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Index for my Toronto Budget 2004 project
Tony's Tax Proposal
10/02/2004

Conservative leadership candidate Tony Clement announced today a dramatic plan for restructuring the income tax system around lifetime (rather than annual) earnings. From the National Post:

His proposal would see a person entering the job market pay no tax on their first $250,000, or about eight to 10 years of the average Canadian's career. That would work out to an average saving on federal income tax of $21,000 over 10 years, he said.

After that point, workers would be taxed at a 14% rate until they hit the $500,000 level, 20% from $500,000 to $750,000, 24% from $750,000 to $1-million and 27% above $1-million.

Clement's site has more complete information. It's described best in this Word document.

I give Tony credit for trying to introduce some new and interesting ideas into a campaign that has been rather dull so far. However, I'm of mixed feelings about the strength of the idea.

Good things:

  • Separating the discussion of reordering the tax system from discussion of tax breaks is good. Tony says his proposal is more-or-less revenue neutral for government, but also for individuals over their lifetimes. If true, this makes it possible to talk about whether the system is better without falling into a debate about shrinking or growing the government.
  • There seems to be some merit in the idea that a progessive tax system is more fair if it is based on lifetime rather than annual earning. Any wealthy person can have a low income year, and lower-earners can certainly have an odd high-income year. Why not smooth things out?
  • There also is some truth to the idea that a dollar in a young person's hands is more precious when he or she is trying to get established in life.

Some concerns:

  • How do we transition from here to there? Won't simply switching over hurt older Canadians who didn't get their early-days benefit? Or does Tony have a different plan? It's not clear.
  • What about immigrants and emigrants?
  • Doesn't this create a brain drain incentive? Once people have reaped the rewards of early-days low tax rates, what's to stop them from moving elsewhere when it is their time to pay dues?
  • How would this system be adjusted for inflation? The tax brackets will have to be adjusted over time, but it seems complicated to do so.
  • Most people don't budget for a lifetime, even though they probably should. Many still live week-to-week... even if they have earned a lot of money over the years. A senior living on a low income will have a much tougher time under this system.
  • Intergenerational strife. While some people may relish fighting this out, this system will mean that any future changes in the tax rates for different brackets will be a very loaded and controversial decision.
  • How is this -- as promised -- a simpler system? Clement talks about eliminating lots of complicating deductions, but it's not clear to me how this is connected. Which deductions does he have in mind and why are they no longer applicable?

Well, I would need a lot of questions answered before agreeing with Tony on this one. But, I still applaud him for exploring innovation. And, unless I've been fooled, he seems to be considering this innovation for its own sake, rather than as as smokescreen for achieving some other goal.

Crossposted to BlogsCanada E-Group


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