Income Taxes and the Ability to Pay
All income tax systems are based on the ability to pay principle, that is that the well-to-do should contribute more to government coffers, as it is less of a burden for them to do so. The implicit assumption in all this is that the level of income a person earns is an adequate measure of an individual's ability to pay. But certainly a person with a high level of savings that earns $40,000 a year is able to pay more in taxes than a person with an income of $40,000 try to collect enough money to put a down payment on their first home. Typical income tax systems do not take into account how wealthy someone is and where they are in life.If Mr. Clement has his way, Canada's income tax laws would be altered to better reflect the ability to pay principle. The innovative "JumpStart" program he's proposed would tie the income tax rate that someone pays to their lifetime earnings. A person, let's call him "Mike", who has just entered the workforce is likely to have very little savings. If JumpStart were enacted, Mike would not pay any income taxes until he reaches $250,000 of lifetime earnings. This would allow Mike to set aside more money for a rainy day, for him to pay off his student loans faster, and to save to buy a house and start a family. Once he's earned $250,000 in lifetime income, which would take him 8 years at an income of $31,250 a year, he will then pay 14% of each dollar he earns to the federal government. This percentage increases at lifetime earnings levels of $500,000 and $750,000, and reaches a maximum of 27% for each dollar earned after lifetime income passes the one million dollar mark. See the chart at the end of this article for details.
The JumpStart program proposed by Tony Clement creates a tighter bond between the ability to pay principle and the income tax system. But what about "The Law of Unintended Consequences"? Might a change to the income tax system cause some unappealing repercussions to the Canadian economy? An obvious one would be the distributional effects caused by the fact that taxpayers are switching from one system to another. The JumpStart system helps taxpayers when they're young at the expense of when they're older. This would be bad for the current generation of "old" taxpayers, as they would pay the costs of the new system without ever having received its benefits. The JumpStart program has anticipated this, as it is only to apply to those who are currently under the age of 18, and thus have never paid taxes under the current income tax system.
Income Taxes and Tax Immigration
Are there others? There's the possibility that a person will move to a lower tax jurisdiction like the United States once he reaches a high marginal tax rate. That's already (arguably) a problem with the current income tax regime, and there's no reason to believe that the JumpStart system would cause an increase in income tax emigrants. One problem I see is that it might cause those who have high lifetime earnings to drop out of the workforce even earlier. How much of a problem that is depends on what impact early retirement has on the economy. It would be interesting to see an economic study on the issue.Mr. Clement should be applauded for introducing this income tax proposal to the mainstream. Too often leadership campaigns become cults of personality, so it's refreshing to see a substantive new policy proposal. Increasing the efficiency and equity of both government programs and government revenue collection schemes, such as the income tax, is a lofty goal, and we need to encourage the study of new approaches in these areas. I would like to hear what you think; please send me your thoughts by using the feedback form.
JumpStart Tax Rates
| Lifetime Income | Income Tax Rate |
| Under $250,000 | 0% |
| $250,000 to $500,000 | 14% |
| $500,000 to $750,000 | 20% |
| $750,000 to $1,000,000 | 24% |
| $1,000,000 plus | 27% |