Tax Reform

[geoffrey]

I apologise for the length for those disinterested, but I doubt if this discussion would get anyone interested anyways. I'm going to be incorporating this as my outline into a paper for school use, and I figure I might as well throw my rough thoughts and outline out there for you to play with, think about, whatever for those that are interested. I'd love to discuss any points, as it'd certainly help me solidify my position for my paper. Obviously, the paper is going to be full of actual citations and numerical examples showing various changes in revenue, and I'd be happy to provide the detailed paper to anyone interested in reading such a boring thing once it's complete, let me know. But this, this is my MapleLeafWeb Opus.

I think that tax reform is needed desperately in Canada, we're in trouble with competitiveness and I don't think our productivity needs be as low as it is.

This post is going to outline my views on what I believe is the most effective and productive tax system we can impose upon Canadians. The entire plan is built upon a realistic environment, with foreign competition, trade and investment... and assuming that the Canadian government would require to maintain near current revenues.

The main goals of the tax package would be to promote productivity, in the sense that I'd be attempting to remove any barriers people may have to reaching their peak contribution to the economy, while ensuring that those efforts are meet with an equitable and fair return to the individual. Contrary to the typical OECD European view, I'm not looking to tax the rich more and the poor less, and have everyone come out close to equal. I'm stressing that taxation needs not be a social engineering program, but in fact, should use methods to absolutely minimize effects on market behavoir.

When individuals receieve reasonable and just returns after the government has taken it's share, they will chose to be more productive to acheive a higher standard of living for themselves and their family. That is the cornerstone of my reform ideas.

We'll start with corporate taxes.

Corporate Taxes

I find corporate taxes very hard to morally justify. We have to look at the corporate structure, what is it made up of and ultimately who benefits from the corporations profit.

All profit returns to the shareholders. A corporation cannot make money, but it can provide wealth for it's shareholders. Governments have in the past made the unreasonable claim that businesses should pay taxes, but all that tax money comes from the profits... which is in fact, a tax on the shareholders.

I'll go further then that. A shareholder only realises the wealth when it is extracted from the company... why do we tax a company's income on a yearly basis? Canada isn't the top country in terms of investment capital, so we must make the best of the little we have. This forms the basis of my first proposal in the package. Let's completely eliminate all taxes on corporate income. Earth shattering perhaps, but this all will make a little more sense quite quickly.

If a corporation can amass tax free cash, it will use that cash to generate further income. If a corporation operates on a 10% Return on Equity basis, and is left with 10% more cash at the end of the year (10% more equity then, as it would be reflected in a higher retained earnings), the corporation will generate 1% more growth than if that income had been taxed, and likely provide more growth and jobs in the economy with that extra money than the government ever could hope to.

This leads people to fear that corporations would hold all the wealth. Well, not quite. People like taking money out (dividends). This is where we tax the corporation, or more accurately, the shareholders. Any withdrawl of cash from a corporation by a shareholder would be confronted with my flat tax, more on this later.

This also addresses the double taxation on small business owners, who pay a small business tax rate, and then a personal income rate on top of that. Very regressive in an economy desperately trying to establish a stronger small business sector. Small business owners would now be taxed the same as the employees of Canada.

But the foreigners would get away tax free! Absolutely not. They need to withdraw money or sell shares to partners outside of Canada. These transactions would be taxed with a withholding tax that would be equal to the combined corporate and withholding tax of the lowest taxed country in the OECD, subject to reasonability review. This would ensure that Canada always has the most attractive investment climate based on the tax structure, which would add to the numerous other advantages we have over other investment destinations.

Personal Tax

This is where I'd see the most change. I strongly advocate the implimentation of a flat tax, close to Hall-Rabushka model.

Essientially, we'd first start be seeing Canadians for what they are, individuals, and tax them as such. One thing that the current tax system ignores is that spouses and children of income earners (take the one income, two parent family) also earn an indirect income that they are not taxed on. This could be accounted for in a flat-tax system quite easily, without marginal rates, income transfered to the spouse and children would still be taxed the same, minus of course, the individual deduction.

Let's, for the sake of argument play with the example of a single income family of 4 (2 adults, 2 minors) earning $60,000 a year and the flat-tax rate will be 10%. We'll state the exemptions at $7,500 per person (I'd likely consider a much reduced exemption for children, but this is just an example... the actual exemptions would likely be much higher in a real example). That leaves the family with $30,000 in taxable income, at 10%, which means the family (or the income earner, same deal) will pay $3,000 in taxes. Great. I think this addresses the concerns of those that do not believe a spouse at home with children is adequately allowed for in the current system. In fact, a flat-tax imposes income splitting without negatively affecting single people.

We also have some concern that spouses carry an unfair burden by returning to the workforce, that this would discourage them... Let's have the spouse in the previous example return to the labour force at $40,000 per year. The family's income is now $100,000 and the personal exemption is still $30,000. The tax bill increases to $7,000. Now the effective rate is higher on that additional income, you may think. True, when looked at on a family basis. But not individually. We must assume that both spouses have an equal standard of living. Therefore, the family income is split amongst the members of the family and now everyone bares an additional $10,000 in income. That $10,000 is taxed at the same rate as the $10,000 before it and the next $10,000.

Currently, there is an effective ~$1,000 tax charge of a spouse entering the workforce, due to the loss of the spousal deduction. In this system, there is no such charge, and the spouse is free to enter the workforce even on a part time basis and be subject to only the flat tax.

Importantly here, there is no tax disincentive to earn more. You make the same amount per hour whether you work 30 hours a week or 40 hours a week. Or if the family as a whole works 80 hours a week. That additional time isn't paid out at an after-tax lower effective rate. We do run into issues at the lines between exempt status and flax-tax paying status, but not any greater than in a progressive system. We do however, eliminate much of the punishment of having a second earner enter the workforce and for people to earn greater amounts beyond the exemption amount.

Works well. In fact, under this system, we'd see many removed from the tax system all together. A realistic number I'd play with is $10k per adult and $5k per child to a maxium of $20k in child deductions. So an average family of 4 would not pay taxes until they made $30,000 a year. Unfortunatley, my tax rate would likely be higher than in the example to make up for the loss... perhaps 20-25%.

This could, perhaps, be adjusted downwards if an increase in the tax base was seen through more people working extra hours and single income families turning into two income families.

This system would elimate all other deductions, allowances... seriously cutting down on administrative overhead and saving the government and the taxpayers millions in admin expenses.

Expanding on my previous point from corporate taxes where I said that corporate profits would be taxed only in the hands of those that personally gain, here it is. Capital gains, dividends and trust disbursments would all be added to the net family income and taxed at the flat rate.

Since your tax-rate does not change based on your income level, RRSP's would no longer make much sense, unless one was of course planning to live under the exemption limit. With more people holding their investments outside of RRSP's, the government would see it's tax revenues on these more quickly, and be able to make significant gains on the time value of this money.

Employer benefits would also be taxed at this rate.

Consumption Taxes

Consumption taxes are easily evaded, in fact, we see it often with cash discounts. There is very little measure of fairness in consumption taxes for this reason, and for the reason that it is nearly impossible to fairly remove low income earners from the effects of the tax. It is, in fact, very regressive.

My suggestion that removing the double taxation on small business would increase small business and self employment also impacts this. More small business and self employed individuals creates more points of sale, more audits that need to be done, and more evasion... which makes the GST more and more costly the more productive and innovative an economy is. That's simply unacceptable. So I propose complete elimination of GST.

Other taxes

Taxes such as inheritence taxes would again be dealt with in the same manner as I've mentioned before, all income in taxed in the hands of the individual. Maintaining the consistancy of this, inheritence of cash and cash like instruments would have to be taxed at flat-rate. Assets transfered (included equity investments) would not be taxed until cash income was derived from them, usually at their sale.

Carbon taxes would not be a part of this system. Providing disincentives for economic activity would not be in line with my objectives outlined at the beginning. Current environmental issues, especially Green House Gas (CO2) emissions would be dealt with through hard caps and environmental regulation. Some view this as a tax, but I contend that it acheives the same results without the administrative overhead, both at the government and corporate level.

Excise taxes... our sin taxes. What to do with them. I'd have to say elimate them.

Take tobacco. Elimate all taxes on it to start. We would then institute an insurance type system where the additional premium would be integrated into each purchase to compensation for the increased risk to the health care system. Say smokers cost the system an extra $1b a year and a million people smoke 100 packs per year. The Canadian Health Premium would then amount to $10 per package of cigarettes. This is no more arbitrary than the current system, in fact, its less, because the smoker pays no more then the burden they are statistically likely to cause. These insurance fees would apply to various items that the various departments deem to be a burden upon the general tax paying public. Alcohol, to health. Gas, to the environment and roads. And so on.

Of course, under the ideal 2-tier system, a smoker could opt out of this excise tax by producing his private insurance card... and the insurer would deal with the fact that he smokes through higher premiums or whatever they'd like to do in the private industry.

This isn't in contradiction to my elimination of consumption taxes... I specifically want to avoid punishing good behavoir (buying and selling things). I also think that people need to be held accountable for various behavoir as we'd see in a completely privately insured environment. Smoking be one of many.

---

In summary, the tax plan actually is quite simple. Tax all income as the person receives it, and the only deduction being the low income per person living allowance. The administrative savings are huge, the economic attractiveness of it is major for investors. Increased insurance and usage premiums, collected at the point of 'sin' would act instead of excise taxes, to cover your share of consumption of government (taxpayer) property, everyone pays for what they use beyond the average person.

[Charles Anthony]

Great! So long as your tax rates are ZERO I think it is a great plan!

[end useless sarcasm]

First, I want to question some of your explicit assumptions and second, I want to question your implicit assumption.

explicitly:

Canada's competitiveness is affected by many things. How much of an impact do you think current taxation has?

Why should government revenue be neutral?

Instead of saying "I find corporate taxes very hard to morally justify" I think you should examine a moral justification of corporate status.

You must provide an explanation for your hard caps and environmental regulation and green house gases.

Your tobacco tax is complicated. It sounds like you want to eliminate a tax on it and put it back on -- after making some wildly convoluted assumption-laden calculations. Also, calling it a premium is comical. Dalton McGuinty would get a kick out of your proposal and the Ontario tax-payers will love you automatically.

implicitly:

Are you outlawing all other forms of taxation power? It seems like you are assuming there is one taxation power. What level of government is going to be your tax-man? [by the way, there is a moral level of government that can do it but we have been through that ad nauseum.]

What are the provinces or the municipalities going to do? If all other levels of government still have the authority to tax willy-nilly, your whole scheme truly is meaningless. Sorry.

[begin useless sarcasm again]

Congratualions on re-inventing the wheel! Your taxation proposal already exists today. The only problem is that Canadians are saddled with other taxes too!

[PolyNewbie]

The best idea I ever heard was a micro tax on stock market transactions. I don't know much about the economy, my interest is the history of banking although I am learning good economic theory from the best people for it (not the UNESCO education system).

I have heard that if we tax the stock market transactions that this would dampen activity and take a lot of speculative capital out of the markets. We would therefore get a more realistic view of the economy through looking at the stock market and people would be inclined to invest in actual useful productivity. The tax would be so low as to be unnoticeable for those who buy derivatives as insurance. The amount of money comming in would reduce the need for much taxation.

Has anyone ever shown that this would be a bad idea ?

[jbg]

How does one avoid th euse of a coroporation to build up cash and avoid ever paying taxes on it? Wasn't that the purpose, in the first place, of levying corporate tax?

Why not, for closely held businesses, adopt a plan whereby its income is treated directly as income to the shareholder(s)?

[imatitlover]

Whats with people always complaining about taxes?

I dont mind paying taxes and I most certainly dont feel overtaxed.

The taxes we pay is a small price to be living in the greatest safest country in the world and for our first class healthcare system.

Quit your moaning

[geoffrey]

Addressing all the concerns:

Canada's competitiveness is affected by many things. How much of an impact do you think current taxation has?

Canada in many studies has come out below average in competitiveness for tax rates. We have some great competitiveness benefits in Canada, lower health costs for employees, an attractive labour environment compared to Europe. But we've always been struggling to up our foreign investment. I think this is mostly do to a very high tax burden on corporations. Taxes cut directly into your return on investment, our taxes are many times that of say Ireland for example. Why would I invest in Canada where much of my investment goes to the government, compared to Ireland where my investment comes home with me? Increases in productivity due to investment are more noticed in people's pockets in environments with lesser taxation.

Even within Canada, outside of oil and gas, Alberta companies still see higher investment than other provinces, due to aggressively low corporate rates.

The biggest development in the economy of the world right now is a move towards small business and contractor services. This allows the economy to be more flexible to changes and also provides increased innovation and productivity. Canada's current policy of having small business owners pay corporate tax (at a small business rate) and then pay income tax after that is not only unfair, but it's holding back our economy and discouraging people from being innovative and launching their own enterprises.

Why should government revenue be neutral?

It shouldn't be, it should be reduced. But that would add a whole other complexity into the paper, I'm looking to deliver the revenue in a better way. If you want to cut the taxes, have at 'er. This is a business accounting paper and not a political science one however, I should have made that clear before. The politics aren't really my concern.

You must provide an explanation for your hard caps and environmental regulation and green house gases.

Outside the scope of the paper. I threw that in because I knew someone was going to ask about a carbon tax and I'd have to answer that I perfer hard caps and regulation. Essientially, compliance with these would be a form of taxation, I understand that, but it provides real results and removes the ability of GHG just becoming a cost of doing business. It also prevents regional disparity. I'd address the hard caps Federally on the basis of emission intensity, and then have the provinces directly control emissions at their level.

Your tobacco tax is complicated. It sounds like you want to eliminate a tax on it and put it back on -- after making some wildly convoluted assumption-laden calculations. Also, calling it a premium is comical. Dalton McGuinty would get a kick out of your proposal and the Ontario tax-payers will love you automatically.

Essientially it is an increase in your health insurance premium. I perfer a private health care system, where it wouldn't even be an issue, if you smoke, you pay more in insurance and I'd leave cigarettes tax free.

I'm not into taxing things just because they can be taxed. It's going to have to be for a reason. That's the whole basis of why I get out of corporate taxation.

Are you outlawing all other forms of taxation power? It seems like you are assuming there is one taxation power. What level of government is going to be your tax-man? [by the way, there is a moral level of government that can do it but we have been through that ad nauseum.]

What are the provinces or the municipalities going to do? If all other levels of government still have the authority to tax willy-nilly, your whole scheme truly is meaningless. Sorry.

I'm dealing with Federal taxation. Provincial taxation would remain. I understand your point, but I think competitiveness between provinces will eventually win out, especially if we readdressed equalisation to prevent life long welfare provinces. That's sort of outside of the scope of what I'm addressing here though, I'm looking purely at creating tax competitiveness and efficency at the Federal level. Being said, why not take my ideas and apply to the provincial level. Alberta has something similar, it's proven to be progressive and fair and the economic outcomes, while not directly related to the taxes of the province, are encouraging.

I'd encourage provinces to adopt a similar method of corporate and personal taxes. Equalisation and provincial jurisdictions are really beyond what I want to address iwth this.

The best idea I ever heard was a micro tax on stock market transactions. I don't know much about the economy, my interest is the history of banking although I am learning good economic theory from the best people for it (not the UNESCO education system).

I have heard that if we tax the stock market transactions that this would dampen activity and take a lot of speculative capital out of the markets. We would therefore get a more realistic view of the economy through looking at the stock market and people would be inclined to invest in actual useful productivity. The tax would be so low as to be unnoticeable for those who buy derivatives as insurance. The amount of money comming in would reduce the need for much taxation.

Has anyone ever shown that this would be a bad idea ?

I disagree with that idea. Speculation happens all the time and it's not always bad. There really is no reason to punish it. People take risks and accept those risks. The tax essientially already exists on individuals through transacation fees with their brokers, generally a percentage up to a very high dollar value.

Taking speculative capital out of the market actually does the opposite of what I'm trying to do, which is draw capital into the market. It's not the best kind, as it tends to dry up the second something goes wrong, but at this point, Canada needs every dime and penny someone will give us in order to stay competitive internationally. I don't think we are in a position to take such a radical step at this time at not risk seriously impacting our investment levels.

How does one avoid th euse of a coroporation to build up cash and avoid ever paying taxes on it? Wasn't that the purpose, in the first place, of levying corporate tax?

To be honest, I think the purpose of levying corporate tax was always disguised, as it is today. If the corporation is just building up cash, no one benefits from it, so why tax it? Let that money remain in the corporation as investment and grow.

We'd still tax capital gains when someone sells a share at a higher price than they bought it... it's essientially cashing in on the equity the company has maintained tax free. The purchaser would still be able to write off capital losses if that share price fell and he sold... so that's how I'd ensure that no one was benefiting from having a corporation amass cash. To get any benefit, you'd be taxed.

Why not, for closely held businesses, adopt a plan whereby its income is treated directly as income to the shareholder(s)?

As it is for partnerships? Really, they could adopt a flow through entity type structure if they really wished to do that under the current rules and it'd apply the same way under my rules. A limited partnership with the general partner being a corporation that manages the company and the limited parnters being the shareholders.

With all corporations paying no tax though, a closely held small or medium sized business that distributes all profits at the end of the year would only be taxed once at the personal level, accomplishing what you encourage. If they want to leave money in the business to grow it, I don't see why we should tax that, it's a good behavoir.

[Saturn]

I have a lot of comments but I don't know where to start. Overall, this will produce a great shift in taxation from the lower and upper levels to the middle-income levels. You are looking at a federal tax rate at around 30-40%. Ouch! I'm moving to the US (unless my employer can increase my salary enough to make up for the 40% tax).

[geoffrey]

I have a lot of comments but I don't know where to start. Overall, this will produce a great shift in taxation from the lower and upper levels to the middle-income levels. You are looking at a federal tax rate at around 40%. Ouch!

I really don't think I am. There is a considerable increase in capital gains and taxes on disbursements from companies. There is also a considerable increase in taxation on corporate profits and the savings from less RRSP contributions have to be considered.

I have anecdotal evidence as well here, Alberta's conversion to a flat-tax did not spike rates. It came at a projected decreased in revenues of 10%, but in fact, revenues did not decrease that much and the province further slashed rates soon after by another percentage. Only BC, Ontario and the Territories have lower rates on the first $35k in income than Alberta, and after that, Alberta is lower the rest of the way.

That is on top of no sales tax, so we aren't playing with just oil money here causing this ability. The flat tax works.

My limit would be in the $30k range, so after that $30k, we'd see much equity with the current system if we were to extrapolate the Alberta results to the RoC.

Low income would see a huge benefit from my plan, high income would benefit as well (though they'd be paying higher capital gains taxes, so perhaps not). The middle income earners definitely don't benefit as much, but I'd say this is correcting a problem in the current system, where the rich and the poor bare far too much of the tax burden.

[Riverwind]

There is also a considerable increase in taxation on corporate profits

I thought you wanted to end corporate taxes too. Significantly increasing taxes on corporations as a part of a tax reform package would not be a good idea.

Ending RRSPs is also a bad idea - providing people with an incentive to saving for retirement is a good idea.

In addition, small enterprenuers people running non-incorporated business would be screwed. Many businesses would be rendered uneconomical because they could not deduct their input costs.

Only BC, Ontario and the Territories have lower rates on the first $35k in income than Alberta, and after that, Alberta is lower the rest of the way.

Alberta is not an example that can be applied to the rest of the country. The oil money is huge and distorts the picture too much.

My limit would be in the $30k range, so after that $30k, we'd see much equity with the current system if we were to extrapolate the Alberta results to the RoC.

Your flat tax is really a progressive taxation system with 2 bands.

[geoffrey]

I thought you wanted to end corporate taxes too. Significantly increasing taxes on corporations as a part of a tax reform package would not be a good idea.

Ending RRSPs is also a bad idea - providing people with an incentive to saving for retirement is a good idea.

In addition, small enterprenuers people running non-incorporated business would be screwed. Many businesses would be rendered uneconomical because they could not deduct their input costs.

Effectively corporate taxes would be ended, but revenues would increase through capital gains increases. The behavoir we want to encourage is people leaving their money for businesses to grow, not constantly taking cash out.

Why would an unincorporated business not be able to deduct input costs? No where did I say that I'd end that? It's an INCOME tax, not a revenue tax, I'd be taxing the business's income, after costs.

RRSP's wouldn't need to be ended, they'd just become less practical. The idea is that you save in an RRSP to pay less tax later. If everyone is paying the same tax rate regardless, then it's rather silly to make that assumption. But there are still many cases where saving in an RRSP would still benefit, my suggestion was that less RRSP savings would be made, so governments would benefit from the increased time value of the tax revenues.

Alberta is not an example that can be applied to the rest of the country. The oil money is huge and distorts the picture too much.

I disagree. If we match the oil royalties off with our reduced corporate taxes and no sales tax, we have very little effect of oil revenues on income taxes.

My limit would be in the $30k range, so after that $30k, we'd see much equity with the current system if we were to extrapolate the Alberta results to the RoC.

Your flat tax is really a progressive taxation system with 2 bands.

Essientially, all flat-taxes have this though, anything realistics anyways. As you'll see if you play with the numbers on income, your effective rate increases as you reach higher incomes, approaching the nominal rate. This gives the flat-tax a progressive nature, without creating the taxation disincentives to taking on additional employement or overtime. People are encouraged to work more because there isn't an increased tax burden as their earnings increase beyond the initial exemption.

It's better to have one bump in the taxes that provide a disincentive than 6 to 10 that exist in some provinces.

[Borg]

As one of those considered "rich" by the NDP - I do pay a pile of tax - even though I consider myself to be nothing more than a middle class kind of guy.

If you can fix the system so any idiot (myself included) with a calculator can do his taxes - and we can get rid of all those tax lawyers and accountants - including nearly the entire Rev Canada department - then not only do you get my vote, but you get my eternal gratitude.

I pay to much tax and get very little for it. As do many others. Spread the wealth and get out of my life - that would be wonderful.

Just change it / fix it / trash it. What we have now really is not working. Anyone thinking it does work has never dealt with Rev Canada on a serious matter. I am nearly to the point of wishing someone or something would "kill them all and let God sort it out". (A joke people - a joke)

We really are due for an over-haul on the tax system - unfortunately all it will likely do is further entrench those who complicate the system in order to perpetuate and protect their positions.

The reason for this is the people who do the over-haul will be the same folks who are in situ now - and they recognize the need for complexity in order to preserve their jobs.

It needs to be completed a couple of folks with a modicum of sense and an ability to think outside the tradtitional lines. And certainly there should be no accounting folks in anything other than an advisory position while this transition takes place.

Borg

[August1991]

Some points.

I have argued elsewhere that the GST is a good tax largely because it is consumption based and it is easier to collect than an income tax. Geoffrey, you seem to think the opposite. Let me try and show you why you're wrong.

Income tax requires contact with over 10 million Canadians on a regular basis. The GST requires contact with several hundred thousand. Which do you think is easier to administer? Tax evasion will always occur but I think GST evasion is less likely than income tax evasion.

Income tax also introduces a distortion in the consumption today vs. consumption tomorrow (saving) decision that the GST avoids. In simple terms, income tax discourages future consumption and encourages current consumption. Exempting pension contributions (or RRSPs) from income tax corrects this distortion in income tax.

Geoffrey, what would you think about raising the GST to 35% and eliminating income tax entirely?

I agree with your idea to cut corporate taxes in principle but you should know that corporate managers and small business owners have access to deductions that normal salaried employees don't. For example, business lunches, leased vehicles and basement offices.

As to the excise taxes, the last time I checked using data in Ontario, cigarette taxes covered roughly the extra health costs of smokers.

You say nothing about property (wealth) taxes. You seem to put the criteria on "productivity" yet ignore the criteria of "equity".

If I understand properly, you want to get rid of the different taxation bands and have one single percentage. That's hardly revolutionary and I don't even think it's desireable.

----

Meanwhile, your plan doesn't address the real problems in Canada's tax system. Canada's various social safety measures (including the latest $100/month/kid) have lead to some very strange marginal tax rates depending on income or family situation. At low incomes, people often face marginal tax rates above 100% for any extra dollar earned.

For example, Margrace in another thread showed how our tax regime creates incentives for people not to save for their retirement.

If you can fix the system so any idiot (myself included) with a calculator can do his taxes - and we can get rid of all those tax lawyers and accountants - including nearly the entire Rev Canada department - then not only do you get my vote, but you get my eternal gratitude.

Amen.

I have argued elsewhere that we should abolish payroll taxes (CPP and EI contributions) and pay for these out of general tax revenues.

[geoffrey]

If you can fix the system so any idiot (myself included) with a calculator can do his taxes - and we can get rid of all those tax lawyers and accountants - including nearly the entire Rev Canada department - then not only do you get my vote, but you get my eternal gratitude.

This is essientially one of the reasons I think my proposal is attractive. It reduces the administrative costs by a huge amount... putting people in my profession outta business.

Here is how simple figuring out your TOTAL taxes would be... let's say family of 4, 20% tax rate and an exemption of $7,500 per person.

taxes due = [ income - ($7500 * 4) ] * .20

Your taxes are now done.

There is no room for playing around, avoiding, evading, whatever. Costs are reduced in that sense too.

[Riverwind]

Why would an unincorporated business not be able to deduct input costs? No where did I say that I'd end that? It's an INCOME tax, not a revenue tax, I'd be taxing the business's income, after costs.

Most of complexity of the tax system is caused by allowing businesses to deduct their input costs (i.e. how do you decide what a legimate input cost is?). The deductions available to most employees are few and easy to administer so eliminating these but not touching business input will do nothing to simplify the tax system.

The same issue shows up with most investments. If I purchase a property that I later sell for a profit I should be able to deduct the expenses required to keep that property.

Eliminating deductions from income is practical impossibility.

That said we could drop the entire concept of income taxes and go with consumption taxes since it is much easier to calculate what someone spends rather than what someone earns.

[madmax]

As one of those considered "rich" by the NDP - I do pay a pile of tax - even though I consider myself to be nothing more than a middle class kind of guy.Borg

I personally am intrigued by Geoffreys proposals. That said, a company I am involved with made over $65million dollars, and paid $35000. Of course we bugged the CFO because it was so high this year.

[blueblood]

If you can fix the system so any idiot (myself included) with a calculator can do his taxes - and we can get rid of all those tax lawyers and accountants - including nearly the entire Rev Canada department - then not only do you get my vote, but you get my eternal gratitude.

This is essientially one of the reasons I think my proposal is attractive. It reduces the administrative costs by a huge amount... putting people in my profession outta business.

Here is how simple figuring out your TOTAL taxes would be... let's say family of 4, 20% tax rate and an exemption of $7,500 per person.

taxes due = [ income - ($7500 * 4) ] * .20

Your taxes are now done.

There is no room for playing around, avoiding, evading, whatever. Costs are reduced in that sense too.

I like this, doing farm income tax is a bloody nightmare.

[Remiel]

Is there some way your plan could conceivably disadvantage domestics compared to foreign-owned comapnies when it comes to buying assets outside of Canada? If, say, a Canadian company and an American company both want to buy a Japanese manufacturer, would your plan, overall, create conditions that would allow the Canadian company to have as good a chance at making a competitive bid as they would now?

[Riverwind]

I like this, doing farm income tax is a bloody nightmare.

Are you sure? This system would require you to pay 20% tax on the money you get for selling your product. No deductions for cost of fuel, fertilizer, machinary, etc. I am willing to bet that you and most other small business people would be forced into bankruptcy by such as system.

[blueblood]

I like this, doing farm income tax is a bloody nightmare.

Are you sure? This system would require you to pay 20% tax on the money you get for selling your product. No deductions for cost of fuel, fertilizer, machinary, etc. I am willing to bet that you and most other small business people would be forced into bankruptcy by such as system.

Geoff said that he wanted to eliminate the GST, so that in itself helps me out. Plus he said after costs was when the tax was to be implemented, there wouldn't be a need to list deductions, just the figuring out of net income. If I'm understanding Geoff's system correctly.

[geoffrey]

Income tax requires contact with over 10 million Canadians on a regular basis. The GST requires contact with several hundred thousand. Which do you think is easier to administer? Tax evasion will always occur but I think GST evasion is less likely than income tax evasion.

Income tax also introduces a distortion in the consumption today vs. consumption tomorrow (saving) decision that the GST avoids. In simple terms, income tax discourages future consumption and encourages current consumption. Exempting pension contributions (or RRSPs) from income tax corrects this distortion in income tax.

Geoffrey, what would you think about raising the GST to 35% and eliminating income tax entirely?

The evasion of GST is much higher than income tax when income taxation is done with payroll deductions. It's extremely difficult to evade income tax in Canada today, but everyone here likely had participated in GST evasion through accepting cash discounts.

I understand how you think the administration is less, but a GST audit is actually much more complex and costly than an income tax audit... I can audit your income taxes in about two or three hours in detail if your not some complex international trader type. GST? That's extremely difficult, and it's more of a police style investigation then an accounting type. GST evasion is nearly impossible to catch.

Raising the rate to 35% is going to make it so much worse.

Think of it this way, right now our GST is 6%, so if a guy offers you a 5% cash discount, you save 5% and he saves 1%. Oh joy. At 35%, he now offers you a 15% discount... you save 15% and he saves 20%. The motivation for evasion is SOOO much higher with a rate like that. As GST rates increase, I think it is reasonable to say that the evasion increases at an exponential rate. At 35%, I think many people would just stop paying the tax, especially trades people. We'd see alot of hard working plumbers with poverty line incomes in a hurry.

Your also discouraging the fundamental aspect of our economy, trade. Punishing the trade of goods is not a desired outcome if we want to increase our productivity.

I understand and agree with your assesment that income based taxation encourages spending now and discourages saving. RRSP's would still have a place in my flat tax system, but obviously they'd be less attractive since the savings would be much less in some cases. The big deal though is that RRSP's would immediately become massively attractive for low income people, stash all of your would-be taxed income into an RRSP, and when you retire at a lower income, you stand the chance of not paying any tax at all for your whole life.

For the rich the benefit is marginal. These people save and invest anyways, they have surplus funds.

But those hovering around that exemption line, the push towards savings becomes stronger.

Your idea is to essiential have people so burdened by spending that they start saving. Which is ok in increasing investment, but we'd see an economic slowdown at the same time.

If everyone got a 35% raise tomorrow, and all prices went up 35% the same day, the economy would be hurt in real terms. Spending would plummet and people would lose jobs as many would stash the cash instead of spending it. You have to find a balance, I think my plan does that.

I agree with your idea to cut corporate taxes in principle but you should know that corporate managers and small business owners have access to deductions that normal salaried employees don't. For example, business lunches, leased vehicles and basement offices.

These expenses would still be deducted from revenues to generate your income figure. Why does this need to be taxed twice? They are a cost of doing business.

If business lunches should be written more like "business lunches" then we're dealing with an evasion issue and that's not better addressed by increasing the rate upon that income. In fact, quite the opposite.

You say nothing about property (wealth) taxes. You seem to put the criteria on "productivity" yet ignore the criteria of "equity".

Property taxes would still exist under the municiple (provincial) structure. Equity (in the property sense of the word) taxes are really another form of double taxation though, the income used to purchase those assets has already been taxed. If your selling major assets for gain, you pay through the capital gain tax, at the flat-rate.

This shifts a burden from the poor to the rich in many situations.

If I understand properly, you want to get rid of the different taxation bands and have one single percentage. That's hardly revolutionary and I don't even think it's desireable.

I think I show that it is benefical in removing disincentives to earn more. Maxime Bernier prepared this paper when working in industry on flat taxes: http://www.iedm.org/uploaded/pdf/nov04_en.pdf

You'll also find many of the most successful regions and economies in the world use flat taxation of some sort. It's not the sole cause, but it certainly assists in increasing many desirables in the economy.

Meanwhile, your plan doesn't address the real problems in Canada's tax system. Canada's various social safety measures (including the latest $100/month/kid) have lead to some very strange marginal tax rates depending on income or family situation. At low incomes, people often face marginal tax rates above 100% for any extra dollar earned.

My detailed paper will have to study these examples and take them into account. Welfare allowances and other long-term benefits will be accounted for in the model I'm going to use to develop my hard numbers.

Many of these issues are also based on policy failure and not on tax failure. That being said, I can't see any obvious failures of my tax system with our current setup, but my research is going to have to ensure that it's more compatible with our welfare system then what we current have for taxes.

For example, Margrace in another thread showed how our tax regime creates incentives for people not to save for their retirement.

I'm confident my explaination above shows that those that struggle with saving (low/middle income people) would be under greater pressure with my exemption to full tax system to save then under the current progressive system. Low/middle income people may not pay tax at all if they plan correctly.

[Riverwind]

I like this, doing farm income tax is a bloody nightmare.

Are you sure? This system would require you to pay 20% tax on the money you get for selling your product. No deductions for cost of fuel, fertilizer, machinary, etc. I am willing to bet that you and most other small business people would be forced into bankruptcy by such as system.

Geoff said that he wanted to eliminate the GST, so that in itself helps me out. Plus he said after costs was when the tax was to be implemented, there wouldn't be a need to list deductions, just the figuring out of net income. If I'm understanding Geoff's system correctly.

How much of your book keeping time was spent calculating your net income and how much is spent calculating the taxes on that net income? In my case, 90% of my business book keeping is used to keep track of input costs so I can deduct them from income. Once I know what my net income is calculating the taxes owed is trivial.

That is why I think a flat tax system that allows businesses to deduct input costs will not simplify the system one bit.

[geoffrey]

Is there some way your plan could conceivably disadvantage domestics compared to foreign-owned comapnies when it comes to buying assets outside of Canada? If, say, a Canadian company and an American company both want to buy a Japanese manufacturer, would your plan, overall, create conditions that would allow the Canadian company to have as good a chance at making a competitive bid as they would now?

I don't see how my plan would at all impact that decision at all. I may have to look at the implications of my withholding tax if it could somehow been seen that a company taking Canadian money outside of Canada to buy Toyota would be taxed on that. I suppose if the equity in that company is still Canadian held, then no transfer of wealth has occured. If the Canadian company then sold their shares in that company outside of Canada, the withholding tax would then apply... I'm going to have to think on this one.

I like this, doing farm income tax is a bloody nightmare.

Are you sure? This system would require you to pay 20% tax on the money you get for selling your product. No deductions for cost of fuel, fertilizer, machinary, etc. I am willing to bet that you and most other small business people would be forced into bankruptcy by such as system.

Of course the deductions would remain. My flat-tax would be on income just like the current banded tax system applies to income in non-incorporated situations.

When I said no deductions, I meant all the little things you can claim on your TD1 forms at work and eventually on your T4's. Not business costs.

[geoffrey]

How much of your book keeping time was spent calculating your net income and how much is spent calculating the taxes on that net income? In my case, 90% of my business book keeping is used to keep track of input costs so I can deduct them from income. Once I know what my net income is calculating the taxes owed is trivial.

That is why I think a flat tax system that allows businesses to deduct input costs will not simplify the system one bit.

In certain industries, like farming, the tax side is an oppressive burden of work. If your just selling a service, as I assume your referring to, your taxes are quite simple. In fact, if your an incorporated small business, which nearly everyone would certainly move to under my system, it's even easier. You only ever have to worry about paying taxes on withdrawls from the company.

[August1991]

The evasion of GST is much higher than income tax when income taxation is done with payroll deductions. It's extremely difficult to evade income tax in Canada today, but everyone here likely had participated in GST evasion through accepting cash discounts.

I understand how you think the administration is less, but a GST audit is actually much more complex and costly than an income tax audit... I can audit your income taxes in about two or three hours in detail if your not some complex international trader type. GST? That's extremely difficult, and it's more of a police style investigation then an accounting type. GST evasion is nearly impossible to catch.

Raising the rate to 35% is going to make it so much worse.

Think of it this way, right now our GST is 6%, so if a guy offers you a 5% cash discount, you save 5% and he saves 1%. Oh joy. At 35%, he now offers you a 15% discount... you save 15% and he saves 20%. The motivation for evasion is SOOO much higher with a rate like that. As GST rates increase, I think it is reasonable to say that the evasion increases at an exponential rate. At 35%, I think many people would just stop paying the tax, especially trades people. We'd see alot of hard working plumbers with poverty line incomes in a hurry.

I don't want to indulge in thread drift but you should keep in mind that GST only applies to the value-added and the Revenue Agency has a paper trail of every item/service sold. To obtain the GST refund, it is in the interest of each firm to declare.

All of the tricks possible with income tax exist with the GST. The difference is that the Revenue Agency deals with fewer people in collecting the GST. BTW, VAT is the preferred taxation method in Europe in part because of income tax evasion. Some jurisdictions depend solely on VAT.

Your also discouraging the fundamental aspect of our economy, trade. Punishing the trade of goods is not a desired outcome if we want to increase our productivity.

Your point applies to all taxes.

I understand and agree with your assesment that income based taxation encourages spending now and discourages saving. RRSP's would still have a place in my flat tax system, but obviously they'd be less attractive since the savings would be much less in some cases. The big deal though is that RRSP's would immediately become massively attractive for low income people, stash all of your would-be taxed income into an RRSP, and when you retire at a lower income, you stand the chance of not paying any tax at all for your whole life.

I think you miss the point that RRSPs correctly avoid taxes because the income is generated tax-free. We could achieve the same by exempting earned interest from taxation - if the initial investment was taxed.

[geoffrey]

I don't want to indulge in thread drift but you should keep in mind that GST only applies to the value-added and the Revenue Agency has a paper trail of every item/service sold. To obtain the GST refund, it is in the interest of each firm to declare.

Absolutely. We wouldn't see the evasion so much in manufactured goods. But in services, it's less clear. As a plumber, I add value to the wrenches, pipes and other materials that I pay GST on. I essientially charge the GST to the customer on those items and then I can claim my GST refund. What I don't charge GST on is my labour, which the CRA really has no freaking idea what I'm doing with... my labour is 100% value-added and could be avoided completley if needed.

All of the tricks possible with income tax exist with the GST. The difference is that the Revenue Agency deals with fewer people in collecting the GST. BTW, VAT is the preferred taxation method in Europe in part because of income tax evasion. Some jurisdictions depend solely on VAT.

Most of those countries don't have the controls that the CRA has over Canadian taxpayers in terms of withhodling their taxes at the point of payment. The submissions of taxes right away shows the CRA what you are earning right away, it's not easy to hide that at year end when you've already submitted your share.

For higher income individuals, they are going avoid the tax either by avoidance/evasion with income tax, or by not being subject to it with the VAT. Much of the high income person's income goes into investments, whether that's real-estate or whatever, free of the VAT.

Your also discouraging the fundamental aspect of our economy, trade. Punishing the trade of goods is not a desired outcome if we want to increase our productivity.

Your point applies to all taxes.

Less so to income. You even said yourself that income taxes encourage people to spend now rather than delay.

I think you miss the point that RRSPs correctly avoid taxes because the income is generated tax-free. We could achieve the same by exempting earned interest from taxation - if the initial investment was taxed.

If the cost of the initial investment is higher, less people will invest, and those that do, will have a real investment of fewer dollars.