Alberta's Flat Tax puts Vital Public Services at Risk: Only Albania has found our income-tax regime worth emulating
By Tony Clarke, printed in Union Magazine
As the Alberta government posts a record $5-billion budget deficit for 2010-2011, the largest in the province's history, Albertans are right to ask: "Where did the money go?"
The government blames "global volatility" for the province's sagging bottom line, but the downturn in the global economy is only part of the story surrounding Alberta's recent money troubles.
A better explanation can be found in our overall revenue mix. For the highest income Albertans, personal income taxes are too low. The same goes for taxes on large corporations. Ten years ago, Alberta gutted its most stable sources of revenue - income taxes from individuals and corporations. Instead, we rely on a mix of unreliable natural-resource revenues and revenues from liquor, gambling and cigarettes.
When Alberta moved from progressive income taxes to a flat income-tax system, it erased billions of dollars in revenue. This undermined the financial stability the tax system gave us, putting our vital public services at the mercy of the global economy and leading to pressure for layoffs, budget cuts and privatization.
While the poor and middle class saw no benefit from the flat tax - and were faced with the spectre of public-sector layoffs and deteriorating public services - there was one segment of the population that gained - the very wealthy.
The Complicated Birth of the Flat Tax
In 1998, the Alberta government began the process of moving from a progressive income-tax system, where tax rates increase as income increases, to a flat-tax system where all income levels are taxed at the same rate.
Under Stockwell Day, the Alberta Treasurer in 1999, the government announced a move to a single tax rate: 11 per cent for all income levels, with increased personal and spousal exemptions.
Prior to the flat tax, Alberta levied 44-per-cent provincial taxes on the federal personal income taxes. In other words, whatever amount in income tax you paid to the federal government, you made another payment of 44 per cent of that total to the Alberta government.
Because the federal income tax was progressive (meaning those who could afford to pay more were charged more and those who could afford to pay less were charged less), low-income Albertans paid about 7.5 per cent of their income in provincial taxes. However, with Stockwell Day's proposed flat tax, low-income Albertans would have seen their taxes increase from 7.5 per cent to 11 per cent. Conversely, high-income Albertans would have seen their income tax decrease from 12.75 per cent to 11 per cent. Middle-income Albertans would see a slight decrease in taxes.
To complicate matters, the federal government announced it would reduce the federal income taxes for the $29,590 to $59,180 income bracket from 26 per cent to 24 per cent. This would have meant that under the flat-tax scheme, every income group except for the wealthiest Albertans would see their personal income taxes actually increase.
In response to the federal income-tax cut, the Alberta government hastily reduced the flat-tax rate from 11 to 10.5 per cent and increased personal and spousal exceptions.
The final round of tinkering with the flat tax came in early 2001, when the new Provincial Treasurer Steve West announced plans to lower the flat-tax rate from 10.5 per cent to 10 per cent. The final cost of these tax reductions to the Alberta Treasury was estimated to be $1.5 billion a year in 2001.1
Under the 10 per cent flat tax, low-income Albertans only saw a tax cut because of the dramatic increase in personal and spousal exemptions. It was the increases in personal and spousal exemptions that benefitted poor and middle-class Albertans, not the flat tax. When changes to personal and spousal exemptions were announced, an estimated 132,000 low-income taxpayers were removed from the province's tax rolls.
Leaving aside exemptions, Alberta's middle- and low-income earners paid higher taxes with the 10-per-cent flat tax than if the Alberta government had maintained the old 44 per cent tax-on-tax system. People earning between $30,755 and $61,509 would have paid only 9.68 per cent under the old system instead of the 10 per cent flat tax.
The wealthy, meanwhile, were left with more cash in their pockets. Those earning between $60,510 and $100,000 saw their Alberta income-tax rate from to 10 per cent from 11.44 per cent; those earning more than $100,000 had rates drop to 10 per cent from 12.76 per cent.
The wealthy in Alberta used to pay higher personal income taxes. Other wealthy Canadians pay higher taxes. All of this suggests Alberta's wealthy can afford to pay more - to pay their fair share - now.
The simplest, most straightforward way to capture more revenue from Alberta's ultra-wealthy would be for the government to implement a surtax. This is an add-on tax that applies when personal income exceeds a certain level and targets only wealthy Albertans who have inordinately benefitted from the flat-tax system.
Surtaxes are simple to understand, easy to apply and many Canadians are familiar with them. In fact, Alberta had an eight-per-cent surtax before the 2001 shift to the flat-tax system. Other provinces have surtaxes aimed at their wealthy populations. Ontario has a two-tiered surtax, which climbs as taxable income increases: 20 per cent on provincial taxes higher than $4,006 and 36 per cent on provincial taxes in excess of $5,127.
The government of P.E.I. levies a 10-per-cent surtax on provincial taxes higher than $12,500. P.E.I. estimates that the surtax applies to about 3,700 people with the top 3.5 per cent of taxable income.
Personal Tax Simulations: Two Options to Consider for Alberta
Simply re-applying Alberta's previous surtax, eight per cent on $3,500 of taxable income, would allow the Treasury to reap more than a quarter of a billion dollars in personal income-tax revenue, the bulk coming from high-income earners. However, this system still sees slight tax increases for working people (individuals earning $60,000 to $100,000), even if only marginally.
The P.E.I. Surtax Model
If the Alberta government were to impose the same surtax P.E.I. applies to its wealthy citizens, an additional $157 million of addition revenue could be gained. Under this surtax, only individuals earning more than $100,000 would see an increase. This tax increase would not be onerous by anyone's standards. People earning between $100,000 and $250,000, for example, would see an average tax increase of about $414 on their tax bill.
Some might claim that if we increase their taxes, the wealthy will pack up and leave. Aside from Alberta's non-existent provincial sales tax and low-low gas taxes, the province's generous personal and spousal tax credits leave ample room for surtaxes aimed at the wealthy.
With P.E.I.-style surtaxes, every income group would still pay lower taxes in Alberta than elsewhere. This is because everyone claims basic personal amounts, despite their income. Leaving aside other tax issues such as sales taxes and gas taxes, Alberta's tax regime is low compared to other provinces.
Flat Taxes A Rarity Around the World
Only seven American states use the flat-tax system, but American states deliver far fewer programs than Canadian provinces. Even after the George W. Bush era, the U.S. federal government still has a progressive tax system.
Around the world, only nine Eastern European countries have embraced the flat tax with any enthusiasm. All flat-tax rates in Eastern Europe, except one, are higher than Alberta's 10 per cent flat rate - for example, Estonia levies a 24 per cent flat tax. Albania's flat tax is the lowest national flat tax rate in the world: Alberta and Albania share a 10 per cent flat tax rate.
Increase Alberta's tax rate for those earning more than $150,000/year
A better way to change the system would be to increase tax rates for those earning more than $150,000/year by up to four per cent. This small increase would leave taxes the same for low- and middle-income people. It would mean someone earning $150,000/year would pay slightly more - but not much more.
Alberta's marginal rates for the very wealthy are by far the lowest in Canada. A simple upward adjustment in taxes for those earning over $150,000 would net us more than $500 million in extra revenue every year, and would still see us charge the lowest marginal rates in Canada for the super-rich.
As the above simulations show, there is plenty of room to get much-needed government revenue through targeted taxation of the super-wealthy, who saw a 25 per cent tax cut in 2001 and have enjoyed far lower rates than the rest of the country for a decade.
1 Alberta government, "Alberta's single income tax rate lowered to 10 percent," January 3, 2001, http://www.alberta.ca/acn/200101/10160. html accessed October 6, 2010
By Tony Clarke, printed in Union Magazine
Tony Clark is the former director of communications for the Alberta NDP Opposition. He now calls Vancouver home where he works as a writer and researcher and remains involved in local, provincial and federal politics.
Analysis for this article was based on Statistics Canada's Social Policy Simulation Database and Model and the article "Alberta's Single-Rate Tax: Some Implications and Alternatives," by Mel McMillan published in 2000 in the Canadian Tax Journal (Vol. 48, No. 4). The assumptions and calculations underlying the simulation results were prepared by Tony Clark and the responsibility for the use and interpretation of these data is entirely that of the author.