Tax Reform: Dual Tax System?

[cybercoma]

Last night, Kevin Milligan, associate professor at the Vancouver School of Economics, delivered the Benefactors' Lecture to the CD Howe Institute, sponsored by the Chartered Professional Accountants of Canada. Here is a link to the transcript of the speech.

Essentially, he calls for tax reform in Canada. He notes that our tax system was designed in the 1960s and is "not well-suited for the challenges of today's economy." Individual, pre-tax, inflation-adjusted total incomes over the last 30 years have grown by 150% for the top 0.01% and just 8% for those in the bottom 9%. Milligan goes on to note that the growth in the top is the result of employment compensation, particularly for those he calls "supermanagers." These are the executives of large firms. Milligan says that 2/3 of the top 0.1% are from this "supermanager" class.

Milligan continues by addressing what happens when taxes are raised on the highest income earners. He suggests that at around 50% tax, the tax pool becomes stagnate. It's at this point we tip over the top of the Laffer Curve, in theory. The highest income earners can and will go out of their way to find efficiencies if they are over-taxed.

So it is thusly that he sets up the problem with today's economy vis-a-vis The Carter Commission of 1966, which established our taxation framework: income concentration is raising concerns about fairness. But the responsiveness of top earners to higher tax rates makes it very difficult for us to raise rates to meet those fairness concerns. He argues that "many growth oriented tax reforms are held back because of concerns about fairness." In essence, we cannot grow the economy because we cannot tax the highest earners where the wealth is being concentrated.

Milligan's solution is this: A Dual Tax System.

First: An income tax on job income that is progressive. We already have this today, but Milligan argues that it could be more progressive. The top bracket begins at $136,270. This is below the top 1%. He does not go on to elaborate on what a more progressive system would look like, but it could be and probably should be in the interest of fairness commensurate with the concentration of wealth. There should be more brackets above $136,270. Perhaps even an additional bracket for the top 0.1%.

Second: A tax on returns on investments. This is a tax on investment earnings. It would be a "simple, common, flat rate" tax that is applied equally to all capital gains.

This dual tax system has been in place in Sweden and other Nordic countries for over 20 years, according to Milligan. By any objective measure, the quality of life in those countries has surpassed and outpaced us.

Milligan goes on to recommend a way in which to reform the tax system gradually to introduce this change. The Dual Tax System is the final stage in his reform. Here's how he recommends implementing the changes:

Tier 1: CLEAN the base

1. Remove inefficient tax credits that disproportionately benefit higher income earners.
2. Broaden taxes to cover stock options that are offered as employment compensation.

Tier 2: SIMPLIFY capital income tax

1. Set a flat rate for capital income and dividends between 15-19%. Currently, there are two different tax rates for each.

Tier 3: TRANSFORM to a Dual Income Tax

1. Move the taxation on interest and other investment income down to the capital income rate.
2. Increase tax rates on HIGH income earners: Milligan writes, "Today’s top federal bracket at 29% starts at about $136,000. We could add to that a bracket of 32% at $250,000 and 35% at $400,000 as possible targets."
3. Corporate tax reform to improve investment opportunities through an Allowance for Corporate Equity system. To vastly oversimplify, corporations are only taxed on capital investment gains that are beyond "normal."

These are Kevin Milligan's suggestions for a pro-growth tax structure in Canada. What do you think of his proposal?

[Argus]

On the face of it he's correct on the need for reform. My issue with the above is it recognizes big numbers but wants to deal with it in small ways Bumping up the tax rates on income for higher earners is silly given he's already admitted most of the higher earners are getting their added wealth through compensation other than income.

For example, his suggested targets for tax increases are those earning $250,000 and then $400,000. Well, that's a way of skimming more off entrepreneurs like me, and small businessmen, but the real 1% will just laugh heartily at that. For example, the guy who runs Magna makes $330,000 in salary, and $10,000,000 in bonuses. The guy who runs Onex gets $25,000,000 a year in bonuses. And you can believe the companies have very clever accountants who figure out how to minimize the tax burden on the various compensation methods they use.

If you want to target the guys making ten and twenty million a year (not counting investments), you don't bump up the tax rackets on the small fry earning three or four hundred thousand.

As to taxing investment income, that was hugely reduced in the eighties, down to about 15%. If you want to take some of the money away from the top .01% to prevent concentration you apply an incremental tax on investments (which he doesn't suggest), rather than imposing a flat rate, so that you aren't hitting mostly pension savings.

I would exempt investment income below $100k from additional capital gains/dividend taxes, and raise it incrementally from there. Again, the target is supposed to those making millions a year, not those saving for a pension, or getting dividend income AS their pension. Focus on those earning at least $250,000 a year in investment income, and preferably higher.

Edited November 26, 2014 by Argus

[cybercoma]

The bonuses would be taxed in one of two ways.

First, if it is capital income it would be taxed in the second tier of the dual tax system at the 15-19% flat rate.

Second, if it is compensation for employment, like stock options, then it would be taxed as employment compensation commensurate with the progressive tax structure.

Your investment income exemption is accounted for in the Allowance for Corporate Equity system when it comes to businesses. Normal returns are not taxed. Excessive returns are. On the individual level, people would still be able to take advantage of tax shelters like TFSAs and RRSPs, but admittedly not to the tune of $100k.

In other words, I think this system actually addresses your concerns already.

[overthere]

The highest income earners can and will go out of their way to find efficiencies if they are over-taxed.

They already do. When countries impose very hefty taxes on the very rich, they leave. Its happened numerous times in the developed world, including Canada.

In some cases, they don't even have to take their money with them. They can leave it a home safe and sound and earning, as long as the country they take up residence in has a tax treaty with Canada.

[cybercoma]

They already do. When countries impose very hefty taxes on the very rich, they leave. Its happened numerous times in the developed world, including Canada.

In some cases, they don't even have to take their money with them. They can leave it a home safe and sound and earning, as long as the country they take up residence in has a tax treaty with Canada.

The research seems to suggest not. The benefits to staying here far outweigh the costs. The tax burden has to actually exceed 50% before that happens in any meaningful way.

[overthere]

Then the research is wrong. It is estimated that 15% of all countires in the world are tax havens, and mostly corporate.

That dovetails neatly into how the very rich actually operate.

Of course they do not have huge personal incomes, That would be idiotic, because they already perceive that tax rates for big earners are high and it makes their money vulnerable.

The very wealthy have money in corporations, shares, bonds and trusts secreted in many of those 15% of the worlds countries and that money is much harder to tax.

Examples?

France ran this old warhorse, tax the rich!, up the flagpole a year or two ago. The response from the rich was rapid and unequivocal: au revoir. The govt backed down, of course.

Ireland has been a corporate(meaning personal when structured correctly by your clever accountant) haven for years, and was just forced by the EU to slow it down. Google 'Double Irish.'

Mexico, Panama, Costa Rica and several countries in the Caribbean have been in this business for decades. They would welcome Canadian expats with open arms, and do.

The Cayman islands have an entire financial sector, a very important one for their economy, based on looking after foreign wealth parked there.

And you don't have to give up your passport. It is all legal here and there.

And so on.

[eyeball]

It sounds like what's needed if countries are going to seriously try to address the problem of wealth concentration through their tax systems is an international effort to shut down the shell game that national boundaries provide to tax avoiders.

[Argus]

The bonuses would be taxed in one of two ways.

First, if it is capital income it would be taxed in the second tier of the dual tax system at the 15-19% flat rate.

Second, if it is compensation for employment, like stock options, then it would be taxed as employment compensation commensurate with the progressive tax structure.

Your investment income exemption is accounted for in the Allowance for Corporate Equity system when it comes to businesses. Normal returns are not taxed. Excessive returns are. On the individual level, people would still be able to take advantage of tax shelters like TFSAs and RRSPs, but admittedly not to the tune of $100k.

In other words, I think this system actually addresses your concerns already.

What you do is set up a corporation, offshore, and then the company pays the millions into the offshore corporation. The corporation can then invest that money in whatever you want to invest it in, entirely legally, entirely tax free. I'm not conversant with the many ways the very rich can get around laws but they have a lot of them. Oh, legally you have to declare a lot of things if the corporation pays you money or buys a car for you, etc. But there are ways around that, too, and it's very had to police. Canadians aren't taxed on income they get when living elsewhere, for example. I suppose, in theory, you could move to Bermuda or Qatar for a year, and if the corporation pays you a hundred million bucks, that wouldn't be taxed in Canada, even when you bring it back with you.

[Bonam]

Milligan's solution is this: A Dual Tax System.

Seems too complex to start with. One of the biggest problems with the tax system is the complexity, which by its very nature enables loopholes, creates an entire industry dedicated to filing taxes, and costs both taxpayers and the government tons of money to administer.

I would favor a tax system based on a single progressive tax structure, with no deductions for anything, and all forms of proceeds (wages, dividends, capital gains, etc) taxed in the same way.

[Ash74]

http://www.dailymail.co.uk/news/article-2298936/France-lost-million-jobs-repressive-tax-regime-report-claims.html

I will not swear by the source but there are many articles about this issue in France.

The rich will indeed leave or hire lawyers to hide their money.

I do agree that taxes are much too complex but just a flat tax is unfair.

A no deduction policy would kill the charities. Even the good ones that do not just spend it on admin fee's

[overthere]

It sounds like what's needed if countries are going to seriously try to address the problem of wealth concentration through their tax systems is an international effort to shut down the shell game that national boundaries provide to tax avoiders.

Not possible.

There is too much money involved.

Oh, and there is nothing wrong or illegal about tax avoidance. Every one of us does it every year.

[Moonlight Graham]

Oh, and there is nothing wrong or illegal about tax avoidance. Every one of us does it every year.

Not to the tune of hundreds of thousands if not millions of dollars.

[Ash74]

It sounds like what's needed if countries are going to seriously try to address the problem of wealth concentration through their tax systems is an international effort to shut down the shell game that national boundaries provide to tax avoiders.

This would not be possible.

Some countries need that money too survive. Their economy if not based on it do depend on it. They are not just going to quit. We have all heard of the Cayman Islands, Belize, Barbados's I believe is a popular one. These are just the countries that are close to the U.S .

[cybercoma]

Seems too complex to start with. One of the biggest problems with the tax system is the complexity, which by its very nature enables loopholes, creates an entire industry dedicated to filing taxes, and costs both taxpayers and the government tons of money to administer.

I would favor a tax system based on a single progressive tax structure, with no deductions for anything, and all forms of proceeds (wages, dividends, capital gains, etc) taxed in the same way.

Actually, it's far simpler than the current system. Tier 1 gets rid of all the boutique credits. Moreover the capital income is a flat rate and not divided between capital gains and dividends as it is now. It may sound more complex from the explanation, but the suggestion actually cleans a lot of things up and simplifies them. They way I wrote it makes it seem that it just removes the "inefficient" credits, but the way it's written in the article he makes it clear that all those credits are inefficient and they all must go.

Edited November 27, 2014 by cybercoma

[cybercoma]

http://www.dailymail.co.uk/news/article-2298936/France-lost-million-jobs-repressive-tax-regime-report-claims.html

I will not swear by the source but there are many articles about this issue in France.

The rich will indeed leave or hire lawyers to hide their money.

I do agree that taxes are much too complex but just a flat tax is unfair.

A no deduction policy would kill the charities. Even the good ones that do not just spend it on admin fee's

The flat tax is only for capital income, not earnings from employment.

It's not a "no deduction" policy for personal income tax, but instead a policy that gets rid of the myriad tax credits that have been added since 2006 which disproportionately benefit the wealthy.

Businesses and non-profits will still have corporate deductions.

[Bonam]

Actually, it's far simpler than the current system. Tier 1 gets rid of all the boutique credits. Moreover the capital income is a flat rate and not divided between capital gains and dividends as it is now. It may sound more complex from the explanation, but the suggestion actually cleans a lot of things up and simplifies them. They way I wrote it makes it seem that it just removes the "inefficient" credits, but the way it's written in the article he makes it clear that all those credits are inefficient and they all must go.

Oh I know it's much simpler than the current system, which is a giant mess. Just saying it should be even simpler than that.

[overthere]

Not to the tune of hundreds of thousands if not millions of dollars.

It is far larger than that, many billions in Canada , every year in taxes by wage earners. If you include self employed and corporate tax avoidance it would be hundreds of billions.

Tax avoidance means that a taxpayer takes advantage of existing allowances and deductions. Personal exemptions, age exemptions, medical expesnes, moving expenses are taken by everybody. Expenses incurred in the creation of income are taken by everybody. Social assistance items like welfare or OAS are exempt and part of tax avoidance. And so on.

Tax evasion is something else. Tax evasion is a crime.

[eyeball]

Tax avoidance that's facilitated by moving money around offshore is just legalized evasion, of a sort that is unavailable to ordinary workers.

I wonder how long the state would put up with an ordinary worker's pay being transferred from a company's offshore account into an employee's offshore account?

[August1991]

It is far larger than that, many billions in Canada , every year in taxes by wage earners. If you include self employed and corporate tax avoidance it would be hundreds of billions.

I disagree, strongly.

About 2% of federal income tax filers pay about 30% of all federal income tax revenues.

Another 60% of filers pay the other 70% of federal income tax collections.

About 30% of filers pay no federal income tax at all.

IOW, Canada has a very progressive income tax system. Indeed, Canadian governments have a sophisticated tax regime that includes a federal VAT (with refunds) and Roth/410k income tax exemptions for saving. We even have lump-sum taxation in the form of CPP/EI contributions. Heck, we even have sophisticated equalization payments so that provincial governments can tax people out of province and induce them to stay away from a supposed free-lunch.

=====

I don't know why this subject has suddenly appeared. Coyne had an article on it. I saw other stuff on the Internet.

Does Harper want to make the next election about taxes?

Edited November 28, 2014 by August1991

[overthere]

^^^^^^

tax avoidnace vs tax evasion. Everybody does the former, criminals do the latter. Hundreds of billions.

The best way might be none of the above. As long as there are different taxes and tax systems for companies and individuals.

I'm interested in the possibilities of completely eliminating taxes for corporations, and taxing every dollar accruing to persons. Every dollar in profit earned by a company eventually trickles down to a person. Share sales, capital gains, dividends, pay cheques, bonus money and so on. Tax it then.

[ProudCanadianConservative]

Second: A tax on returns on investments. This is a tax on investment earnings. It would be a "simple, common, flat rate" tax that is applied equally to all capital gains.

Yes lol, let's tax people that are actually saving for their retirement or close to retirement....

on second thought, no thanks.

[Michael Hardner]

Yes lol, let's tax people that are actually saving for their retirement or close to retirement....

on second thought, no thanks.

Ok, but we maybe we should tax returns on mining so that there's a fund to clean it up when it's abandoned years later.

[Argus]

Ok, but we maybe we should tax returns on mining so that there's a fund to clean it up when it's abandoned years later.

Would it not be better to simply require the companies clean it up as opposed to taxing investment in mining?

[Michael Hardner]

Would it not be better to simply require the companies clean it up as opposed to taxing investment in mining?

Yes, but they cut and run, sell the assets and pay out owners before closing the company out. Corporations do die... sometimes... and especially when the living version left a big mess to clean up. At that point, the company has no money, only the people who made the money do and they're pretty difficult to get to.

[eyeball]

Would it not be better to simply require the companies clean it up...?

What a novel concept, I wonder why no one ever thought of that before?

It's no wonder they pay you the big bucks.