alberta’s single-rate tax: some implications and alternativesslim the intended tax reductions to...

(2000), Vol. 48, No. 4 / no 4 1019

Alberta’s Single-Rate Tax: SomeImplications and Alternatives

Melville L. McMillan*

PRÉCIS

En 2001, l’Alberta introduira le premier système d’impôt à taux uniforme au Canadaet cette réforme sera accompagnée d’une réduction de 25 pour cent des impôtssur le revenu. Dans cet article, nous mettons en lumière les conséquences decette réforme quant à la redistribution du fardeau fiscal, soit une augmentationdu fardeau fiscal pour une large catégorie de contribuables à revenus moyens, etdes réductions pour les contribuables à faibles revenus mais surtout pour ceux àrevenus très élevés. Nous comparons cette redistribution du fardeau fiscal à cellesqui résulteraient de deux propositions alternatives de réforme; ces deux propositionsmaintiennent une structure de taux marginaux d’imposition progressive etpermettent de générer le même niveau de recettes fiscales avant et aprèsréforme. L’analyse de réformes qui sont neutres par rapport aux recettes fiscalespermet de mieux mesurer l’impact sur la redistribution du fardeau fiscal en éliminanttoutes distorsions provenant d’une réduction concomitante des impôts. Aussi,nous analysons brièvement les bénéfices potentiels en termes d’équité, d’efficacitéet de ralentissement de l’« exode des cerveaux » qui pourraient résulter del’introduction d’un impôt uniforme. Pour ce qui est de l’équité, l’argument selonlequel l’impôt à taux uniforme assure un traitement fiscal plus équitable desfamilles à un seul revenu par rapport aux familles à deux revenus est discutable.En ce qui concerne l’efficacité, on prévoit que les gains résultant de la réformefiscale en Alberta seront à la fois minimes et incertains. Tous gains d’efficacité,aussi modestes soient-ils, seront davantage dus à la réduction importante desimpôts qu’à l’adoption d’un système à taux uniforme.

ABSTRACT

In 2001, Alberta will introduce Canada’s first single-rate personal income tax incombination with a 25 percent income tax reduction. This article outlines theresulting redistribution of the tax burden—that is, an increase to a large and broadclass of middle-income taxpayers with reductions to low and especially to very

* Of the Department of Economics, University of Alberta. The article benefited from thehelpful comments of two reviewers. My thanks to Jason Waywood, whose MA researchstimulated this study.

1020 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

(2000), Vol. 48, No. 4 / no 4

high income earners—and compares the tax distribution with that under each oftwo revenue-neutral alternatives with progressive marginal tax rates. The focuson revenue-neutral options ensures that the distributional consequences are notobscured by tax reductions. Benefits in terms of equity, efficiency, and easing ofthe “brain drain” that the single-rate tax might yield are briefly reviewed andassessed. Whether equity between dual- and single-earner families is enhancedis debatable. Efficiency benefits from a revenue-neutral shift to the single-rate taxare projected to be very small and uncertain. The relatively modest efficiencybenefits that may be realized from the Alberta tax change package are a productof the tax reductions rather than the changes in the tax rate structure.

INTRODUCTION

In 2001, the Alberta government will introduce Canada’s first single-rate per-sonal income tax in combination with a large tax reduction. Many of the reformshave merit, but some of the changes have questionable, and not well-documented,implications. In particular, neither the report of the Alberta Tax Review Com-mittee, which recommended these changes, nor the subsequent budget docu-ments indicate the shift in the tax burden to the middle-income taxpayer.1 Howslim the intended tax reductions to the middle-income taxpayer were to be andthe relative shift of Alberta’s personal income tax burden to that group wererevealed as a result of the announcement by the federal government in its 2000budget of plans to reduce the income tax rate on the middle-income tax bracketfrom 26 percent to 24 percent as of July 1. That change would have left manymiddle-income taxpayers worse off under Alberta’s single-rate tax even after thetax reduction. As a result, the Alberta government subsequently announcedplans to amend its single-rate tax proposal by reducing the planned rate from 11percent to 10.5 percent and by increasing the planned personal and spousalexemptions to $12,900 from $11,620 so that (again, despite the federal change)almost all Alberta taxpayers would experience a tax reduction with the move tothe single-rate tax and the accompanying tax decrease.

The introduction of a single-rate tax in Alberta is a significant move away fromthe multiple progressive rate structures that have characterized personal incometaxation in Canada (and generally elsewhere), and it has significant distributionalconsequences. Hence, it is useful to understand the implications better. Thisarticle is directed to that end. In the first section of the article, I review Alberta’sinitial 11 percent single-rate tax proposal. I then examine the consequences forthe Alberta proposal of the scheduled reduction in the federal tax rate for the

1 Alberta Tax Review Committee, Final Report and Recommendations: Future Direction forPersonal Income Taxes in Alberta (Alberta: Ministry of Treasury, October 1998); and Alberta,Ministry of Treasury, 1999 Budget, March 11, 1999 and 2000 Budget, February 24, 2000.

ALBERTA’S SINGLE-RATE TAX: SOME IMPLICATIONS AND ALTERNATIVES 1021

(2000), Vol. 48, No. 4 / no 4

middle bracket. In the major portion of the article, I discuss the distributionalimplications of a single-rate tax and two multi-rate alternatives providing equaltax relief. The analysis focuses on revenue-neutral alternatives so that the distri-butional differences are clearly revealed without the distorting effects of varioustax reductions. This picture helps readers focus on the question of tax structure,which is central to the proposed change, and so address—given that a commonlevel of revenues is to be raised (or tax relief provided)—which tax structurethey might prefer. Following this analysis, other benefits that might arise from asingle-rate tax are briefly assessed.

THE INITIAL SINGLE-RATE TAX PROPOSAL

In the March 1999 budget, the Alberta government announced that, should fiscalconditions permit, the province would implement a (net) tax reduction of about$500 million and introduce a new provincial income tax system with expandedpersonal exemptions and a single tax rate of 11 percent on taxable income. The$500 million reduction represented 10.9 percent of forecast 1998-99 personalincome tax revenue. Part of that reduction would come from the phased-inelimination of the 8 percent surtax on Alberta income taxes in excess of $3,500and elimination of the 0.5 percent flat tax on taxable income. Personal and spousalexemptions were to increase from $7,131 and $6,055, respectively, to $11,620and be indexed for inflation. Finally, the provincial marginal tax rate would nolonger increase with income but be a flat 11 percent of taxable income. Almostall Alberta income taxpayers would realize some tax savings as a result.

Alberta was the first province to announce plans to take advantage of a 1998federal-provincial agreement to allow provinces to levy provincial income taxeson income (tax-on-base) rather than the present practice of setting the tax rate asa percentage of the (basic) federal tax liability (tax-on-tax). Alberta’s current(tax-on-tax) rate is 44 percent of basic federal tax (but actual rates reached amaximum of 45.6 percent with flat tax and surtax included).2 The option to taxthe income base directly gives the provinces much more flexibility to establish aprovincial tax structure and rates that vary from the federal pattern.3 It appears

2 The basic federal tax can differ from the federal tax liability. For example, federal surtaxesare not included in the basic federal tax. For information on the provincial income tax, seeRobin W. Boadway and Harry M. Kitchen, Canadian Tax Policy, 3d ed., Canadian Tax Paperno. 103 (Toronto: Canadian Tax Foundation, 1999), 139-40; and Karin Treff and David B.Perry, Finances of the Nation 1999 (Toronto: Canadian Tax Foundation, 1999), chapter 3.

3 Pressures for a tax-on-base method have been building. See, for example, Thomas J. Courcheneand Arthur E. Stewart, “Provincial Personal Income Taxation and the Future of the TaxCollection Agreements,” in Melville L. McMillan, ed., Provincial Public Finances: Plaudits,Problems, and Prospects, vol. 2, Canadian Tax Paper no. 91 (Toronto: Canadian Tax Foundation,1991), 266-314; and David B. Perry, Financing the Canadian Federation, 1867 to 1995: Settingthe Stage for Change, Canadian Tax Paper no. 102 (Toronto: Canadian Tax Foundation,


(2000), Vol. 48, No. 4 / no 4

that the concern of Alberta tax planners for bracket creep, single-earner families,and marginal tax rates, particularly, drove the reforms.

Enhanced Personal ExemptionsSince 1988, the failure of the basic personal exemption and tax brackets to beindexed sufficiently to offset inflation has caused many low income earners tobecome taxpayers and shifted many with unchanged real incomes into highertax-paying brackets. The proposed increase in personal exemptions to $11,620exceeded that necessary to adjust for inflation. The enhanced exemption benefitsall taxpayers because it increases everyone’s tax credits. In particular, it was ini-tially estimated to remove 78,000 (subsequently revised to 132,000) low-incometaxpayers from the tax roll. These exemptions are to be indexed fully for inflation.

Single- and Dual-Earner FamiliesBecause our tax system taxes individual earners and does so somewhat progres-sively, a single-earner family pays more income tax than a dual-earner familywith the same total income. This differential was judged to favour excessivelythe dual-earner family. The initial proposal to raise the spousal exemption from$6,055 to $11,620 was intended to redress this imbalance.4 This significantadjustment makes single-earner families clear winners under the new Albertatax system. Whether this is the appropriate adjustment is a complex issue thatwill not be explored here in any detail.5

Shifting the Tax BurdenExpanded exemptions work largely to the advantage of lower-income taxpayers.On the other hand, the move to a single-rate tax works to the advantage of high-income taxpayers. The middle-income taxpayer fares least well. A simplifiedexample illustrates why. Table 1 shows the federal marginal tax schedule—thatis, the basic rate at which income in each income bracket is taxed. The federalstatutory rates are 0 percent if there is no taxable income, 17 percent on taxableincome up to $29,590, 26 percent on taxable income from $29,591 to $59,180,and 29 percent on taxable income above $59,180. At the current Alberta tax rate

1997), 95-98. For implications, see Thomas J. Courchene, “National Versus Regional Con-cerns: A Provincial Perspective on the Role and Operation of the Tax Collection Agreements”(1999), vol. 47, no. 4 Canadian Tax Journal 861-89.

4 Tax-paying single-parent families also benefited through the larger equivalent-to-spouseexemption.

5 Recent studies addressing this topic include Kenneth J. Boessenkool and James B. Davies,Giving Mom and Dad a Break: Returning Fairness to Families in Canada’s Tax and TransferSystem, Commentary no. 117 (Toronto: C.D. Howe Institute, November 1998); and CaroleVincent and Frances Woolley, “Taxing Canadian Families: What’s Fair, What’s Not” (2000),vol. 6, no. 5 Choices 1-44.


(2000), Vol. 48, No. 4 / no 4

of 44 percent on basic federal tax, the provincial marginal rates are 0, 7.48,11.44, and 12.76 percent, respectively, over those brackets. (Allowing for flatand full surtaxes, the actual current rates were 0, 7.98, 11.94, 12.86, and 14.28percent.) Replacing the multiple rates with a single rate of 11 percent wouldmean that those in the lowest bracket with taxable income would face a highertax rate, those in the highest bracket would enjoy a lower tax rate, and those inthe middle would see little change.6 Without the accompanying tax reduction,middle-income taxpayers would be paying more income taxes while low- andhigh-income persons would be paying less.

Further indications of the distributional changes introduced by the originalsingle-rate tax proposal are reported in table 2. It shows the amount of provin-cial income tax savings and those savings as a percentage of household incomefor different types of households at three income levels—$30,000, $55,000, and$100,000. Except for the single taxpayer with a $30,000 income, who suffers aslight tax increase of $36, all the other cases illustrated were to get a tax reduc-tion. Across income classes, there is no evident pattern to the dollar amountsexcept that they are typically larger for higher-income households. The taxsavings as a percentage of income for the dual- and single-earner family house-hold types show that tax savings are smallest relative to income for the $55,000income households. This fact hints at the pattern of the detailed results to follow.

The striking feature of this table is the large gains realized by single-earnerfamily households at all income levels. Tax savings to the single-earner familiesillustrated range from $840 to $2,555 and from 2.07 percent to 2.80 percent ofincome. These gains substantially exceed those for the other cases and contrastparticularly with the gains to dual-earner families; except for the lowest incomegroup, dual-earner households receive the smallest tax reductions, even lessthan single taxpayers.

6 Although those in the lowest income tax bracket would face a higher tax rate on taxableincome, because taxable incomes for those in this bracket are low, the expanded exemptions(for example, from $7,131 to $11,620) would result in most realizing lower income taxesunder the single-rate plan.

Table 1 Alternative Marginal Tax Rates in Alberta

Federal marginal tax rates, 1999

0% 17% 26% 29%

Taxable income . . . . . . . . . . . . . . . . . . . . . . 0 Up to $29,591- Greater than$29,590 59,180 $59,180

Alberta marginal rateWith 44% provincial tax on tax . . . . . . 0 7.48% 11.44% 12.76%With 11% single-rate tax on income . . . 0 11% 11% 11%


(2000), Vol. 48, No. 4 / no 4

REVISIONS TO THE 1999 PLAN

Alberta’s February 2000 budget advanced the date of implementation of the 11percent single-rate tax from 2002 to 2001. However, the subsequent announce-ment by the federal government of its intention to reduce the federal tax rate onthe middle-income bracket from 26 percent to 24 percent, beginning July 2000,created problems. Calculations by accountant Brad Severin revealed that (afterthe federal 2 percent mid-bracket reduction) many middle-income people wouldbe paying more Alberta income taxes in 2001 under the 11 percent single-ratetax than if the existing system were to continue. For example, taxpayers earningbetween $24,150 and $68,400 would pay more (typically in the order of $175more) Alberta income tax under the 11 percent single-rate tax.7

Why the 11 percent single-rate tax becomes an absolute disadvantage to themiddle-income taxpayer is easily demonstrated. Under the 44 percent Albertatax-on-tax, a 24 percent federal rate on the middle bracket translates to a provin-cial rate of 10.56 percent.8 Hence, even with enhanced personal and spousalexemptions, many middle-income taxpayers would have found themselves pay-ing more under the 11 percent single-rate proposal.9

Table 2 Tax Savings from an 11 Percent Rate by Income and HouseholdType (Dollars and Percentage of Income)

Household type $30,000 $55,000 $100,000

Single . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −$36 $295 $1,711−0.12% 0.54% 1.71%

Dual earner with 2 children . . . . . . . . . . . . . $463 $171 $4751.54% 0.31% 0.47%

Single earner with 2 children . . . . . . . . . . . . $840 $1,138 $2,5552.80% 2.07% 2.55%

Source: Dollar amounts provided by Alberta Tax Review Committee, Final Report and Recom-mendations: Future Direction for Personal Income Taxes in Alberta (Alberta: Ministry of Treasury,October 1998), 4 and 46.

7 Larry Johnsrude, “Flat Tax: Federal Budget Changes Rekindle the Debate, and Put Alberta’sPlan Under a Harsh Light,” Edmonton Journal, April 22, 2000, H3.

8 In effect, 44 percent of the federal reduction is passed through as a reduction in Alberta incometaxes, beyond the federal decrease. This automatic passthrough of a proportion of changes inthe federal tax rates (especially in the downward direction) demonstrates a concern of theprovinces about the tax-on-tax system. See Courchene and Stewart, and Perry, supra footnote3. The prospect of federal tax reductions and the need to increase tax-on-tax rates to maintainprovincial revenues likely contributed to the provinces’ speedy adoption of tax-on-tax.

9 Severin actually underestimated the disadvantage of the move to the single-rate tax. The 44percent tax-on-tax rate would raise more revenue than the 11 percent tax-on-base. Comparable


(2000), Vol. 48, No. 4 / no 4

As noted earlier, in response to this problem, the Alberta government modi-fied the original plan. The single rate will be 10.5 percent and personal andspousal exemptions will be increased to $12,900 from $11,620. These changesare expected to cost the Alberta Treasury 50 percent more in forgone revenuesthan the latest estimate for the 11 percent proposal. The 2001 revenue cost of therevised single-rate tax is estimated to be $1.3 billion as opposed to $850 million.

The nature of the problem that arises when a progressive multi-rate taxsystem is replaced with a single-rate tax system is illustrated in figure 1. Thisgraph illustrates the situation for an individual taxpayer who claims only per-sonal exemptions, where revenue neutrality is assumed. Total income is on thehorizontal axis and taxes paid on the vertical axis. The multi-rate tax parallelsour present tax system, having three tax brackets with increasing tax rates. EM isthe level of personal exemption—that is, income not subject to tax. The first taxbracket goes from EM to B1, the second from B1 to B2, and the third beyond B2.The single-rate tax provides a larger personal exemption, ES, as well as a singletax rate. The single-rate tax schedule lies below the multi-rate schedule at thetwo ends—that is, from EM to IL and for incomes above IH—and thus reducestaxes for the low and high income groups. Because the two taxes are required togenerate the same revenues, the lower taxes for the low and high income groupsmust be offset by higher taxes on the remaining middle-income group of taxpay-ers in the IL to IH range. This increase is shown by the single tax line restingabove the multi-rate line in the middle-income range; the exact position dependsupon the distribution of incomes. Hence, a move to a single-rate tax shifts thetax burden to the middle-income taxpayers.

The only way to enable all to benefit from the introduction of a single-ratetax is to provide a tax reduction as well. The tax reduction must enhance theexemption and/or reduce the rate sufficiently to shift the single-rate tax line tothe right and/or down so that it lies everywhere below the multi-rate line. As theAlberta case demonstrates, the necessary reduction can be quite beneficial totaxpayers’ disposable incomes but costly in terms of forgone tax revenues. Forplausible reductions, however, the middle-income taxpayer carries a larger shareof the total tax burden.

revenues could be raised with a rate in the order of 41.1 percent, which implies provincialrates of 6.99, 9.86, and 11.92 percent. These rates suggest that a larger number of Albertataxpayers would have been disadvantaged by the move to the 11 percent tax and that theirlosses would have been larger than indicated. In addition, the federal government intends toreduce the middle-bracket rate to 23 percent by 2004. This will mean a further disadvantageof the single-rate tax for the middle-income Alberta taxpayer; but by then, when the provincewill be operating under a single-rate system, the impact will be less obvious.


(2000), Vol. 48, No. 4 / no 4

ALTERNATIVE FORMS OF TAX REDUCTION: THE SINGLE-RATE TAX AND TWO OPTIONS

This section is directed at exploring the implications of the single-rate tax to beimplemented by the Alberta government and some of the options available. Inparticular, it examines the single-rate tax and two multi-rate alternatives. Beingrevenue-neutral alternatives (that is, each generating equal revenues), each ofthese alternatives would afford the same total tax relief to Alberta taxpayers asthe existing plan. These alternatives are compared with the current Albertapersonal income taxes and with each other.

This analysis does not distinguish among single individual, dual-earner, andsingle-earner households. However, the results do reflect household composi-tion to the extent that the average taxpayer spousal exemption by income class isincorporated, and this amount varies across income classes. The average of otherallowances by income class also is incorporated.

The Alternatives ConsideredThe proposed single-rate tax is compared with two revenue-neutral multi-rateoptions. The single-rate system outlined is the revised Alberta government pro-posal, combining a 10.5 percent tax rate with personal and spousal exemptionsof $12,900. The multi-rate alternatives require a more detailed explanation.

The first multi-rate option (“option A”) approximates the existing tax systemadjusted for inflation. (The changes described below are outlined in table 3.)The federal tax structure (the exemptions, brackets, and rates) upon which thecurrent Alberta tax structure is based was introduced in 1988. The initial exemp-tions and brackets have not been fully indexed for inflation since then. Hence,

Figure 1 Illustration of the Tax Burdens of a Taxpayer Under Revenue-Neutral Multi-Rate and Single-Rate Income Tax Systems

EM = personal exemption under multi-rate tax.ES = personal exemption under single-rate tax.B1, B2 = lower and upper bounds of the middle income bracket, multi-rate tax.IL, IH = incomes at which single-rate and multi-rate taxes are equal.

Taxe

s

IncomeEM ES IL B1 B2 IH

Single rate

Multi-rate


(2000), Vol. 48, No. 4 / no 4

the first change in creating this option is to adjust personal and spousal exemp-tions and tax brackets for inflation since 1988; that is, the 1988 tax schedule isrecreated in current-dollar terms. Thus, rather than the value of the personalexemption being $6,456 in 1998, it is increased to $8,327 to provide the samereal dollar value as the $6,000 exemption in 1988. Similarly, the spousal exemp-tion rises to $6,939 from $5,380; however, for multi-rate option A, the spirit ofthe Alberta proposal is followed and a spousal exemption is adopted which isequal to the personal exemption. The income limits for the tax brackets alsochange (to correspond with 1996 income data). The end point for the firstbracket becomes $37,146 for this analysis, rather than $29,590, and that for thesecond bracket becomes $74,305, rather than $59,180.10 These adjustments dem-onstrate the substantial impact of incomplete indexing. In 1998 alone, all tax-payers lost almost $1,900 in personal exemptions, and many taxpayers were inhigher tax brackets despite no matching increase in real income since 1988.

10 These adjustments are larger than those found in Canada, Department of Finance, 1999Budget, February 16, 1999. Option A is somewhat similar to the personal income tax reformsintroduced by Saskatchewan in its 2000 budget. Saskatchewan will have three provincial taxbrackets and three corresponding rates: 11 percent on taxable income up to $35,000; 13percent on taxable income between $35,000 and $100,000; and 15 percent on taxable incomeover $100,000. In addition, personal and spousal exemptions will be increased to $8,000 each(credited at 11 percent), and there will be a child exemption of $2,500 per child, also creditedat 11 percent. See Saskatchewan, Department of Finance, 2000 Budget, March 29, 2000; andMichael Rushton, “Interprovincial Tax Competition and Tax Reform in Saskatchewan” (2000),vol. 48, no. 2 Canadian Tax Journal 374-88.

Table 3 Adjustments to Exemptions and Brackets, Multi-Rate Alternatives

Income Multi-ratetax values alternativesb

Inflation1988 1998 adjusteda Option A Option B

Value of personal exemption . . . . $ 6,000 $ 6,456 $ 8,327 $ 8,327 $11,620Value of spousal exemption . . . . . 5,000 5,380 6,939 8,327 11,620Tax brackets change at

First to second . . . . . . . . . . . . 27,500 29,590 37,146 37,146 37,146Second to third . . . . . . . . . . . . 55,000 59,180 74,305 74,305 74,305

Alberta marginal tax ratesunder options A and B:

First bracket . . . . . . . . . . . . . . 7.07 8.28Second bracket . . . . . . . . . . . . 9.98 11.69Third bracket . . . . . . . . . . . . . 12.05 14.13

a Because calculations are based on 1996 incomes and compared with “current” taxes assuming1998 tax rules, brackets are inflation adjusted to 1996 but exemptions are adjusted to 1998. Theseadjustments exceed somewhat those reported in Canada, Department of Finance, 1999 Budget,February 16, 1999. b The multi-rate alternatives use tax rates consistent with federal rates of 17, 24,and 29 percent.


(2000), Vol. 48, No. 4 / no 4

The final change introduced for this option is to use the middle-bracket taxrate of 24 percent that became effective July 2000. Hence, the tax rates assumedto be adopted in Alberta parallel the new 17, 24, and 29 percent federal rates ratherthan the former 17, 26, and 29 percent rates. The Alberta marginal rates neededunder option A to generate the same revenue as the single-rate tax are 7.07, 9.98,and 12.05 percent, respectively, in each of the three brackets.11 Thus, option A ofthe two multi-rate alternatives adjusts for inflation, enhances the spousal exemp-tion, and adopts the new 24 percent middle-bracket tax rate. Option A depictsprimarily the impacts of today’s multi-rate tax system had it been adjusted fullyfor inflation.

Option B differs from option A in one respect: the personal and spousal exemp-tions are each increased to $11,620, the level initially proposed by the Albertagovernment. Although somewhat less than the exemptions under the revisedproposal, they nevertheless demonstrate the impact of the increase. Because theenhanced exemptions diminish the tax base, the marginal tax rates required toraise the same revenue rise to 8.28, 11.69, and 14.13 percent for each of thethree tax brackets.12

Implications for Average Rates and Tax DistributionThis section examines the tax implications of the three alternatives and the currentsystem from two perspectives. First, it reviews the impact on the tax liability ofindividual taxpayers in the various income brackets; then it considers the impacton aggregate tax revenues accruing to the Alberta government.

Impacts on the Individual TaxpayerTax Liability

The average amount of taxes payable by taxpayers in each income class underthe current and three revenue-neutral tax reduction alternatives is outlined intable 4. Income classes range from the under-$10,000 group to those withincomes exceeding $250,000.

It is important to distinguish the very high income groups because they areimportant contributors to the income tax and because some of the more interest-ing developments occur there. Note the column reporting taxable income. In thefirst income class, taxable incomes average $7,999. In the highest bracket,taxable incomes average $551,904. Note also the number and distribution oftaxpayers. More than half of all taxpayers (in 1996) reported less than $30,000total income and three-quarters less than $45,000. Only 3 percent had total

11 If the federal tax also corresponded to option A, the Alberta tax-on-tax rate to raise theequivalent revenue would be 41.57 percent.

12 The corresponding tax-on-tax rate needed (if the federal tax matched option B) would be48.72 percent.


(2000), Vol. 48, No. 4 / no 4

Tab

le 4

Alb

erta

Per

sona

l Inc

ome

Tax

per

Tax

paye

r an

d A

vera

ge T

ax R

ates

by

Inco

me

Cla

ss U

nder

the

Cur

rent

and

Thr

ee A

lter

nati

ve T

ax S

yste

ms

Ave

rage

Mul

ti-ra

te ta

xesb

taxa

ble

Taxp

ayer

s (1

996)

Cur

rent

aSi

ngle

-rat

e ta

xbO

ptio

n A

Opt

ion

Bin

com

eIn

com

e cl

ass

(199

6)C

umul

ativ

eTa

xA

v. r

atec

Tax

Av.

rat

eTa

xA

v. r

ate

Tax

Av.

rat

e(t

otal

inco

me)

(’0

00)

$N

umbe

r%

%$

(%)

$(%

)$

(%)

$(%

)

$ 0-

10 .

. . .

. . .

. .7,

999

87,0

606.

56.

50

00

00

00

010

-15

. . .

. . .

. . .

.11

,897

165,

880

12.3

18.8

940.

80

013

51.

10

015

-20

. . .

. . .

. . .

.16

,295

170,

520

12.6

31.4

508

3.1

210.

136

72.

398

0.6

20-2

5 .

. . .

. . .

. . .

20,7

7914

7,78

010

.942

.395

34.

643

82.

164

33.

140

72.

025

-30d

. . .

. . .

. . .

25,3

3914

4,50

010

.753

.01,

298

5.1

893

3.5

954

3.8

767

3.0

30-3

5 .

. . .

. . .

. . .

29,6

3512

1,40

09.

062

.01,

675

5.7

1,35

64.

61,

287

4.3

1,15

13.

935

-40e

. . .

. . .

. . .

33,7

8210

3,74

07.

869

.82,

106

6.2

1,72

05.

11,

517

4.5

1,41

04.

240

-45

. . .

. . .

. . .

.37

,894

85,4

306.

376

.12,

582

6.8

2,12

55.

61,

814

4.8

1,75

14.

645

-50

. . .

. . .

. . .

.42

,175

62,6

204.

680

.73,

076

7.3

2,57

16.

12,

227

5.3

2,24

25.

350

-60

. . .

. . .

. . .

.47

,908

100,

430

7.4

88.1

3,71

57.

73,

136

6.5

2,75

55.

72,

857

6.0

60-7

0 .

. . .

. . .

. . .

56,6

4554

,550

4.0

92.1

4,79

98.

53,

999

7.1

3,59

06.

33,

819

6.7

70-8

0 .

. . .

. . .

. . .

65,0

1232

,320

2.4

94.5

5,93

99.

14,

856

7.5

4,40

76.

84,

772

7.3

80-9

0 .

. . .

. . .

. . .

73,6

4220

,550

1.5

96.0

7,06

39.

65,

666

7.7

5,16

97.

05,

651

7.7

90-1

00 .

. . .

. . .

. .82

,088

13,1

101.

097

.08,

090

9.9

6,43

77.

86,

019

7.3

6,65

48.

110

0-15

0 .

. . .

. . .

.10

0,09

323

,490

1.7

98.7

10,4

7910

.57,

904

7.9

8,02

98.

09,

004

9.0

150-

250

. . .

. . .

. .

154,

463

10,1

700.

7599

.417

,756

11.5

13,6

288.

814

,163

9.2

16,2

0210

.525

0+ .

. . .

. . .

. . .

551,

904

6,85

00.

5199

.969

,864

12.7

52,2

859.

558

,015

10.5

67,6

2912

.3

aD

eriv

ed f

rom

app

lyin

g 19

98 t

ax r

ules

to

1996

inc

ome

tax

data

. Fro

m J

ason

Way

woo

d, “

The

Dis

trib

utio

nal

Impa

cts

of S

ingl

e-R

ate

Prov

inci

al I

ncom

e Ta

xes,

”M

A d

egre

e re

sear

ch p

aper

, Dep

artm

ent o

f E

cono

mic

s, U

nive

rsity

of A

lber

ta, 1

999.

bT

he s

ingl

e-ra

te a

nd m

ulti-

rate

alte

rnat

ives

are

thre

e re

venu

e-ne

utra

l alte

rnat

ives

rela

tive

to e

ach

othe

r bu

t rep

rese

nt a

per

sona

l inc

ome

tax

redu

ctio

n of

abo

ut 2

4.4

perc

ent r

elat

ive

to th

e cu

rren

t sys

tem

. All

taxe

s ar

e ca

lcul

ated

usi

ng 1

996

inco

me

tax

data

. The

sin

gle-

rate

opt

ion

assu

mes

per

sona

l an

d sp

ousa

l ex

empt

ions

of

$12,

900

and

a ta

x ra

te o

f 10

.5 p

erce

nt. T

he i

nfla

tion-

adju

sted

mul

ti-ra

te o

ptio

n A

adj

uste

dth

e 19

88 f

eder

al p

erso

nal a

nd s

pous

al e

xem

ptio

ns a

nd ta

x br

acke

ts f

or in

flat

ion

and

appl

ied

Alb

erta

rat

es c

onsi

sten

t with

17,

24,

and

29

perc

ent f

eder

al ta

x ra

tes.

The

enha

nced

exe

mpt

ion

optio

n B

is

like

A, b

ut t

he p

erso

nal

and

spou

sal

exem

ptio

ns a

re i

ncre

ased

to

$11,

620.

See

tab

le 3

for

det

ails

. cA

vera

ge t

ax r

ates

are

cal

cula

ted

with

res

pect

to ta

xabl

e in

com

e. d

The

med

ian

taxa

ble

inco

me

falls

into

this

inco

me

clas

s. e

The

mea

n ta

xabl

e in

com

e of

$33

,662

is a

ssoc

iate

d w

ith th

is in

com

e cl

ass.


(2000), Vol. 48, No. 4 / no 4

incomes over $100,000. The average taxpayer had taxable income of $33,662but the median taxable income rests in the $25,000-30,000 income class, whichhas an average taxable income of $25,339. The distribution of taxable incomeunderstates the share of income to the higher income groups because capitalgains deductions and, more important, registered savings (especially registeredpension plan and registered retirement savings plan) contributions have alreadybeen deducted, and these are concentrated in the higher income groups. Forexample, while registered savings plan contributions (Canada-wide in 1996)averaged about $2,300 for taxpayers with less than $50,000 income, they aver-aged about $5,400 for those above $50,000 and about $10,500 for those withincomes exceeding $100,000.

Consider the income taxes under the current system. Average provincial taxesper Alberta taxpayer across the brackets range from nil in the under-$10,000income class to $69,864 in the $250,000-plus bracket, with corresponding aver-age tax rates on taxable income ranging from zero to 12.7 percent. Taxpayers inthe median and average income classes ($25,000-30,000 and $35,000-40,000,respectively) pay average taxes of $1,298 and $2,106, respectively, at averagerates of 5.1 and 6.2 percent.

The tax burden changes substantially under the proposed single-rate tax. Theaverage taxes range from nil to $52,285, or 9.5 percent, on average taxableincome of $551,904. Taxpayers in the median and average taxpayer classes pay$893 and $1,720, respectively, at average rates of 3.5 and 5.1 percent. Acrossthe income classes, average taxpayers all pay less than currently because of thereduction of about 25 percent in total income taxes levied.

The tax reductions are not realized from the change from the 44 percent tax-on-tax to the single-rate tax alone. Part of the tax decrease comes from elimina-tion of the Alberta surtax and flat tax. The impacts of those taxes (and theselective tax-reduction program) are reported in table 5. The surtax begins toapply in the $60,000-70,000 income class and increases tax progressivity. Theflat tax imposes an additional tax liability on taxpayers in all classes and flattensthe tax schedule. In combination, these taxes do not substantially change thedistribution of income taxes from that under the 44 percent tax-on-tax forincome classes beyond the selective tax-reduction range. The selective tax-reduction program eliminates income taxes for those in the lowest income classand reduces them for those in the $10,000-20,000 class. The net revenue fromthese three programs under the current estimates presented here amounts toabout 6.6 percent of Alberta personal income tax revenue. Thus, removal ofthese programs under the single-rate proposal accounts for just over one-quarterof the 25 percent tax reduction. These programs are excluded from the analysisof all three tax reduction alternatives considered here.

Returning to table 4, compare the results under options A and B. Total incometaxes are reduced by the same amount as in the single-rate tax case, but thedistribution of the taxes collected differs. For option A, across the classes, taxes


(2000), Vol. 48, No. 4 / no 4

Table 5 Sources of Current Alberta Personal Income Tax Revenue,per Taxpayer by Income Class

44% of basic Alberta Alberta Selective taxIncome class (’000) federal tax surtax flat tax reduction Totala

$0-10 . . . . . . . . . . . . . . $ 108 $ — $ 40 $ 148 $ 010-15 . . . . . . . . . . . . . . 290 — 59 255 9415-20 . . . . . . . . . . . . . . 544 — 81 117 50820-25 . . . . . . . . . . . . . . 849 — 104 — 95325-30 . . . . . . . . . . . . . . 1,171 — 127 — 1,29830-35 . . . . . . . . . . . . . . 1,527 — 148 — 1,67535-40 . . . . . . . . . . . . . . 1,937 — 169 — 2,10640-45 . . . . . . . . . . . . . . 2,392 — 189 — 2,58245-50 . . . . . . . . . . . . . . 2,866 — 211 — 3,07750-60 . . . . . . . . . . . . . . 3,476 — 240 — 3,71560-70 . . . . . . . . . . . . . . 4,441 75 283 — 4,79970-80 . . . . . . . . . . . . . . 5,458 157 325 — 5,93980-90 . . . . . . . . . . . . . . 6,458 237 368 — 7,06390-100 . . . . . . . . . . . . . 7,370 310 410 — 8,090100-150 . . . . . . . . . . . . 9,499 480 500 — 10,479150-250 . . . . . . . . . . . . 15,985 999 772 — 17,756250+ . . . . . . . . . . . . . . 62,393 4,711 2,760 — 69,864

Total revenueb . . . . . . . $3,035.4 $71.8 $217.1 $75.3 $3,249.0

a May not sum exactly because of rounding. b Millions.

Source: Jason Waywood, “The Distributional Impacts of Single-Rate Provincial Income Taxes,”MA degree research paper, Department of Economics, University of Alberta, 1999. Calculated byapplying 1998 tax rules to 1996 income data.

range from nil to $58,015 and average rates range from zero to 10.5 percent.Note, however, that although the marginal tax rate is lower in the lowest taxbracket (7.07 versus 10.5 percent—table 3), because of the smaller exemptions($8,327 versus $12,900), the tax liability for taxpayers in the $10,000-30,000class exceeds that under the single-rate tax. For example, the average taxpayerin the median $25,000-30,000 class pays $954 or an average rate of 3.8 percentin contrast to $893 or 3.5 percent in the single-rate case. (However, most of theunder-$30,000 taxpayers would be paying less than under the current system.) 13

Taxpayers in the $30,000-100,000 range pay less tax than under the single-ratetax. For example, the average taxpayer (with $33,662 taxable income and in the$35,000-40,000 income class) pays almost $200 less—$1,517 or 4.5 percent oftaxable income, as opposed to $1,720 or 5.1 percent under the single-rate tax. Inthe over-$100,000 range, taxes are higher under option A but not substantiallymore except in the $250,000-plus income group. The average taxpayer in thatclass pays $58,015 rather than $52,285 (but still 17 percent less than current

13 Taxpayers in the $10,000-15,000 class each pay $41 more on average.


(2000), Vol. 48, No. 4 / no 4

taxes), or an average tax rate of 10.5 percent rather than 9.5 percent (versus thecurrent 12.7 percent rate). Thus, option A reduces taxes more evenly across allincome classes rather than concentrating the reductions in the lowest and high-est income groups.

Under option B, the enhancement of the exemptions (to $11,620) particularlybenefits the lower-income taxpayers. Because the larger exemptions reduce thetaxable incomes of all taxpayers, the need to be revenue-neutral necessitateshigher Alberta marginal tax rates (8.28, 11.69, and 14.13 percent—table 3) andultimately shifts the tax burden toward the higher-income taxpayer. In this case,essentially all taxpayers below the $90,000 level pay less tax than under thesingle-rate tax.14 In particular, the average taxpayer in the median income classpays $767 versus $893 (or 3.0 versus 3.5 percent), and the average taxpayer inthe average income class pays $1,410 versus $1,720 (or 4.2 versus 5.1 percent).Taxpayers in income classes over $90,000 pay more. Those in the $90,000-100,000 class pay $6,654 rather than $6,437 (or 8.1 versus 7.8 percent), andthose in the $250,000-plus class pay $67,629 rather than $52,285 (or 12.3 versus9.5 percent). Under option B, all taxpayers, even those in the $250,000-plusbracket, pay less tax than under the current system, but the reductions favour thelower and middle (up to $90,000) income classes.

The level and distribution of the tax burden among taxpayers across incomeclasses is shown in figure 2. The average tax rate lines for the three tax-reductioncases all lie below the current tax line, indicating that taxpayers in all incomeclasses pay lower taxes than currently.15 The three revenue-neutral tax-reductionalternatives distribute the tax burden somewhat differently. The single-rate taxprovides the largest benefits to taxpayers in the lowest and, particularly, in thehighest income brackets. (Note the discontinuities in the income scale, particu-larly for taxpayers with income above $100,000. While these can make a curveappear to turn up as it goes, for example, to the $250,000-plus class, rememberthat the taxable income of that final class is 6.7 times that of the $90,000-100,000 class; thus, on a continuous scale, this point would be 6.7 times fartherto the right than shown, and the curve would continuously flatten out.) Thecurve for option A, which lies below the single-rate tax curve in the middleregion, shows the middle-income classes sharing more of the tax reduction. Theline for option B demonstrates the shifting of the relative tax burden to the highestincome group. For income classes below $80,000 (except for a small segment at$15,000-20,000), the option B curve lies beneath the single-rate tax line but thenrises well above it as incomes exceed $90,000.

14 Only those in the $15,000-20,000 class pay more ($98 versus $21), but they still experience atax reduction of $410 relative to current taxes.

15 The $10,000-15,000 class under option A is the one exception to this general statement, sincethose taxpayers lose slightly from the deletion of the current selective tax reduction program.


(2000), Vol. 48, No. 4 / no 4

Individual Tax Savings

The distribution of the reductions from current taxes under the revenue-neutralalternatives adds insight. These reductions are reported in table 6 in both dollarand percentage terms. Relative to options A and B, the single-rate tax providesthe largest dollar savings to those in the under-$20,000 classes and, as expectedof a “flat” tax, to those in the highest income classes. Notably, the $17,579average reduction to those in the $250,000-plus class swamps the reductions tothis group from either of the multi-rate options ($11,849 in the case of option Aand $2,235 for option B). The single-rate tax provides only modest savings forthose in the broad middle range. In contrast, option B affords tax reductionsquite similar to those under the single-rate tax for those with incomes less than$25,000, larger reductions up to about $90,000, but much smaller tax savingsbeyond that level, especially in the top class. Option A falls between option Band the single-rate tax in the sense that it penalizes upper-income taxpayers lessthan option B and taxpayers in the broad middle-income range less than thesingle-rate tax. In particular, taxpayers in the $30,000-100,000 range fare betterunder option A than under the single-rate tax.

0

2

4

6

8

10

12

14

Option B

Option A

Single-rate tax

Current

250+100-15080-9060-7045-5035-4025-3015-200-10

Figure 2 Average Alberta Personal Income Tax Rates Under Current and Alternative Tax Systems, by Income Class

Perc

enta

ge o

f ta

xabl

e in

com

e

Income class (’000)

Source: Table 4.


(2000), Vol. 48, No. 4 / no 4

The distribution of the tax reductions shows up more clearly when expressedin relative terms. Tax savings as a percentage of taxable income appear in table6 and are plotted in figure 3. Relative to income, the savings under the single-rate tax are concentrated at the lower and upper ends of the income range. Forexample, the $487 average savings in the $15,000-20,000 class represents 2.99percent of income, while the average $17,579 of tax savings for the $250,000-plus class represents an even larger 3.19 percent of taxable income. Tax savingsfor taxpayers with income between $25,000 and $90,000 nowhere exceed 1.9percent of income and are as low as 1.08 percent for those in the $30,000-35,000class. The simple average across those classes is 1.25 percent. Under option A,the tax savings relative to income are small across the lower income classes,then tend to increase gradually as incomes rise, peaking at 2.57 percent for the$80,000-90,000 class, and declining slightly thereafter. This pattern largely reflectsthe reduction in the tax rate for the middle tax bracket. The larger exemptionsunder option B provide benefits similar to those of the single-rate tax for the lowincome groups, but as income continues to increase, tax savings relative toincome decline almost uniformly.

Figure 4 shows the tax savings as a percentage of current taxes. Because theoverall tax reduction is 24.4 percent, this value is a benchmark. Taxpayers withtax reductions larger (smaller) than 24.4 percent will bear a smaller (larger)post-change share of the income tax burden. For the single-rate tax case, the

Table 6 Individual Tax Savings Relative to the Current Tax System

Multi-rate taxes

Single-rate tax Option A Option B

Income class % of % of % of % of % of % of(’000) $ income taxes $ income taxes $ income taxes

$0-10 . . . . . . 0 0 0 0 0 0 0 0 010-15 . . . . . . 94 0.79 100.0 −41 −0.34 −43.6 94 0.79 100.015-20 . . . . . . 487 2.99 95.9 141 0.87 27.7 410 2.52 80.720-25 . . . . . . 515 2.48 54.0 310 1.49 32.5 546 2.63 57.325-30 . . . . . . 405 1.60 31.2 344 1.36 26.5 531 2.09 40.930-35 . . . . . . 319 1.08 19.0 388 1.31 23.2 524 1.77 31.335-40 . . . . . . 386 1.14 18.3 589 1.74 28.0 696 2.06 33.040-45 . . . . . . 457 1.21 17.7 768 2.03 29.7 831 2.19 32.245-50 . . . . . . 505 1.20 16.4 849 2.01 27.6 834 1.98 27.150-60 . . . . . . 579 1.21 15.6 960 2.00 25.8 858 1.79 23.160-70 . . . . . . 800 1.41 16.7 1,209 2.13 25.2 980 1.73 20.470-80 . . . . . . 1,083 1.67 18.2 1,532 2.36 25.8 1,167 1.79 19.680-90 . . . . . . 1,397 1.90 19.8 1,894 2.57 26.8 1,412 1.92 20.090-100 . . . . . 1,653 2.01 20.4 2,071 2.52 25.6 1,436 1.75 17.7100-150 . . . . 2,575 2.56 24.6 2,450 2.45 23.4 1,475 1.47 14.1150-250 . . . . 4,128 2.67 23.2 3,593 2.33 20.2 1,554 1.01 8.7250+ . . . . . . 17,579 3.19 25.2 11,849 2.15 17.0 2,235 0.40 3.2


(2000), Vol. 48, No. 4 / no 4

percentage tax savings are naturally largest for the lowest income classes, forwhich taxes are entirely or largely eliminated. However, tax savings are alsorelatively large, about 25 percent of current taxes, for those in the $100,000 andover income classes. Taxpayers in most of the other classes realize tax savingsin the 15 to 20 percent range. Thus, the single-rate tax results in a reduced taxshare for those with incomes under $30,000, a relatively constant share for thosewith incomes exceeding $100,000, and a larger tax share for those in the$30,000-100,000 range. In contrast, the relative tax savings under option Bdecline almost steadily as a percentage of current tax (from 100 to 3.2 percent)as income increases, and the division between winners and losers in the taxshare outcome falls at about $50,000. Option A provides a considerably moreuniform distribution of tax savings than either option B or the single-rate tax.While the relative reductions range from 17 to 32.5 percent (overlooking thesmall tax increase at the $10,000-15,000 level), the reduction is approximately26 percent for taxpayers in most classes.

Ignored in our analysis is the varying impact of the Alberta tax reforms ontaxpayers by family status. While table 2 provided some insight into thoseeffects, it is worthwhile commenting further on this matter. Plotting of the tax

Figure 3 Individual Tax Savings as a Percentage of Taxable Income, by Income Class

−1

0

1

2

3

4

Option B

Option A

Single-rate tax

250+100-15080-9060-7045-5035-4025-3015-200-10

Perc

ent


Source: Table 6.


(2000), Vol. 48, No. 4 / no 4

savings as a percentage of income from Alberta’s initial 11 percent single-ratetax proposal for the single taxpayer, the single-earner family with two children,and the dual-earner family with two children yields functions each having thegeneral U-shape observed for the single-rate tax alternative in figure 3.16 How-ever, because the increased spousal exemption benefits the single-earner family,those taxpayers realize greater tax savings. Thus, the level of relative benefitsvaries by family status. So does the income level at which the U-shaped func-tions reach their minimum point. The single taxpayer savings curve reaches itsminimum of −0.165 percent (that is, higher taxes) at about $30,000; that for thedual-earner family is 0.1 percent at about $74,000; and the minimum for the single-earner family is 2.05 percent at about $60,000.17 The revised Alberta tax plan

Figure 4 Individual Tax Savings as a Percentage of Current Taxes, by Income Class

−60

−40

−20

0

20

40

60

80

100

120

Option B

Option A

Single-rate tax

250+100-15080-9060-7045-5035-4025-3015-200-10


Perc

ent

Source: Table 6.

0%

24.4%

16 Jason Waywood, “The Distributional Impacts of Single-Rate Provincial Income Taxes,” MAdegree research paper, Department of Economics, University of Alberta, 1999.

17 These results are discussed in more detail in Melville McMillan, “Alberta’s Single-rate Tax:Shifting More of the Tax Burden to the Middle Class” (1999), vol. 3, no. 3 The Post, ParklandInstitute, University of Alberta, 3 and 6.


(2000), Vol. 48, No. 4 / no 4

changes the details but not the general pattern. All middle-income taxpayersbenefit relatively less than low- and high-income households from Alberta’s single-rate tax plan; but clearly, in a tax-neutral situation, relatively greater numbersand a broader range of single taxpayers and dual-income family households willfind themselves absolutely disadvantaged. That is, Alberta’s move to a single-rate tax will shift the tax burden to the middle-income taxpayer generally, butthe expanded spousal exemption narrows the burden to focus it more on those inthe single taxpayer and dual-earner family groups. It is not the objective of thisarticle to address the merits of the expanded spousal exemption. However, inpassing, note that the argument for it is usually in the context of children in thehome, although the exemption is available to all single-earner family house-holds whether or not there are dependent children present, and the argumenttypically ignores the value of the at-home spouse’s services beyond child care.18

The Aggregate PictureIt is also informative to look at the personal income tax revenue picture from anaggregate, rather than an individual, perspective. The aggregate revenues generatedby income classes for the current and alternative tax systems are reported intable 7. The derivation of current taxes (1998 rules applied to 1996 income taxdata) arrives at $3,249 million total Alberta personal income tax revenue.19 Thisvalue compares favourably with actual 1997 revenues of $3,311 million.20 As isto be expected from a tax based on ability to pay, most of the taxes are paid bythose with higher incomes. Half of the current Alberta personal income taxrevenue is paid by the 87.9 percent of the taxpayers in income classes under$60,000, who account for two-thirds of total taxable income. The remaining halfis paid by the other 12.1 percent of taxpayers receiving the remaining third oftaxable income. (The distribution of taxable income is reported in table 8 andthe distribution of taxpayers comes from table 4.) The 3 percent of taxpayers inthe $100,000 and over income classes pay almost 28 percent of Alberta personalincome taxes while receiving 17 percent of the taxable income. The 1.25 percentof taxpayers in the $150,000 and over classes pay 20.3 percent of the incometaxes and receive 11.8 percent of the taxable income, which averages $314,418.While a large share of income taxes comes from the small percentage of highincome earners, those taxpayers have a large share of both aggregate and taxableincome and also a high ability to pay.

18 In recognition specifically of families with children, the Alberta government does makepayments to these families based on number of children and family employment income.

19 The procedure follows that in Waywood, supra footnote 16.

20 The 2000 Alberta budget estimate of personal income tax revenue in 2000-01 is $4,713million and in 2001-02 $4,809 million, despite an initially planned tax cut for the latter yearexceeding $600 million.


(2000), Vol. 48, No. 4 / no 4

Tab

le 7

Alb

erta

Per

sona

l Inc

ome

Tax

Rev

enue

Und

er A

lter

nati

ve I

ncom

e T

axes

Mul

ti-ra

te ta

xes

Cur

rent

Sing

le-r

ate

tax

Opt

ion

AO

ptio

n B

Inco

me

clas

sC

umul

ativ

eC

umul

ativ

eC

umul

ativ

eC

umul

ativ

e(’

000)

$a%

%$

%%

$%

%$

%%

$0-1

0 .

. . .

. . .

.0

00

00

00

00

00

010

-15

. . .

. . .

. .

15.6

0.5

0.5

00

022

.40.

90.

90

00

15-2

0 .

. . .

. . .

.86

.62.

73.

23.

60.

10.

162

.62.

53.

416

.80.

70.

720

-25

. . .

. . .

. .

140.

84.

37.

564

.72.

62.

795

.03.

97.

360

.12.

53.

225

-30

. . .

. . .

. .

187.

55.

813

.312

9.0

5.3

8.0

137.

95.

612

.911

0.9

4.5

7.7

30-3

5 .

. . .

. . .

.20

3.4

6.3

19.6

164.

66.

714

.715

6.2

6.3

19.2

139.

85.

713

.435

-40

. . .

. . .

. .

218.

56.

726

.317

8.4

7.3

22.0

157.

46.

425

.614

6.3

5.9

19.3

40-4

5 .

. . .

. . .

.22

0.5

6.8

33.1

181.

57.

429

.415

5.0

6.3

31.9

149.

56.

125

.445

-50

. . .

. . .

. .

192.

75.

939

.016

1.0

6.5

35.9

139.

55.

737

.614

0.4

5.7

36.1

50-6

0 .

. . .

. . .

.37

3.1

11.5

50.5

314.

912

.848

.727

6.7

11.3

48.9

286.

911

.742

.860

-70

. . .

. . .

. .

261.

88.

158

.621

8.1

8.9

57.6

195.

88.

056

.920

8.3

8.5

51.3

70-8

0 .

. . .

. . .

.19

1.9

5.9

64.5

156.

96.

464

.014

2.4

5.8

62.7

154.

26.

357

.680

-90

. . .

. . .

. .

145.

14.

569

.011

6.4

4.7

68.7

106.

24.

367

.011

6.1

4.7

62.3

90-1

00 .

. . .

. . .

106.

13.

372

.384

.43.

472

.178

.93.

270

.287

.23.

565

.810

0-15

0 .

. . .

. .24

6.1

7.6

79.9

185.

77.

679

.718

8.6

7.7

77.9

211.

58.

674

.415

0-25

0 .

. . .

. .18

0.6

5.5

85.4

138.

65.

685

.314

4.0

5.9

83.8

164.

86.

781

.125

0+ .

. . .

. . .

.47

8.6

14.7

100.

1b35

8.1

14.6

99.9

b39

7.4

16.2

100.

046

3.3

18.9

100.

0

Tota

lb .

. . .

. . .

3,24

9.0

100.

02,

456.

210

0.0

2,45

6.2

100.

02,

456.

210

0.0

aA

ll d

olla

r am

ount

s ar

e in

mil

lion

s. b

Tota

ls m

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(2000), Vol. 48, No. 4 / no 4

Table 8 Alberta Taxable Income, 1996

Total taxable incomea

Income class (’000) ($ million) Percent Cumulative percent

$0-10 . . . . . . . . . . . . . . . . . . . . . . 696.4 1.5 1.510-15 . . . . . . . . . . . . . . . . . . . . . . 1,973.5 4.3 5.815-20 . . . . . . . . . . . . . . . . . . . . . . 2,778.6 6.1 11.920-25 . . . . . . . . . . . . . . . . . . . . . . 3,072.1 6.8 18.725-30 . . . . . . . . . . . . . . . . . . . . . . 3,661.5 8.1 26.830-35 . . . . . . . . . . . . . . . . . . . . . . 3,597.6 7.9 34.735-40 . . . . . . . . . . . . . . . . . . . . . . 3,504.6 7.7 42.440-45 . . . . . . . . . . . . . . . . . . . . . . 3,237.3 7.1 49.545-50 . . . . . . . . . . . . . . . . . . . . . . 2,641.0 5.8 55.350-60 . . . . . . . . . . . . . . . . . . . . . . 4,811.4 10.6 65.960-70 . . . . . . . . . . . . . . . . . . . . . . 3,090.0 6.8 72.770-80 . . . . . . . . . . . . . . . . . . . . . . 2,101.2 4.6 77.380-90 . . . . . . . . . . . . . . . . . . . . . . 1,513.3 3.3 80.690-100 . . . . . . . . . . . . . . . . . . . . . 1,076.2 2.4 83.0100-150 . . . . . . . . . . . . . . . . . . . . 2,351.2 5.2 88.2150-250 . . . . . . . . . . . . . . . . . . . . 1,570.9 3.5 91.7250+ . . . . . . . . . . . . . . . . . . . . . . 3,780.5 8.7 100.0

Total . . . . . . . . . . . . . . . . . . . . . . 45,457.3 100.0

a From Jason Waywood, “The Distributional Impacts of Single-Rate Provincial Income Taxes,”MA degree research paper, Department of Economics, University of Alberta, 1999.

The focus here is primarily on the distribution of the tax burden after the taxreduction. The three alternatives each generate $2,456.2 million in revenue, butthe distributions of the burdens differ. As seen from table 7 and figure 5, the single-rate tax reduces the share of the income tax burden on taxpayers in the under-$30,000 income class, holds constant the share of the over-$100,000 incomeclass, and increases the share paid by taxpayers between $30,000 and $100,000.Under option B, the share of the tax burden is reduced from the current share forall taxpayers up to $50,000 but increased for all others, especially for those inincome classes exceeding $100,000. Option A modestly increases the share ofthe tax burden of taxpayers in the $150,000 and over income classes but leavesthe share of taxpayers in other classes quite comparable to existing shares. Thatis, option A distributes the tax reduction more uniformly than either option B orthe single-rate tax and thus effects a smaller change in the distribution of the taxburden.

We can also examine the distributions of the aggregate tax reductions. Theaggregate dollar amounts and the percentages are reported by income class intable 9. The single-rate tax provides 28.1 percent of the total tax reduction tothose 3 percent of taxpayers in income classes beyond $100,000 (or 20.5 percentto the 1.25 percent in the over-$150,000 brackets). This share approximatelyequals the 29.4 percent reduction to the 46.5 percent receiving tax savings in theunder-$30,000 classes (or 22 percent to the 35.6 percent in the under-$25,000


(2000), Vol. 48, No. 4 / no 4

0

5

10

15

20

Option B

Option A

Single-rate tax

Current

250+100-15080-9060-7045-5035-4025-3015-200-10

Figure 5 Percentage Share of Alberta Personal Income Tax, by Income ClassPe

rcen

t


Source: Table 7.

classes). Options A and B are less generous to the highest income groups. OptionA provides the $100,000 and above group with 22.1 percent of the tax reduction,while option B provides only 8.3 percent (or 14.8 and 3.9 percent, respectively,to those in the over-$150,000 classes).

Figure 6 shows the percentage share of the tax reduction accruing to taxpay-ers in each income class. Except for the scale, plots of the dollar amounts havesimilar patterns. The single-rate tax shows a U-shaped curve with small sharesgoing to the middle-income groups. The curve for option A is a modest invertedU up to $100,000, with larger shares going to the middle-income groups than thesingle-rate tax provides. Beyond $100,000, the shares increase but less so thanfor the single-rate tax. The curve for option B is broadly horizontal, with anotable downturn once incomes exceed $70,000.

An Overview of the Alternative Tax ResultsThe Alberta government’s single-rate tax program will reduce the provincial per-sonal income taxes by about 25 percent. While hardly any individual taxpayerwill lose absolutely from this change, the large tax reduction obscures signifi-cant shifts in the income tax burden—shifts which, as the foregoing analysis


(2000), Vol. 48, No. 4 / no 4

Tab

le 9

Tax

Rev

enue

Red

ucti

ons

Rel

ativ

e to

Cur

rent

Sys

tem

, by

Inco

me

Cla

ss

Mul

ti-ra

te ta

xes

Sing

le-r

ate

tax

Opt

ion

AO

ptio

n B

Cum

ulat

ive

Cum

ulat

ive

Cum

ulat

ive

Inco

me

clas

s (’

000)

$a%

%$

%%

$%

%

$0-1

0 .

. . .

. . .

. . .

. . .

. . .

. .0

00

00

00

00

10-1

5 .

. . .

. . .

. . .

. . .

. . .

. .15

.62.

02.

0−6

.8−0

.9−0

.915

.62.

02.

015

-20

. . .

. . .

. . .

. . .

. . .

. . .

83.0

10.5

12.5

24.0

3.0

2.1

69.8

8.8

10.8

20-2

5 .

. . .

. . .

. . .

. . .

. . .

. .76

.19.

622

.145

.85.

87.

980

.710

.221

.025

-30

. . .

. . .

. . .

. . .

. . .

. . .

58.5

7.4

29.5

49.6

6.3

14.2

76.6

9.7

30.7

30-3

5 .

. . .

. . .

. . .

. . .

. . .

. .38

.84.

934

.447

.25.

920

.163

.68.

038

.735

-40

. . .

. . .

. . .

. . .

. . .

. . .

40.1

5.1

39.5

61.1

7.7

27.8

72.2

9.1

47.8

40-4

5 .

. . .

. . .

. . .

. . .

. . .

. .39

.04.

944

.465

.58.

336

.171

.08.

956

.745

-50

. . .

. . .

. . .

. . .

. . .

. . .

31.7

4.0

48.4

53.2

6.7

42.8

52.3

6.6

63.3

50-6

0 .

. . .

. . .

. . .

. . .

. . .

. .58

.27.

355

.796

.412

.154

.986

.210

.974

.260

-70

. . .

. . .

. . .

. . .

. . .

. . .

43.7

5.5

61.2

66.0

8.3

63.2

53.5

6.7

80.9

70-8

0 .

. . .

. . .

. . .

. . .

. . .

. .35

.04.

465

.649

.56.

269

.437

.74.

785

.680

-90

. . .

. . .

. . .

. . .

. . .

. . .

28.7

3.6

69.2

38.9

4.9

74.3

29.0

3.7

89.3

90-1

00 .

. . .

. . .

. . .

. . .

. . .

.21

.72.

771

.927

.23.

477

.718

.92.

491

.710

0-15

0 .

. . .

. . .

. . .

. . .

. . .

60.4

7.6

79.5

57.5

7.3

85.0

34.6

4.4

96.1

150-

250

. . .

. . .

. . .

. . .

. . .

.42

.05.

384

.836

.64.

689

.615

.82.

098

.125

0+ .

. . .

. . .

. . .

. . .

. . .

. .12

0.5

15.2

100.

081

.210

.299

.8b

15.3

1.9

100.

0

Tota

lb .

. . .

. . .

. . .

. . .

. . .

.79

2.8

100.

079

2.8

100.

079

2.8

100.

0

aA

ll d

olla

r am

ount

s ar

e in

mil

lion

s. b

Tota

ls m

ay n

ot s

um e

xact

ly b

ecau

se o

f ro

undi

ng.


(2000), Vol. 48, No. 4 / no 4

Figure 6 Percentage Share of Total Tax Reduction, by Income Class

−5

0

5

10

15

20

Option B

Option A

Single-rate tax

250+100-15080-9060-7045-5035-4025-3015-200-10

Perc

ent

Total income (’000)

Source: Table 8.

demonstrates, operate to the advantage of low- and high-income taxpayers butdisadvantage a broad range of middle-income taxpayers. In addition, relative totwo reasonable multi-rate alternatives generating equal aggregate revenues andtax reductions, the single-rate tax again disadvantages a wide class of middle-income taxpayers. Those alternatives also provide tax relief to (nearly) every-one, to varying degrees, and particularly to those with incomes under $30,000,but they are more neutral in the treatment of those in the middle-income classes.

The results shown above are summarized in table 10, which shows the distri-butions of the tax burdens for three broad income groups. It is evident that thesignificant reduction in the tax share of the under-$30,000 group that is providedby the single-rate tax is achieved at the expense of the $30,000-100,000 middle-income group. The tax share of the lower income group falls from 13.3 to 8percent, that of the middle group increases from 59 to 64.1 percent, and theshare of the over-$100,000 group is unchanged. That is, the highest income groupdoes not contribute to the substantial tax cut to the lowest income group; instead,the reduction is paid for by the middle-income taxpayers. Under option A, thetax burden is distributed more evenly, with a slight reduction in the shares of thelower and middle groups (13.3 to 12.9 percent and 59 to 57.3 percent, respectively)


(2000), Vol. 48, No. 4 / no 4

and a modest increase in the share of the high income group (27.8 to 29.8percent).21 Option B, with larger exemptions, provides the low income groupwith the lowest share of the income tax burden (7.7 percent), but the cost of thatreduction is paid for by the high income group, whose tax share increases to34.2 percent, while the share of the middle group (58.1 percent) changes onlyslightly (although there is some redistribution of the burden within it).

The alternative distribution of the tax reduction, shown in the lower block oftable 10, reveals a matching picture. Under the single-rate tax, the under-$30,000group receives a disproportionately large share of the tax relief (relative to taxshare), while the middle-income group receives a disproportionately small share.Under option B, about 30 percent of the tax relief goes to the lowest incomegroup, but only 8.3 percent to those with incomes over $100,000. Under optionA, the low- and middle-income groups both gain modestly; their share of the taxreduction, in each case, is slightly larger than their current tax burden share, atsome cost to the high-income taxpayers.

Middle-income taxpayers do not uniformly share the extra burden. The expandedspousal exemption benefits the single-earner family or couple—that is, the 15percent of taxpayers claiming that credit. Hence, the reallocated burden ofAlberta’s single-rate tax program will fall more heavily upon single taxpayersand dual-earner middle-income taxpayers.22

21 If there is concern about the more modest tax reductions afforded the lowest income group byoption A, that might be rectified by a lower initial tax rate or explicitly addressed at lowercost through a supplementary tax reduction program (such as that currently used in Alberta)targeted to those taxpayers.

22 Besides exploring revenue-neutral tax changes, one might also contemplate the distributionalimplications of forgone expenditures or forgone debt reductions that the tax cut supersedes.That approach is not pursued here.

Table 10 Alberta Personal Income Tax Shares and Shares of Tax Reductionby Income Group Under Alternative Income Taxes (Percent)a

Multi-rate taxes

Income group Current Single-rate tax Option A Option B

Tax sharesUnder $30,000 . . . . . . . . . . . . 13.3 8.0 12.9 7.7$30,000-100,000 . . . . . . . . . . . 59.0 64.1 57.3 58.1Over $100,000 . . . . . . . . . . . . 27.8 27.8 29.8 34.2

Shares of tax reductionUnder $30,000 . . . . . . . . . . . . na 29.5 14.2 30.7$30,000-$100,000 . . . . . . . . . . na 42.9 63.5 61.0Over $100,000 . . . . . . . . . . . . na 28.1 22.1 8.3

a Percentages may not sum exactly because of rounding.

Source: Tables 7 and 9.


(2000), Vol. 48, No. 4 / no 4

Alberta’s move to increase the tax burden on middle-income taxpayers con-trasts with changes elsewhere. The federal government’s reduction of the middlebracket tax rate from 26 to 24 (and perhaps to 23) percent is easing the tax burdenfor middle-income (and upper-income) taxpayers.23 As a result, the difference inthe marginal tax rates between the middle and highest tax brackets is becomingmore distinct as the marginal tax rates across the three brackets change from 17-26-29 percent to 17-24-29 percent. That is, the federal structure is becoming lessflat at the middle and upper tax brackets. Indeed, the flatness of the Canadianincome tax beyond the $30,000 income level has been striking,24 especially forfamilies with children, and, as noted below, is a common concern along with thesharp progressivity at low income levels. Given the flatness of the basic struc-ture, one almost wonders why the Alberta government felt it necessary to intro-duce an explicitly flat, single-rate tax.

Ontario also provides a contrast. The Harris government in Ontario hasembarked on a tax reduction campaign; but, interestingly, the reductions have beenfocused on the lower and middle-income groups, while surtaxes have increasedthe taxes on high-income taxpayers. For example, for 2001, Ontario tax ratesacross the three brackets are to be 6.20, 9.24, and 11.16 percent,25 but withsurtaxes the rates are 6.20 percent in the initial federal bracket, 9.24 and 11.09 inthe middle bracket, and 13.39 and 17.41 percent in the highest bracket.26 Clearly,the Ontario rate structure is fairly steeply graduated. The result, in part, is thatrelative savings from Ontario’s tax reductions favour least the highest incomegroups.27 Ontario’s approach is in strong contrast to Alberta’s anti-middle-classsingle-rate tax. Indeed, in planning to follow the movement to a tax on income,all the other provinces have retained a multi-rate income tax.28

Looking to the United States, the US federal tax structure has progressivegraduated rates over a broad income range. There are five brackets in the federal

23 Our options A and B above incorporate the 24 percent rate, and that contributes to the slightdecreases in the middle-income group tax shares reported for those options in table 10.

24 How flat the tax structure is (even with surtaxes) after a steep short initial phase is wellillustrated by the plotting of tax rates against income. See, for example, David B. Perry,“Federal Marginal Income Tax Rates,” Fiscal Figures feature (1998), vol. 46, no. 2 CanadianTax Journal 477-85; Robert D. Brown, “Tax Reform and Tax Reduction: Let’s Do the JobRight” (1999), vol. 47, no. 2 Canadian Tax Journal 182-205 (which includes Ontario provin-cial taxes), figure 4, at 192; and Edwin C. Harris, “Comments on the Paper by Robert D.Brown,” ibid., at 206-9. The closeness of the 26 and 29 percent rates, the narrow middle-income bracket, incomplete indexing, and clawbacks contribute to this pattern.

25 These rates translate to 36.5, 38.5, and 38.5 percent tax-on-tax rates.

26 Ontario, Ministry of Finance, 2000 Budget, Budget Paper C, May 2, 2000, 71 and 72.

27 Ibid., at 74.

28 See, for example, supra footnote 10, which outlines Saskatchewan’s strategy. Also, BritishColumbia intends to introduce an explicit five-bracket tax-on-income structure in 2001:British Columbia, Ministry of Finance, Budget 2000, Report C, March 27, 2000.


(2000), Vol. 48, No. 4 / no 4

personal income taxes, with rates of 15, 28, 31, 36, and 39.6 percent and separationpoints of approximately $38,600, $93,700, $195,400, and $424,700 (in Canadiandollars). While many US federal taxpayers pay taxes at marginal rates comparableto Canadian federal tax rates, the highest-income US taxpayers pay at consider-ably higher rates. In 1996, 51 percent of the US federal income tax collectionscame from taxpayers with adjusted gross income exceeding US $100,000,29 whilein Canada, taxpayers with total incomes beyond Cdn.$100,000 provided 22 per-cent of federal taxes. Even in US states, where income taxes are less importantthan in Canadian provinces, graduated income taxes are preferred over single-rate taxes in a ratio of seven to one.

Analysts of Canadian taxes, when considering reform of the personal incometax, generally accept the desirability of the progressive marginal tax rate struc-ture. An excellent overview of the scholarly thinking on Canadian tax reform isreflected in the series of papers appearing in this journal from the recent confer-ences on personal income tax reform30 and the tax policy conference on Cana-da’s competitiveness.31 While many points of view are expressed, the majorthemes (not necessarily reflecting a clear separation of reform and reduction)include tax reduction (relying heavily on greater capacity utilization and on debtreduction), reduction of the relatively high (by international standards) Cana-dian dependence on the personal income tax, shifting of the tax mix to rely moreon consumption (and perhaps payroll) taxes, and reform (as recommended bythe Technical Committee on Business Taxation)32 and reduction of businesstaxes and taxes on capital income. Specifically in regard to the personal incometax, frequently mentioned proposals for reform include easing of the tax burden;the need to reduce especially the relatively high marginal tax rates on lower andmiddle-income groups; an increase in retirement savings contribution limits,which would make the personal income tax (already three-quarters of the way)even more of a consumption tax;33 various means of enhancing the treatment offamilies and children; the need to index; and the desirability of substantiallystretching the existing tax brackets. While the papers presented at these confer-ences typically advocate comprehensive reform packages, there is almost unani-mous acceptance and even endorsement of a progressive marginal rate

29 US taxpayers with incomes over $75,000 paid 62.5 percent of US federal taxes. Thesepercentages were calculated from data in Statistical Abstract of the United States, 1995-1999(Washington, DC: United States Census Bureau, 1999), table 590, and Income Statistics(Ottawa: Revenue Canada, 1998), basic table 2.

30 (1999), vol. 47, nos. 2-5 Canadian Tax Journal.

31 (2000), vol. 48, nos. 1-4 Canadian Tax Journal.

32 Canada, Report of the Technical Committee on Business Taxation (Ottawa: Department ofFinance, April 1998) (herein referred to as “the Mintz report”).

33 Satya Poddar and Morley D. English, “Canadian Taxation of Personal Investment Income”(1999), vol. 47, no. 5 Canadian Tax Journal 1270-1304.


(2000), Vol. 48, No. 4 / no 4

structure.34 Kenneth McKenzie, supporting the Alberta single-rate tax, providesthe only exception.35 Basing his position on arguments relating to work andsaving incentives, interprovincial fiscally induced migration, and the principlethat provincial governments should not use the tax system to redistribute income,he contends that “Alberta got it right” and Saskatchewan “almost.”36 Some mayagree with his arguments, as a prescription for provincial income taxes, butothers may find them less than compelling. However, like others, McKenzieappears to favour progressive marginal rates for the federal income tax.37 Finally,although there is surprisingly little direct evidence of taxpayers’ preferences forincome tax progressivity, surveys reveal a preference for progressive marginaltax rates.38 While what is considered to be the appropriate distribution of theincome tax burden is a matter of personal preference and, ultimately, social choice,it is clear that the distribution implied by the single-rate structure proposed bythe Alberta government is an unusual approach.39

The income tax is the only tax that affords a progressive tax structure. Reduc-ing the progressiveness of the personal income tax will reduce the progressivityof the overall tax structure, which, already, is approximately proportional fortotal taxes.40

34 In particular, see, Brown, supra footnote 24; Pierre Fortin, “Less Taxes and Better Taxes:Principles for Tax Cuts and Tax Reform” (2000), vol. 48, no. 1 Canadian Tax Journal 92-100;Jonathan R. Kesselman, “Base Reforms and Rate Cuts for a Revitalized Personal Tax” (1999),vol. 47, no. 2 Canadian Tax Journal 210-41; and Allan Maslove, “Closing Comments: ThePolitics of Personal Income Tax Reform” (1999), vol. 47, no. 5 Canadian Tax Journal 1315-20.

35 Kenneth J. McKenzie, “Provincial Tax Priorities in a Global and National Economy: What’s Goodfor the Goose Is Good for the Gander” (2000), vol. 48, no. 2 Canadian Tax Journal 356-73.

36 Ibid., at 364.

37 Also like others, he argues for wider brackets, indexing, and the elimination of surtaxes. Ibid.,at 362.

38 See, for example, Joel Slemrod and Jon Bakija, Taxing Ourselves (Cambridge, MA: MITPress, 1998), 61, table 3.1; Steven M. Sheffrin, “Perceptions of Fairness in the Crucible ofTax Policy,” in Joel Slemrod, ed., Tax Progressivity and Income Inequality (Cambridge:Cambridge University Press, 1994), 309-34; and Jane G. Gravell, “Comments,” ibid., at 335-40.

39 Contrary to the developments noted above, the Canadian Alliance Party has recently advo-cated a single-rate personal income tax at the federal level. It proposes a tax rate of 17percent, personal and spousal exemptions each expanded to $10,000, and a new $3,000 perchild deduction while maintaining all existing deductions and credits. The policy is outlinedin Canadian Alliance, Solution 17 (Calgary: Canadian Alliance, January 2000). Even with noincrease in the personal and spousal exemptions, a single-rate tax of about 23.5 percent(before tax credits) would be necessary to be revenue-neutral. Brown, supra footnote 24, at 200,estimates that, with personal amounts raised to the Alberta level, a single-rate tax of 27 percentis required to be revenue-neutral and would be a heavy burden on the middle-income Canadian.See also Don Drummond, “Show Us the Money,” The Globe and Mail, July 18, 2000, A11.

40 Frank Vermaeten, W. Irwin Gillespie, and Arndt Vermaeten, “Tax Incidence in Canada”(1994), vol. 42, no. 2 Canadian Tax Journal 348-416.


(2000), Vol. 48, No. 4 / no 4

ARE THERE OFFSETTING GAINS?If the middle income earner is to carry a relatively greater share of the Albertatax burden as a result of the move to a single-rate tax, will there be someoffsetting gains? The Alberta Tax Review Committee advanced arguments forpotential improvements in both equity and efficiency, which the Alberta govern-ment apparently accepted.

EquityThe equity improvements involve comparable taxation of single- and dual-earnerfamilies.41 As discussed earlier, under the current progressive multi-rate struc-ture, a single-earner family with income equal to that of a comparable dual-earnerfamily pays more income tax. This situation is deemed to be inequitable. A single-rate tax with equal personal and spousal exemptions means that single- and dual-earner families with the same family income pay the same aggregate income tax.42

This situation is deemed to be fair even though most people would regard thesingle-earner family with an adult member at home as being better off economi-cally than the family requiring two income earners to realize the same income.43

The single-rate tax with equal exemptions solves the single- versus dual-earnerfamily tax problem only as the single-rate tax advocates define it. In fact, as referenceto standard taxation textbooks demonstrates, the issue of the appropriate tax unit(that is, how to tax individuals and families) is much more complex, and the“solution” advanced in Alberta, by neglecting particularly the value of the ben-efits of services provided by (the production of) the member in the home, createsits own inequities.44 What the best solution to this problem may be is debatable,but it is questionable whether the one being introduced in Alberta would rank atthe top. Thus, whether tax equity among families is enhanced by the Albertareforms is, at best, uncertain.

41 A single-rate tax also offers some equity, administrative, and compliance benefits by remov-ing tax advantages (for most) of intrafamily income splitting and by not requiring averaging(not now available) to avoid tax disadvantages from fluctuating incomes.

42 The same argument and solution is advanced in the Canadian Alliance Party’s Solution 17position paper. See supra footnote 39.

43 Although typically presented in the context of families, the situation discussed applies equallyto households without children. Hence, because the enhanced spousal exemption and single-ratetax treat single-earner couples without minor children in the home the same as single-earnerfamilies, any justification of the change on the basis of support for at-home parental childcare is weakened.

44 For example, see Boadway and Kitchen, supra footnote 2; and Harvey S. Rosen et al., PublicFinance in Canada (Toronto: McGraw-Hill Ryerson, 1999). Comprehensive discussions arealso found in Boessenkool and Davies, and in Vincent and Woolley, supra footnote 5.


(2000), Vol. 48, No. 4 / no 4

EfficiencyThe Tax Review Committee also expressed concern about the potential negativeimpacts of high marginal tax rates. Although the question has more to do withtax levels than with changes in the rate structure, the committee paid particularattention to popular, but poorly documented, claims that lower taxes are requiredto stem the “brain drain.” While a reduction in taxes should have some marginaleffect, the committee’s review neglected much relevant evidence and ignoredpotentially more important factors.45

First, the brain drain experienced in recent years is smaller than that at anytime during the past century.

Second, the modest upturn in the number of Canadians relocating to theUnited States that has occurred very recently has more to do with differences inlabour markets between the two countries and with mobility enhanced by theNorth American free trade agreement than with tax differences.46 For example, alarge portion of current migrants are health professionals and university andother researchers who experienced reduced opportunities because of govern-ment fiscal restraint. Even more critical is the attraction of higher wages andsalaries. By way of illustration, Roger Martin, dean of the University of Toron-to’s Rotman School of Management, reported on a prevailing and substantialpay differential among Nortel engineers favouring comparable employees in theUnited States.47 After-tax salary differentials adjusted for purchasing powerparity ranged from 23 to 47 percent in favour of the US employee. HigherCanadian taxes accounted for one-quarter of the earnings differential at mostand made no difference for the starting engineer. Such cases illustrate the needfor Canadian business and government to pay competitive salaries in an interna-tional labour market; competition in that market also imposes considerable pres-sure to achieve comparable productivity.

Third, tax differences between Canada and the United States may have only asmall effect. Don Wagner, using samples of Canadians living in Canada andliving in the United States, found that after controlling for other factors, such asincome differences, tax differences accounted for only 6 percent of migration

45 For an objective overview, see John Helliwell, “Checking the Brain Drain: Evidence andImplications” (September 1999), vol. 20, no. 7 Policy Options 6-17.

46 Increased labour mobility was a specific objective of the free trade agreements that Canadanegotiated. Clearly, some Canadians are now benefiting from this. While some may believethat those provisions now operate to the “advantage” of the United States because the netflow is in that direction, the situation may change at some point.

47 Keith McArthur, “Brain Drain Blamed on Pay, Not Tax,” The Globe and Mail, December 2,1999, B16.


(2000), Vol. 48, No. 4 / no 4

from Canada to the United States.48 Although this is a preliminary and probablyconservative estimate, it appears that the role of taxes is quite modest.

Finally, whatever gains might be realized in this context by the reduction ofAlberta’s personal income tax did not require a change in the rate structure. Changesin the tax rate schedule in a revenue-neutral situation will have unknown mar-ginal impacts on what evidence suggests would already be a small effect. Allthis lends support for John Helliwell’s conclusion that the brain drain should notbe a motive for tax or expenditure changes that are not otherwise economicallyor politically justified.49

Interprovincial mobility may be more important than international migration,and here changes in the marginal tax rate schedule may be more significant. Thetax reduction will make Alberta an even more fiscally attractive place to reside.The single-rate tax plan will make it particularly more attractive for individualswith a very high income, possibly those Alberta would (most) like to attract, andalso for low income earners. Other than single-earner families, taxpayers in thebroad middle income group will find Alberta only marginally more appealing,even after the tax reduction. Alberta may regard this fiscally induced migrationas beneficial. Nationally, however, it may represent a net loss because labourwill be induced by lower taxes to relocate in Alberta when it could be moreproductive elsewhere. Note that the impact of the tax reduction arises whether ornot the single-rate tax is introduced.50 Adding the single rate may only slightlymodify the composition of the migration to Alberta. In the end, however, even ifthe new residents pay average taxes, Albertans will be sharing their naturalresource income among more residents.

The more appealing efficiency reason for a single-rate tax is that it has thepotential to improve the efficiency and productivity of the economy by changingwork and saving/investment incentives. McKenzie estimated this improvementfrom Alberta’s move to the single-rate tax (at the 11 percent rate as initiallyproposed) to be $160 per family—$60 resulting from efficiency gains in the

48 Don Wagner, “Do Tax Differences Contribute Toward the Brain Drain from Canada to theUS?” paper presented at the 34th Annual Meetings of the Canadian Economics Association,University of British Columbia, June 1-4, 2000.

49 Supra footnote 45.

50 If taxes were not reduced but government spending and services increased (or debt reduced),the fiscal attractiveness of Alberta would still be enhanced. For a discussion of fiscallyinduced migration, see Kathleen M. Day and Stanley L. Winer, “Internal Migration andPublic Policy: An Introduction to the Issues and a Review of Empirical Research in Canada,”in Allan M. Maslove, ed., Issues in the Taxation of Individuals (Toronto: University of TorontoPress and the Fair Tax Commission of Ontario, 1994), 3-61.


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labour market and $100 from those in the capital market.51 Although alreadymodest, this estimate does not reflect the effect of the shift to a single-rate taxbut refers to efficiency improvements from the accompanying (then estimated$600 million) tax reduction. While McKenzie’s paper did not address this issue,it is reasonable to predict that essentially all of the gains will come from the taxreduction and that any gains from a revenue-neutral move to a single rate wouldbe very small and possibly even negative.52

One must think carefully too about the estimated $100 gain in the capitalmarket, or, more appropriately, about whatever smaller amount would resultfrom a revenue-neutral comparison. As McKenzie points out, there are manyproblems with capital income taxation in Canada—for example, the uneventreatment of interest, dividends, and capital gains; the taxation of nominal asopposed to real capital income; and the possibility that the quarter of capitalincome not accruing to registered savings is still being taxed.53 The gain thatMcKenzie found from the tax reduction/tax change planned in Alberta resultedfrom improved net returns that encouraged saving. Further investment withinAlberta was not predicted to occur. The problem with taking solace from possi-ble capital market efficiency improvements arising from the changes McKenzie

51 Kenneth J. McKenzie, “O’Brien’s Last Stand: An Examination of the Single Rate Tax,” apaper presented at the conference organized by the Institute for Public Economics, Alberta’sFiscal Frontiers: The O’Brien Years and Beyond, Edmonton, September 17, 1999.

52 Rough calculations using McKenzie’s method and assumptions suggest that, because thesingle-rate tax at 11 percent results in higher marginal tax rates for most taxpayers than does arevenue-neutral tax at 41.1 percent, maintaining the multi-rate tax may even result in a smallerexcess burden to labour than the single-rate alternative. In the conference paper cited earlier,supra footnote 35, at 366, McKenzie predicts much larger efficiency gains from the replace-ment of the revenue from 5 percentage points of the 11 percent personal income tax by revenuefrom a 5 percent Alberta sales tax on the goods and services tax base.

53 Note the concerns and recommendations of the Mintz report, supra footnote 32, whichemphasizes the non-neutral tax rates among corporations. The double taxation of corporateincome resulting from the large corporate income tax makes the corporate income tax itself aproblem. Somewhat surprising, given the extensive discussion of tax reform and the concernsexpressed about capital income taxation particularly, is that more attention was not paid in theCanadian Tax Journal conference papers to deflating interest and capital gains for inflationso as to tax only real income from these sources—especially when, because the currentmethods impose very high and often horizontally uneven tax rates (see McKenzie, suprafootnote 35, at table 2 for some indications), such a reform offers both equity and efficiencyimprovements. Indexing these sources of capital income would also avoid many of theimperfect and ad hoc offsets now in place. Such indexing maintains the spirit of the existing“hybrid” system, which Davies sees as having some value. James B. Davies, “Comments onthe Paper by Satya Poddar and Morley D. English” (1999), vol. 47, no. 5 Canadian TaxJournal 1305-9.


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analyzes (or, more appropriately, those arising from a revenue-neutral conver-sion to a single-rate tax) is that these changes are blunt and imperfect instru-ments for realizing such improvements. Larger gains could be realized andcould be achieved more effectively by reforms aimed specifically at correctingdeficiencies in capital taxation. Those reforms should be implemented first. Thepotential capital market gains from restructuring marginal tax rates could thenbe assessed more accurately. While a good case can be made for personalincome tax reductions (likely best achieved through various tax improvements),capital and business income taxation probably carries the stronger case forfundamental reform.

Analyses of major income tax reform proposals in the United States showthat estimates of the potential efficiency gains are quite sensitive to assumptionsand are, in the end, quite debatable.54 Those studies have focused on moves toflat and consumption-based taxes, which offer more potential for efficiencygains than does a simple change in the personal income tax from a progressivemarginal rate system to a single-rate tax. The results suggest that any efficiencygains that may be realized from Alberta’s single-rate plan are, at best, modest;moreover, this approach involves significant adverse transitional and distribu-tional consequences. Boadway and Kitchen sum up the case for the positiveincentive effects of a flat tax with the statement “we have no good empiricalevidence on these so-called supply-side effects.”55 Also, as many Americans realizeand as the commentators on the Canadian tax system at the previously mentionedconferences have noted, there are alternative ways to enhance the efficiency ofthe tax system, which should be explored further. These alternative approachescould yield more, and certainly less dubious, benefits than those to be achievedby switching to a single-rate personal income tax.

CONCLUSION

Generally, the planned income tax reductions will result in more disposableincome for Alberta taxpayers. Few would argue with the merits of targeting

54 See Henry J. Aaron and William G. Gale, eds., Economic Effects of Fundamental Tax Reform(Washington, DC: Brookings Institution, 1996); and Slemrod and Bakija, supra footnote 38,especially at chapter 7. Some indications of the debate have appeared in the sets of confer-ence papers mentioned: for example, Jean-Yves Duclos and Julie Gingras, “A Roadmap forFederal Tax Reform” (2000), vol. 48, no. 2 Canadian Tax Journal 303-39; Andrew Jackson,“Tax Cuts: The Implications for Growth and Productivity,” ibid., at 276-302; and Neil Brooks,“Comments on the Paper by Robin W. Boadway and Harry M. Kitchen” (1999), vol. 47, no. 3Canadian Tax Journal 608-23.

55 Robin W. Boadway and Harry M. Kitchen, “Personal Income Tax Reform in a BroaderContext” (1999), vol. 47, no. 3 Canadian Tax Journal 566-602, at 597.


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significant gains to low-income taxpayers. Questionable, however, is the plannedsingle rate, which will afford absolutely and relatively large tax reductions to thetop 2 or 3 percent of taxpayers. Middle-income taxpayers gain less from the taxreductions and end up bearing a larger share of the Alberta tax burden. In effect,the tax reductions to income earners under $30,000 will be paid for entirely by the$30,000-100,000 group, and taxpayers with incomes over $100,000 will notcontribute. Single individuals and dual-earner families in the middle-incomerange particularly will be affected adversely. In contrast to the Alberta move toadvantage high income earners, the federal and Ontario governments’ effortstoward tax reduction have been less generous to that group and have evenmoved explicitly to favour low- and middle-income taxpayers. Nor is thereevidence of offsetting gains to the majority of taxpayers from a single-rate taxthat would not also be available from a more distribution-neutral tax reduction.Most, if not all, efficiency improvements come from tax reduction, not from theshift to a single-rate tax. Also, taxes are a minor determinant of the so-calledbrain drain, and payoffs there also come from overall tax reduction. Not surpris-ingly, with rare exceptions, reforms of the personal income tax recommended bytax analysts do not include a single-rate tax structure. Thus, the only certainresult of Alberta’s conversion to a single-rate tax is the large tax savings to thetop 2 or 3 percent of taxpayers; beyond that, the advantages are dubious. Unfor-tunately, the shift of the Alberta personal income tax burden to the large middleincome class has been obscured by the large and recently expanded tax reduc-tions. Consequently, the question of redistribution of the tax burden has not beendebated as thoroughly as it deserves.

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