Earlier today I noted that progressive taxation is alive and well in Canada. Incidentally, this observation prompted a reader to offer the following critique of proportional taxation, i.e. a flat tax:
A flat tax would redistribute wealth upwards. It’s why Alberta has the highest wealth inequality in the country.
Let’s clarify something: Alberta may refer to its provincial income tax as flat; in reality, it is nothing of the sort. Rather, it is progressive. Our reader fails to understand that progressive taxation does not require graduated tax rates. In fact, the same effect can be achieved by incorporating exemptions into the tax code. As the province’s own tax plan explains (my emphasis):
The province’s income tax system is progressive, which is achieved through the highest basic, spousal and eligible dependant credit amounts in Canada. Albertans can earn significantly more income than residents in other provinces before having to pay income tax. A single individual can earn over $18,000 before paying any provincial income tax while a two-income family of four can earn over $46,000 before paying provincial income tax.
Of the nearly 2.7 million Albertans who file personal income tax returns, 1.9 million are subject to federal income tax, while 1.7 million are subject to provincial income tax. Nearly 40 per cent of taxfilers pay no provincial income tax, while 10 per cent account for more than half of Alberta’s personal income tax revenue.
While it is true that progressive taxation is a disincentive to productivity, the level of taxation is considerably more important than its progressiveness. Consider, for example, two individuals, one of whom has an annual income of $20,000 while the other earns $100,000. Under a 50% flat tax, the former will pay $10,000 and the latter will pay $50,000. Under a steeply progressive tax with rates of 1% for incomes of $20,000 and 40% for incomes of $100,000, the former will pay $200 and the latter will pay $40,000. Faced with a choice between the two tax systems, both are better off with, and will therefore be expected to choose, the progressive tax system. It is the level of the tax rates that matters.
Nonetheless, all taxation, by its very nature, redistributes income. This is in distinct contract to the allocation of resources by the unhampered free market. As Murray Rothbard explains:
…[T]he free market does not distribute incomes; income there arises naturally and smoothly out of the market processes of production and exchange. Thus, the very concept of “distribution” as something separate from production and exchange can arise only from the government’s binary intervention. It is often charged, for example, that the free market maximizes the utility of all, and the satisfactions of all consumers, only “given a certain existing distribution of income.” But this common fallacy is incorrect; there is no “assumed distribution” on the free market separate from the voluntary activities of every individual’s production and exchange. The only given on the free market is the property right of every man in his own person and in the resources which he finds, produces, or creates, or which he obtains in voluntary exchange for his products or as a gift from their producers.
There is nothing inherently evil about income inequality. The woefully ignorant who advocate coerced egalitarianism, i.e. income equality, are advocating an end to economic calculation and a reversion to barbarism.