Tax Policy

I came across this story of tax reform changes proposed by Tony Clement. Its a very interesting proposal that is basically a progressive tax system based on lifetime earning as opposed to yearly earnings. His proposed tax brackets are:

- 14 per cent for between $250,000 and $500,000
- 24 per cent for between $501,000 and $750,000
- 27 per cent for those making over $1 million over time

This seems like a very good policy especially for us younger Canadians. The story doesn't really go into details about how it would be implemented though. The transition from our current tax system to this proposal could certainly get messy.

Anyways, tax systems that are seriously discussed are:

- progressive (our current system)
- flat (everyone pays the same rate regardless of income)
- lifetime progressive (Clement's proposal)

Personally I would prefer a flax tax regime simply due to the fairness that would result from it. I guess the definition of 'fairness' in this case is debatable and so your opinion on the flat tax may differ. And quite seriously the chances of Canada implementing a flat tax are about as good as nil.

So that leaves us with the choice of the current progressive system or a lifetime progressive system.

I don't see the need to debate the pros and cons of the current system because its been beaten to death so lets just look closer at the lifetime progressive system.

The lifetime progressive system would allow people to keep more of their earnings in their early income earning years. This would allow people to start saving for retirement early and to make the big purchases early in life such as a home (student loans anyone?). And even if a person wasn't in a situation where buying a home was practical then at least they would have more of that money to invest for the future.

A couple of significant cons to this proposal are as I mentioned earlier, relate to the implementation of it. Would you prorate peoples earnings and stick them at the tax bracket they would have been in as if the system was in place years ago? This would suck if you were past the lowest lifetime earnings bracket because you wouldn't benefit from its lower rate.

Alternatively, would everyone just start at the lowest tax bracket during its first year of implementation? If you go with this plan then overall tax revenues would drop significantly during its first few years in effect. So basically, thats a no go. I'ld love it but we all know how governments work so we can knix that idea.

If anyone has any idea how Clement plans to implement his proposal drop me a line, I'ld be interested in the details. Could it be phased in?

Another con I can see to this idea is that currently when you move from one tax bracket to the next, your overall percentage of tax paid doesn't increase all that much. This allows people to adjust to changes in their earnings gradually. Under Clement's proposal when your lifetime income crossed the $500,000 mark, your percentage of taxes paid would increase from 14% to 24% which would be quite an adjustment to make in one year.

Regardless, it seems like a rock solid proposal that has a lot of potential.