BIG LITTLE LIES OF SIMPLE TAX (FLAT) RATE

Posted on May 31, 2018 by ffswpadmin

BIG LITTLE LIES OF SIMPLE (FLAT) TAX RATE

(These thoughts are purely the blunt, no nonsense personal opinions of the author about financial fairness and discrimination and are not intended to provide personal or financial advice.)

This blog post was prompted by a right wing think tank article that once again promotes a flat tax and big little lies that it is already progressive and should replace the progressive tax system. It was submitted to a local newspaper in shortened format, but was not published.

The article ‘Many misconceptions surround single tax rate’ is reprinted in its entirety at the end of this post along with reader comments.

EVALUATION OF SIMPLE (FLAT) TAX

This right wing author says he is the originator of the simple tax. In fact, he has changed the name of the flat rate to the simple tax as per explanation given in article as reprinted at the end of this post. The simple tax of 10% was adopted by the Alberta Conservative Government in 2001.

While it is true the personal exemption rate was increased during implementation of the simple tax, during their forty year Alberta reign the Conservatives failed to raise the minimum wage to meaningful levels. (Reality check: The wealthy also get to use the personal exemption rate.) One of the best big little lies or gaslighting of this author occurs when he fails to tell the truth that during the implementation of this simple tax the tax rate for lower income persons was changed from 8% to 10%. There was no Alberta Advantage for lower income earners as a result of the tax rate being increased at the same time personal exemption rate was increased.

He once again spews lies on single tax being progressive. He says tax paid by the wealthy are a gift to those who pay little or not tax. Oh, puh-leese.

He states low income earners pay no tax, but fails to mention wealthy never pay their fair share. He fails to mention the many tax federal and provincial tax loopholes and benefits which filter down to the wealthiest taxpayers.

The wealthy, for example, put their Old Age Security (OAS – a poverty reduction pillar that is only clawed back on top two percent) into TFSAs that are not declared as income. Forty per cent of Canadians have net worths over $750,000.

The poor pay plenty by suffering financial and mental stresses while trying to pay for basic human necessities on provincial minimum wages which remained static for many years. Low income earners cannot take advantage of tax loopholes and benefits because they do not have the income to do so.

CONCLUSION

Instead of ‘Conservative gaslighting pants on fire’ half truths, he needs to speak full truths on tax loopholes, benefits and minimum wages. Progressive versus simple tax and ‘taxes explained in beer’ provides further discussion on fallacies of the simple tax for low income earners (tax-system-explained-in-beer-analogy). (End of post).

Reprint of simple tax article is given below.

‘MANY MISCONCEPTIONS SURROUND SINGLE TAX RATE’, Mark Milke, May 12, 2018 (https://www.pressreader.com/canada/calgary-herald/20180512/281702615355933)

Alberta’s cancelled single tax rate is in the news again after the United Conservative Party passed a policy resolution wanting it back.

That was followed by Twitter wars, interviews and commentaries about that tax, much of it uninformed or making obvious points.

I know something about the single rate tax system. I wrote about it in a 1998 submission to the Alberta Tax Review Committee, which recommended it be adopted, which it was in 2001. I favour its return one day, but when spending is controlled and the budget is balanced.

Class warfare warriors have long mischaracterized Alberta’s single rate tax, so let’s clear up some misconceptions.

Let’s start with why it is called a single tax and not a flat tax. Because a true flat tax system would mean that no basic exemption exists — that everyone pays the same proportion of tax relative to income. That would be a bad idea. But that was never Alberta’s tax system. It is also why the political and media myth that the single tax was not progressive is nonsense.

In 2014, the last year the single-rate system was in effect, Alberta’s basic provincial personal exemption was $17,787. Income earners below that paid nothing in provincial income tax. As for everyone else, at $25,000 in income, 2.9 per cent went to provincial income tax. At $50,000, the rate was 6.4 per cent. A $100,000 income was taxed 8.2 per cent. The single tax system was progressive.

Next up, the silly notion that the single rate tax was a giveaway to the wealthy. Note the language. It assumes money belongs to government and not those who earn it. In that view, any tax relief is a gift. That inverts a more sensible view from citizens to politicians: We will pay reasonable and justifiable taxes, but don’t assume our earnings are your property.

A relevant fact: Higher- and middle-income Albertans pay most of the income tax, not those with lower incomes. That is why the former and not the latter would gain in any tax relief scenario.

For example, using tax data from 2014, those earning under $50,000 counted for 57.3 per cent of all tax filers and paid just 7.6 per cent of all provincial income tax. Of note, almost 1.8 million Albertans were in that under $50,000 group in 2014, but nearly half (845,690 Albertans) quite properly paid nothing in tax due to low incomes. (Another 8,290 at higher levels also did not pay provincial income tax for various reasons, such as maximizing previously unused RRSP deductions.) Those who earned between $50,000 and $100,000 counted for 27 per cent of all tax filers and paid 30.6 per cent of all provincial income tax.

Albertans whose incomes were more than $100,000 accounted for 15.7 per cent of Alberta’s tax filers; they paid 61.8 per cent of all provincial income tax. Point: If one’s argument is that the wealthy should pay a hefty share of Alberta’s income tax burden, the $100,000-plus crowd in Alberta already did (a proportion higher both of tax filers and of total taxes paid than in any other province). Thus, any substantive tax relief will naturally benefit that group.

Here’s the summary: Even when the single rate tax was in effect, Alberta’s over $50,000 tax filers already paid 92.4 per cent of all provincial income tax. And even for those who earned less than $50,000, more than half — more than 920,000 Albertans — paid all the income tax collected from that group.

When someone claims a single tax is a giveaway to higher incomes, the rhetoric has it backwards: The gift is actually from more than 2.2 million Albertans at all income levels in 2014, to the more than 850,000 Albertans who quite properly, mostly due to low incomes, paid nothing for the cost of government.

READER COMMENTS

#1 – Don’t bother with hard numbers Mark. It doesn’t fit the left wing rhetoric. Math is too hard for them. Lies and innuendo is the tool of the left. And 100k + income earners only paying 62% of the tax. No, Canadians want those earning more than 100k a year to pay 100% of the tax. That way, they get closer to their dream of equality of outcome. The last thing you want to do is stump a Canadian with real facts.

#2 – Your most salient point is that money belongs to those who earn it….not the government. I accept that if we want the social services we now enjoy taxes must be collected. But it must be fair and not punitive, which it is right now.

#3 – Whenever taxes are reduced, the high tax payers will always get the biggest break. Usually the biggest complainers of this move, are the socialists who pay very little tax. When Alberta implemented the single tax rate they increased the personal exemption, if the provincial or federal governments really wanted to help low income earners, just raise the exemption Trump increased the personal exemption for everybody, which means the low wage earners got a major tax break from trump. Currently are personal taxes are twice as high as the US, so why would any professional want to live in Canada compared to the US from a tax perspective. (End of article).

(This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice.) This is a WordPress blog designed by a hired individual.

TAXES: FLAT VS. PROGRESSIVE AND DEBUNKING “THE TAX SYSTEM EXPLAINED IN BEER”

Posted on November 27, 2017 by ffswpadmin

TAXES: FLAT VS. PROGRESSIVE AND DEBUNKING “THE TAX SYSTEM EXPLAINED IN BEER”

(These thoughts are purely the blunt, no nonsense personal opinions of the author about financial fairness and discrimination and are not intended to provide personal or financial advice.)

Prelude: Yet again, the tax system explained in beer story is used to ludicrously and simplistically explain the tax system, and no less by the USA White House. We have been wanting to do a blog post on flat and progressive tax systems comparisons, so here it is.

The story about “The tax system explained in beer” (democratic) has been flitting around the internet since 2001. Apparently no author can be identified for the article. The analogy makes the argument that since wealthy people pay the most in taxes, they will also receive the most benefit from a tax cut. It also suggests that wealthy people will leave the US if they are made to pay more in taxes.

It appears that how the reader interprets the article is based on ‘right’ or ‘left’ political thinking, flat versus progressive taxation systems and social democracy or not.

On October 30, 2017 Sarah Huckabee Sanders, USA White House Press Secretary began her daily press briefing pitching USA Trump tax cuts by reciting the article. Then she said, “And that, ladies and gentlemen, is how our tax system works,” Sanders continued. “The people who are being paid the highest taxes will naturally benefit from a tax reduction but not the largest benefit. Taxing them too much and they might start drinking overseas where the atmosphere is somewhat friendlier. This is a silly story but it illustrates a very important point. Our tax cuts and reforms will create a fair system that works better for everyone. It will make our country the friendliest in the world for American families trying to build a better life for their children. And for American companies seeking a competitive edge. I will be happy to get that story to everybody so you can get those numbers later. Again, I know that may be an oversimplification but it paints a very good picture of the tax system.”

From the analogy the information is condensed as follows, ‘the premise is every day ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it goes something like this…’ (first four people are the poorest). Based on their incomes, the ten men would pay:

The first four men (poorest) would pay $ 0
The fifth would pay $ 1
The sixth would pay $ 3
The seventh would pay $ 7
The eighth would pay $12
The ninth would pay $18
The tenth man (richest) would pay $59 (for a total of $100)

Everyone is happy with this arrangement, until the owner throws them a curveball. Because they are such good customers, he reduces the bill to $80. It is decided it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, so each man would now be paying:

(Blog author comment: Truly funny, the totals add up to $79, not $80, so it appears the bar tender will be short changed by $1.)

First four persons $ 0
Fifth person $ 0 (100% saving on prior payment)
Sixth person $ 2 ( 33% saving)
Seventh person $ 5 (28% saving)
Eighth person $ 9 (25% saving)
Ninth person $14 (22% saving)
Tenth person $49 (16% saving) for a total of $79

However, the men begin to compare their savings with those who get the least in percentage of savings complaining the most.

The wealthy get all the breaks. Wait a minute, yelled the first four men, we didn’t get anything at all. This new tax system exploits the poor. The nine men yelled at the tenth and made him feel bad so the next time the tenth man didn’t show up for drinks and the nine sat down and had their beers without him. When it came time to pay the bill, they discovered something important. They no longer had enough money between them all to even cover half of the bill.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.’ (End of analogy).

Reader comment: ‘Yes, the perilous story of the wealthy person who will leave it all behind if the taxes go a percentage point too high…all his businesses, his customers and his suppliers, all his family, his home, his social networks, his local culture, his kids schools, why he’ll just pick up all of that and magically whisk it away to some other place with a lower tax burden for free. The only thing the story is missing to start with is “Once upon a time…” like all fairy tales’.

ANOTHER EXPLANATION OF THE ABOVE ANALOGY

Taken from the following article: “SA Tax System Explained Through Beer” (based on South African Rand) tax-system-explained-through-beer

‘Economies are not one-liners. We’re talking about systems here – and you can’t talk about taxation and spending without talking about “where did the money come from”.

So let me attempt to re-tell that parable.

Ten Men Walk Into A Bar…And One Of Them Owns The Brewery. Suppose that every day, ten men go out for beer and the bill for all ten comes to R100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (poorest) would R 0
The fifth would pay R 1
The sixth would pay R 3
The seventh would pay R 7
The eighth would pay R12
The ninth would pay R18
The tenth man (richest) would pay R59 (for a total of R100)

So, that’s what they decided to do.

There are many reasons why the richest man agreed to pay the bulk of the bill, but the important one is that he owned the only brewery in town, and the barman would buy all the beer from him.

The seventh, eighth and ninth men all worked in the brewery, and earned salaries according to their skill level. The sixth and fifth men owned farms which supplied the hops – although they didn’t earn particularly well, because the brewery was the sole buyer and it negotiated quite stiff rates.

The remaining four men were farm labourers who earned enough to eat, but not enough to drink.

The way that the brewery man saw it: the drinks must flow in order for the barman to be in business and sell the beer that the brewery produced.

The ten men were also very protective of their beer industry, and would run any newcomers out of town. This meant that the ten men were the only real regulars at the bar, and the only real source of its income.

So to keep the bar in business and the town happy and the drinks flowing, the richer men would pick up most of the tab. And happily, most of the bill would end up back in the brewery man’s hands anyway.

So the ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the barman threw them a curveball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by R20”. Drinks for the ten men would now cost just R80.

What he didn’t say is that there had been a bumper season of barley, so the brewery had produced its beer fairly cheaply that month – and the brewery owner had offered the barman a substantial discount on the beer in order to get rid of it.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? How could they divide the R20 windfall so that everyone would get his fair share?

They realized that R20 divided by six is R3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so

The fifth man, like first four, now paid R 0 (100% saving)
The sixth instead of R3 now paid R 2 (33% saving)
The seventh instead of R7 now paid R 5 (28% saving)
The eighth instead of R12 now paid R 9 (25% saving)
The ninth instead of R18 now paid R14 (22% saving)
The tenth instead of R59 now paid R49 (16% saving) for total of R79

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the R20 saving,” declared the sixth man. He pointed to the tenth man,”but he got R10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a rand too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get R10 back, when I got only R2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

In their rage, the nine men decided to boycott the bar.

The next night only the tenth man showed up for drinks so he sat down and had the beer on his own. But when it came time to pay the bill, he discovered something important. 90% of the beer had gone unsold, and the barman was threatening to return the stock to him in the morning.

And if the situation remained unchanged, then the barman was planning to shut up shop, and the brewery would have to close, and then everyone would be without jobs.

And that is how our economy works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction, but the wealthy also have a vested interest in keeping consumers at the table.

That consumption drives the economy and gives value to the businesses that they own. And the hard truth is: if anyone decides to leave the table, then it’s likely that everyone will lose. And it’s really hard to keep everyone happy.

It’s complicated.’ (End)

EXAMPLE OF PROGRESSIVE FEDERAL AND PROVINCIAL 2017 FOR ALBERTANS

For this blog author, the initial article is based on true stupidity and over simplification of the tax system. In this blog article, an example is used to explain the Canadian and provincial tax system based on a progressive tax system versus a flat tax system. These calculations are examples only. Also, final taxes will vary based on personal deductions, other deductions, tax credits and loopholes not included here.

The following information outlines the 2017 progressive tax system for Canadian and Alberta families of two or more using 2011 Stats Canada information on incomes for Quintile 1 to 5. For the tax calculation, the highest income for Quintile 1 to 4 rounded off was used plus an arbitrarily assigned income of $350,000 for Quintile 5.

CANADIAN DISTRIBUTION OF INCOME (from MoneySense 2015 All Canadian Wealth test (moneysense.ca/save/financial-planning/the-all-canadian-wealth-test-2015/)

Quintile 1 up to $38,754
Quintile 2 $38,755 to $61,928
Quintile 3 $61,929 to $88,074
Quintile 4 $88,075 to $125,000
Quintile 5 $125,001 and over

Upper income point of quintiles

Quintile 1 $ 39,000
Quintile 2 $ 62,000
Quintile 3 $ 88,000
Quintile 4 $125,000
Quintile 5 $350,000 (arbitrarily assigned value)

ANALYSIS

First, it must be stated that all persons identified in the quintiles will not pay the full tax shown in the table since personal deductions, other deductions and tax credits have not been applied. Also, the ability to use tax loopholes and credits, (more likely to benefit wealthy the most) have not been applied. Examples are TFSAs (no tax savings on principal amounts, but savings are realized on tax free investments and interest earned on principal) and RRSPs (reduced taxes on employment income for yearly RRSP amounts, but will pay taxes on withdrawals from RRSP, for example, in retirement when income is likely to be less than when employed). Combined principal amounts for TFSAs for couples now totals almost $100,000 (tfsa-boondoggle-for-singles-and-low-income-canadians). It is almost 100% certain that couple earning $39,000 will not be able to contribute to TFSAs and RRSPs.

Also, calculations are based on the combined total income for one or two earners in family of two or more. Taxation will vary based on income earned by each spouse and tax rules for family income.

It is interesting to note percentage of after tax income without application of any other deductions for Quintile 1 to 4 families of two or more persons averages between 70% and 75%, while percentage of after tax income for the richest Quintile 5 $350,000 arbitrarily assigned income for family of two or more is about 60%. The 60% after tax income, however, will increase substantially with the deductions, and tax avoidance, loopholes and credits that wealthy are able to use.

After tax income with no deductions for family of two or more earning $350,000 will be at least $211,078 or $17,590 per month (as compared to only approximately $2,400 per month for Quintile 1 family of two or more persons). Families earning $39,000 with equal incomes between the spouses at 2,000 annual worked hours each works out to about $10/hr.

If 2015 old flat tax rate of 10% for Alberta is applied to Quintile 5 person earning $350,000 the total tax would only be $35,000 instead of $43,383. What a difference a progressive tax makes! The average person does not understand that the first dollar earned is taxed lower than the last dollar earned in the progressive tax system. The person earning $350,000 pays the exact same tax on the first $125,000 of pay as the person making only $125,000. That is what makes progressive taxes fair.

From MoneySense article the top income for unattached individuals for Quintile 1 is $18,717 (as compared to $38,754 for family two or more persons), Quintile 2 $23,356 ($61,928 for family two or more persons), Quintile 3 $36,859 ($88,074 for family two or more persons), Quintile 4 $55,498 ($125,000 for family two or more persons), and Quintile 5 $55,499 and over (over $125,000 for family two or more persons). Analysis shows incomes of families of two or more are at least double or more to that of unattached individuals. It is almost 100% certain that unattached individuals in Quintiles 1, 2 and 3 will not be able to save by contributing to TFSAs and RRSPs (unless RRSP is a forced contribution through employer).

Income does not include assets that the upper class and wealthy might have such as paid for $600,000 and up housing, investments, etc.

CONCLUSION

Michael Lewis, author of “The Undoing Project” book, describes how a Nobel Prize-winning theory of the mind altered our perception of reality. Two Israeli psychologists, Daniel Kahneman and Amos Tversky’s work created the field of behavioral economics which revolutionized thinking of how the human mind works when forced to make judgements in uncertain situations. An example is outcomes of surgery where there might be a 5% chance of death versus 95% chance of surviving the surgery. When patients are presented with 95% chance of survival rate rather than 5% death rate, they are more likely to go through with the surgery. The same judgement should apply to tax system based on beer analogy.

For upper class and wealthy, please don’t ‘cry me a river’. Wealthy need to look at what they have left after taxation instead of what is being taken from them in taxation. Only when all the tax loopholes, offshore tax havens, and privileging through tax credits like Tax Free Savings Accounts TFSAs that benefit wealthy the most are eliminated so that there is a level playing field and fairness between poor and wealthy, only then can the wealthy ever complain that they are being taxed unfairly.

The wealth gap between the rich and poor needs to be lessened by increasing the minimum wage to an indexed living wage and eliminating the tax deductions, loopholes and tax credits that benefit the wealthy the most (selective-democratic-socialism).

Regarding the ‘The Tax System Explained in Beer’ analogy, we will take the South African Rand analogy as being the more accurate of the two analogies, thank you very much!

Postscript: For those who wish to read more on the debunking of tax system explained in beer analogy, the following online article and reader comments is a great one – (Reality) Check, Please: Why the Restaurant Analogy Doesn’t Work (Restaurant-Analogy-Doesnt-Work).

UPDATE OCTOBER 31, 2018 – We are very grateful to a reader who pointed out that an error was made in the calculation of information in the table. The table has been updated. The update decreases the tax that is paid in the $350,000 Alberta income category.

(This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice.)