Can We Get Rid Of Income Tax?

Couldn't we just replace income tax with consumption taxes? Imagine - working for an hour and getting paid for an hour, not for 38 minutes - wouldn't it be great? Wouldn't it be fair if everyone paid the same tax and if there was a single rate for everybody? And, if we taxed shopping instead of working - wouldn't that encourage families to save more? Some even say the tax will be so simple that we could disband the CRA...

Yes, the idea is worth looking into. In fact, the idea must be properly looked into, because there are many details that are hard to notice at the first glance. And, as we know, the devil is in the details.

First of all - what about corporate income taxes? Are we going to abolish them too or are we going to tax business income but not personal income? Sales taxes paid on business expenses are usually get refunded back to the businesses. So if we abolish corporate income taxes - we'll have to find a way to tax business transactions without driving up the costs of raw materials or equipment repairs. (Otherwise we leave the manufacturing sector seriously disadvantaged.)

Then - what rate will it be? The US Fair Tax Proposal suggests a 30% hidden tax (prices are posted "tax included", so every $100 out of pocket expense contains a $23 tax on a $77 purchase), as well as ~$200 monthly rebates per adult - to ease the effect of the tax on the low income families. Their proposal apparently doesn't factor in state income taxes. So what could be the rate for Canada, if we factor in the provincial taxes?

According to the recent budget, the government is expecting to raise $118,595M in personal income taxes and $27,565M in GST. If we want to raise all those funds ($146.16B) with GST alone, the rate should be 26.5%. To compensate for the higher rate, GST credit checks should be made monthly and the amount should go up from $30.75 to $163. With the provincial taxes on top of that we should add 8% (existing provincial portion of the HST) and then another 12% which would compensate for the lost provincial income tax revenues. That adds up to a 46.5% tax. Or, if we make it a hidden tax - that would be $32 tax on a $68 purchase for every $100 out of pocket expense.

Of course, if we cut all the wasteful spendings, we can bring the rate down by 5-6% on the federal level and by 3-4% - on the provincial level. Still - even a 37% sales tax (or a hidden tax of $27 on a $73 purchase) would result in massive tax evasion through online and cross-border shopping. How can we prevent that if the lion share of our population lives within 2- or 3-hour drive from the US border? And what can we do with online shopping? Even if we're going to check every single package and slap a 37% (if not 47%) duty to compensate for the lost sales tax revenue - still, people will find a way to cheat; instead of lowering their income, they'll try to lower the value of their purchases...

So even though the idea itself seems to be fair and reasonable - we're simply not ready to implement it. Not until we get the government spendings under control - so we could end up with lower rate than 46.5% or 37%. Not at least our next door neighbor starts implementing a similar tax shift - so that prices stay the same at both sides of the border. Not until we restructure our economy so it could handle the inevitable decline in retail sales... Not now (unfortunately) - that's for sure.