The world is a complex place today, and more and more we seem to live multiple lives. Few people (and even fewer in the future) tread a linear path of education, career, family, and location.

Basically, nobody knows what the future will bring. In this type of uncertain environment, a key advantage for the individual is financial flexibility. The ability to control one’s destiny is much enhanced if one has more options with which to respond to a changing world.

Are there innovative policies Canada can adopt that could help? I think there are, and here is one: create continuous income smoothing for tax purposes.

In Canada, we have a progressive tax system wherein those who earn more pay a higher marginal rate, and most of us agree that this is the right policy. Nevinomics’ suggestion is that the Federal and Provincial Governments smooth income tax payable throughout one’s lifetime and make tax refunds payable monthly and instantly when one is not working, or earning less. This would act as an automatic individual and overall macro-economic stabilizer, providing much more flexibility for people to join and leave the workforce – a huge positive impact on Flourishing.

Here is how it would work:

  • Tax payable would depend on average earnings from the age of 18.
  • For periods where you are not working, the average amount of tax paid would be declining, because the average earnings per period since age 18 is declining.
  • So, for an individual who, say, works from 18-28 and then decides to go to college, the government would owe them a refund of part of the previous taxes paid for each month they are out of the labour force.
  • This needs to be done on a monthly basis, so that when you leave the labour force, or earnings are reduced, the next month you start to receive the benefits of the smoothing scheme.
  • Of course, when you re-enter the labour force, your tax payable may be higher than the headline rates because the smoothing calculation works both ways.

Basically, this policy works as an automatic saving mechanism for the individual. There would have to be adjustments for inflation, but that is easily worked out in the modern world.

Nevinomics believes that this type of tax smoothing scheme would have an enormous positive impact on Flourishing.


Photo: Denis Collette. Flickr Canadian landscapes. Creative Commons License.