SIGNS OF THE TIMES

By Barry Stagg

April 1996

THE FLAT TAX: DEATH KNELL FOR ENTITLEMENT

At a weekend economic summit at the historic Toronto landmark known locally as the Wheat Sheaf Tavern, it was agreed that with a basic personal exemption and sensible family exemptions, the flat tax would be a catalytic boost for the Canadian economy.

With a flat rate income tax, Canada would be the most competitive industrial country in the world. Provided that both federal and provincial income tax were set at a fixed rate, private business could plan for prosperity and attack the world markets with courageous vigour.

Certainty in the day to day working world would be attained because the worker and his boss would be assured of taking home a full pay cheque without any tax at all up to a basic personal exemption of $25,000. Each dependent would be represented by an added $3,000 exemption.

The secret key to economic good times would be in the mandatory reduction in government employees and in government services. Simply put there would be less civil servants needed because of the simple tax structure and most significantly citizens would be expected and required to do more for themselves rather than look to government for services. This is a logical and necessary product of government leaving more money in the hands of taxpayers. For instance all subsidies for daycare would end as would all tax write-offs for such things as business entertainment. Cash would be king again as voters got used to the intoxicating feeling of spending their own money and abandoning the credit traps laid out by the obscenely prosperous lenders of this nation.

The need to radically restructure the tax system in Canada, to put more money in the hands of hard working private business people is a real exercise in crisis management. The crisis is due to the inexorable pressure put on small business by the tax structure. A combination of high taxes, maximum tax exposure and high indirect taxes such as licensing and professional fees has put the small business owner in danger of being destroyed. That means that Main Street is being crushed between two stony walls--big government and big bankers on the one side and the government-funded subsidized class on the other.

This is a simple equation. Low paid wage workers qualify for government subsidies such as daycare, drug and dental benefits and income top-ups which the business owner pays for through her taxes. The owner is self-employed and does not get these benefits. Big government creates the subsidies and pays for them by taxing the businesses on Main Street into insolvency. Bankers extend easy credit to the wage earners and expensive credit to the taxpaying owners. The result is inevitably insolvency and business oblivion. Government and lenders extract exorbitant taxes, fees and interest payments from Main Street. Main Street has no tax protection or shelter and thus must pay the full shot.

In effect Main Street is providing the tax money for big government to continue subsidizing the employees working on Main Street. This means that a form of welfare class has government benefits that Main Street taxes fund. Maddeningly these benefits cannot be afforded by the owners who must pay full price instead of the subsidized rate. That means that the grocery clerk gets free daycare while the store owner and her husband pay cash they cannot find outside of their credit cards.

The flat tax economy will put cash in the hands of the grocery clerk. The clerk will have to use that cash to pay for the service more appropriately called "babysitting " but which has been mutated into "daycare" by the politically correct. Something called responsibility goes with the increase in spendable cash. There will be no more subsidies to distort the market and bleed business into early autopsies.

The high tax burden of small business now includes income tax, business and property tax, licensing fees and the odious GST. To this is added the cost of credit at the local bank where the owner is a bad risk because of her heavy debt load and the obvious uncertainty of revenue from her ostensibly free enterprise. The ultimate in real absurdity is reached when the bank ignores the owner as a possible RRSP customer and approaches her clerk knowing full well that the owner is in debt and the clerk at least has a steady wage. Thus the clerk builds his pension while the owner cannot afford to get her children's teeth cleaned.

That bald-faced example of unfairness is the best reason for flat tax reform that this writer can see. Without real reform of the equation existing between taxes and services by drastically cutting both taxes and services there is the very real chance of social unrest if not outright anarchy. A taxpayer who sees her taxes wasted will eventually withhold the taxes and go underground as an exercise in self-preservation. Main Street must not be driven underground. The tax laws must change.


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