of all. It is also easy to understand and visible. Under a pure flat tax, the taxman takes the same cut from the last dollar you earn that he took from the first. The appeal to high earners is obvious. But the administrative elegance of such a system is not so immediately apparent. Because every dollar is taxed at the same rate, it does not matter to the tax collector how many dollars are going to whom. Thus, in principle, the taxman could simply withhold 20% of a company's payroll, without needing to know who was paid what. Add a second rate of tax, however, or a personal exemption, and the tax collector must find out how much money is going into each pay packet before he can be sure of collecting the right amount from the right person.

To the layman a flat tax simply means a single rate of income tax. But the connoisseur of the flat tax can distinguish several different varieties. A proposal for a flat income tax with a personal exemption, is designed not to be tax saving. It thus resembles a consumption tax, such as VAT, more than a traditional income tax, which is typically also levied on returns to saving, such as interest and dividends. Slovakia, which taxes profits firms make, but not the dividends they distribute, perhaps comes closest to this model.

The most remarkable turnaround in government revenues was recorded in Russia. Prior to its 2001 tax overhaul, the federal government's tax-raising powers were rapidly deserting it. Clifford Gaddy and William Gale of the Brookings Institution report that tax arrears amounted to 34% of collections in 1997. By 1998, federal revenues had fallen to just 12.4% of GDP, leaving the government unable to pay its creditors. Investigators appointed by the president revealed that Russia's biggest enterprises ignored 29% of their taxes and paid another 63% in kind, with goods and services the government might or might not want. In lieu of $80,000 in taxes, one company reportedly offered the government ten tonnes of toxic chemicals.

On January 1st 2001, Russia flattened and broadened its personal income taxes, collapsing 12%, 20% and 30% bands into a single, uniform 13% rate. The state also withheld taxes at source, identified taxpayers by number, and audited suspected tax-dodgers.

How did revenues respond? A year after the reform, the personal income tax was raising almost 26% more revenue in real terms. Some of this was due to the rebound in the economy: real wages grew by 12% that year, and the take from all taxes, flat or otherwise, consequently improved. But the surge of rubles encouraged by the flat tax was more sustained.

Many advocates of the flat tax, argue that it sharpens the incentive to work. A progressive income tax, they claim, deters extra effort from society's best-paid (and therefore most productive) members.

In part, the tax system is burdensome because people dodge it. Every loophole that is exploited must be plugged. Every blurry line that is crossed must be sharpened. But Messrs. Owens and Hamilton worry that the tax-codifiers and the tax-dodgers are locked in a mutually destructive “arms race”. The code is made more complex because of tax dodgers. More people then seek to avoid taxes. The best way to fight tax avoidance, then, is with simplicity.

Under an Atlantica Party government, as the Nova Scotian economy improves, revenues increase and spending is controlled it would be possible to lower the flat income tax rate over time. A preliminary calculation puts Nova Scotia’s flat tax rate at around 12%, with which the province's revenue from income tax would remain the same, this is based on Nova Scotia's revenue from income tax in 2015.

Alan Nightingale

Atlantica Party