Hey there, time traveller!
This article was published 28/12/2017 (625 days ago), so information in it may no longer be current.
So, what would an ideal tax system look like? Here is my personal wish list for the new year.
Recall that taxes typically have three functions – to raise revenues, support redistribution of income and wealth, and to punish and reward. Most of the mischief occurs with the last use, so I will start there.
In December I scurry around making charitable donations prior to the Dec. 31 cut-off. I think that I offer more to my favored health and arts organization because the tax credit means, I am spending 60-cent dollars. So, my first proposal at tax simplification is to eliminate the concept of a charitable organization entirely and all associated tax benefits, be they tax credits or as in other countries, tax deductions.
This would eliminate the process of Canada Revenue Agency passing judgment on the fitness of any organization to receive donations, a process which is open to substantial interpretative discretion. Visit the Canada Revenue Agency website to understand how interpretation can shape which organizations benefit from charitable status and what they need to demonstrate to qualify.
This interpretation can become political as some accused the Harper government of doing when it initiated a "Political Activities Review Program" in 2012. Organizations that raised awareness of social issues or advocated for specific policies, believed they were under specific threat from this review and spent time and resources to fight this initiative…monies that did not flow to their stated uses.
Aside from the costs of government qualifying and maintaining the list of qualified organizations as well as the efforts organizations make in registering to be on that list, the tax benefits triggered by charitable donations have three negative consequences.
First, because of the progressive income tax, they reward the rich much more than the poor. A $500 contribution benefits someone in the upper tax bracket more than someone in the lowest.
Second, they allow recipient organizations to become lazy and less attentive to donors. To overcome the loss in incentive to donate provided by the credits, recipient organizations would need to become more imaginative in rewarding their donors for their charity.
Third, despite my personal view that the tax provisions encourage me to donate a little more, scant evidence exists that they increase contributions. Countries such as Austria, Finland, Ireland, Italy, Sweden, and Switzerland all have strong charitable organizations without these tax benefits. When New Zealand eliminated its charitable tax deductions in the 1980s, contributions did not drop.
My second tax reform proposal is to take inequality seriously. The progressive income tax, with the basic exemption works well in this regard, but it has one serious limitation. It does nothing to address the growing wealth inequality. Wealth and income are related but distinct ideas.
Income is a flow of cash every hour, day, week or month. Wealth is a stock, that can offer the owners a regular return in the form of interest or dividends as well as the increase in value or capital gain upon the sale of stock, paintings or land.
Government taxes interest and dividends and 50% of capital gains at one’s personal income tax rate, with an important exception. That is what needs fixing.
To support home ownership government does not tax the increase in the value of one’s principalresidence. Yet, that increase in value has almost nothing to do with anything done by the home owner. Population increase as well as tax support infrastructure as well as private investment are almost 100% responsible for the increased value of my home since I purchased it.
Some argue that since the principal residence is a major form of saving for the middle class, changes in the value of this asset needs to remain untaxed to support retirement saving. Others note that the property tax is a mainstay of municipal budgets and in Manitoba of educational budgets.
If we apply the current rules, then for most people, the actual tax due on the sale of their home would be about 15 per cent of the gain. In the current Canadian housing market, this is not a large sum for the typical homeowner.
The third major reform is for Canada to introduce an inheritance tax. We are about to witness a massive intergenerational transfer of wealth as the boomers exit. This transfer will only perpetuate inequality.
The final proposal is to increase the GST substantially, while reducing the income tax rates. It is relatively easy to transfer wealth and income streams offshore, but if you want to drive a Lamborghini in Winnipeg, you must purchase it in Canada or import it. Taxing the toys of the rich is an effective way to increase the equity of the tax system and mitigating tax avoidance. To reduce the impact of the GST on lower income families, one can increase the personal exemption on income taxes and maintain the current exemptions for the GST.
A politician that proposed any of these four "modest" proposals would face a tsunami of opposition. Which exactly why we should be consider them if we are serious about increasing the fairness and efficiency of our tax system. Happy New Year.
Gregory Mason is an associate professor in the department of economics of the University of Manitoba.
Updated on Thursday, December 28, 2017 at 2:17 PM CST: Corrects erroneous reference to tax credit.
4:58 PM: Typo fixed.