Years ago I worked in structured finance for an investment bank, creating tax-efficient structures for large corporations. That left me with the lasting impression that income taxes are inefficient — both in terms of equity and collection — and should be levied at low flat rates if they cannot be avoided altogether.
Any tax acts as a disincentive. The impact of flat taxes at low rates is mild. We don’t often think of GST/VAT as deterring consumption. But income tax, with progressive tax rates, acts as a massive disincentive on production. If there was no income tax, we would all be encouraged to work harder. Doctors might not play golf on Wednesdays, but the average worker would also seek more income because they aren’t giving half of it back in taxes. This would give a significant boost to GDP. Interest would also not be taxed, creating an incentive to increase savings.
The problem with all taxes is they tend to increase over time. Flat rate taxes such as GST are the exception because of political fall-out from a rate increase. It is too easy with progressive taxes, like income tax, for politicians to introduce increases by stealth or simply to allow inflation to push taxpayers into higher tax brackets over time. Flat taxes allow politicians less wiggle room as any tax increases are evident to all.
Substituting a combination of land taxes, resource taxes and sales taxes (GST/VAT) for income taxes, or even just reducing income taxes to a low flat rate, would boost both economic growth and savings while making politicians more accountable to their electorate.