The Fraser Institute

The Fraser Institute

January 22, 2008 06:00 ET

The Fraser Institute: Evidence From 20 Other Nations Shows Canadians Would Prosper if Government Moved to a Flat Tax

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Jan. 22, 2008) - As more countries around the globe move to a flat tax, Canada could become a magnet for investors and entrepreneurs if it followed suit and adopted a 15 per cent flat tax, recommends a new report released today by independent research organization The Fraser Institute.

"The flat tax is anything but a policy experiment. There are now more than 20 jurisdictions with flat taxes and this is expected to continue growing," said Patrick Basham, co-author of Lessons From Abroad - Flat Tax in Practice.

"The flat tax is a proven instrument of sound fiscal policy. International evidence clearly shows that Canada would benefit greatly from adopting the flat tax."

With a flat tax, people are no longer penalized for working harder, saving, investing, and engaging in entrepreneurial activities as they are under Canada's current tax system where tax rates rise as an individual's income increases.

In a recent report for The Fraser Institute, A Flat Tax for Canada, Dr. Alvin Rabushka of Stanford University recommended that Canada adopt a 15 per cent flat tax. He stressed that at 15 per cent, the government will collect the same amount of revenue as it currently does. Reductions in spending or restraint in the growth of spending in the future would result in an even lower rate.

In Lessons From Abroad - Flat Tax in Practice, authors Basham and Daniel Mitchell bolster the move for tax reform and provide a compelling case for Canada to adopt a flat tax. However, they also warn that entrenched special interests, value-based objections, and beneficiaries of current tax preferences will mount opposition.

"Central and Eastern European nations faced limited opposition when they adopted the flat tax. Canada has a myriad of extremely powerful, vested interests that benefit from the current system and will fight to limit discussion, promotion, or introduction of a Canadian flat tax," Basham said.

"Introducing a flat tax in Canada will require a substantial change in attitude, given the country's history with progressive taxation."

Basham and Mitchell show how Canada could benefit from a flat tax by looking at the history of flat taxes in other nations and the impact on their economies. Hong Kong has had a flat tax since 1947 and remains the administrator of the world's most efficient tax system. While the U.S. income tax system generates 66,000 pages of code and regulations, Hong Kong's entire tax code is no more than 200 pages.

"Nowhere is the flat tax more prominent than in Hong Kong, which built itself into an economic giant using the flat tax as a fiscal anchor. The system is so successful, it even survived Hong Kong's handover to China," Mitchell said.

During the past decade, the Hong Kong economy had to withstand Asia's 1997 financial crisis, the bursting of America's dot-com bubble, and the bird-flu and SARS epidemics. Yet, Hong Kong's tax system continues to provide a fiscal environment within which the economy can flourish. Since 1997, the number of multinational companies with regional headquarters in Hong Kong has increased by one third with billions in capital raised through public offerings.

Since the fall of the Soviet Union, a number of former republics as well as other Eastern European nations have adopted flat taxes, including Estonia, Latvia, Lithuania, Russia, Serbia, Slovakia, Ukraine, Romania, Montenegro, and just this year Bulgaria became the latest country to adopt a flat tax. The Czech Republic is expected to adopt a flat tax later this year.

"After the fall of the Soviet Union, the former communist countries of Central and Eastern Europe imported the kind of discriminatory tax structure found in Western Europe, but policy makers soon realized that graduated rate structures discouraged economic activity. Consequently, they opted for the simplest, most efficient system - a flat tax," Mitchell said.

"Most countries with a flat tax are keen to promote economic growth and see the flat tax as a method by which to improve economic incentives for working, saving, and investing."

Mitchell and Basham show how the Eastern and Central European nations provide a graphic illustration of the economic advantages that accompany adoption of the flat tax.

The economic reform star of the European flat tax movement is Slovakia, which adopted a flat tax rate of 19 per cent in 2004. The attractive combination of a flat tax, a deregulated labour market, and a well-run, funded pension system has resulted in a flood of foreign investment, stimulating economic growth. In 2004, the World Bank named Slovakia the world's top economic reformer. Since the flat tax's introduction, Slovakian economic growth has been among the highest in Europe. In 2005, the Slovakian economy grew by six per cent; growth in 2006 measured 8.3 per cent, a record high. In 2005, foreign direct investment in Slovakia was six times more than it was in 1998.

"Progressive personal income-tax rates make for a needlessly complex tax system and increasingly taxpayers ask if there is a realistic alternative to Canada's wasteful, inefficient tax system. The answer is yes - the flat tax system," Mitchell said.

"The most telling signal of the flat tax's suitability to the modern, Western economy is that no country that has introduced the flat tax has reversed course and re-adopted a progressive tax system."

Lessons From Abroad - Flat Tax in Practice and A Flat Tax for Canada are chapters from the Fraser Institute's book, The Impact and Cost of Taxation in Canada, The Case for Flat Tax Reform, which will be released in mid-February. PDFs of the chapters are available at www.fraserinstitute.org.

The Fraser Institute is an independent research and educational organization based in Canada. Our mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. We do not accept grants from governments or contracts for research. Visit www.fraserinstitute.ca.

Contact Information