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Sound like science fiction? Not really. This proposal for a simple income tax has been made numerous times in the past both in Canada and other countries. The federal government even took it seriously enough that the Goods and Services Tax form is a page submitted to Canada Revenue Agency.

The only thing that gets in the way of putting a stake into the heart of complex and distorting income taxation are voters tolerating special interest groups pleading for targeted preferences and politicians enacting special provisions to attract votes. We could devise an income tax that is fair, simple and pro-growth if voters rose to the occasion and voiced their displeasure over a tax system that has gone off the rails.

Simplification would be a major disruption, but well worth the effort. Some people would pay more tax and others less in a tax reform that yields the same revenue, but the long-run economic benefits will appeal to voters. Only accountants, lawyers and tax economists like myself will regret a shift to a simple income tax since the demand for advisory services will drop like a stone (2).

So what would a simple income tax look like? Taxpayers would receive their usual T4 forms indicating income received from their employers. Those with self-employed income would need to have their business income calculated according to accounting principles — but with a twist that I explain below. Taxpayers can then deduct contributions to registered saving and pension plans without limits and add withdrawals from these plans to their income. Or they can put money in Tax-Free Saving Accounts or housing as much as they wish without limitation. Withdrawals from TFSAs or the sale of a house would not be taxable as in the current situation. Some other limited deductions could be provided, but far less than now.