tax system Tax codes are complicated. They needn’t be. Despite what we may be told, most tax laws are politically or pork-barrel motivated, and add to the complexity but not the fairness of the laws. One consequence of complex tax laws is that only the rich can afford the expertise and the elaborate mechanisms that get around the laws, effectively nullifying the progressive (richer people pay higher rates) nature of most tax laws, so that effective tax rates are almost flat.

A second consequence of complex tax laws is that these laws are essentially unenforceable. Inadvertent or deliberate errors in tax reporting are almost inevitable as the number of pages and calculations in the tax form rise, so authorities focus on the larger taxpayers and those in ‘profile’ groups known to evade taxes. The mistakes the rest of us make, whether in our favour or the government’s, may never be caught.

Taxes are designed to generate revenues to pay for government programs by appropriating or withholding a portion of people’s and corporations’:

  • Income (salary, investment income and capital gains), 
  • Payrolls (social services taxes), 
  • Wealth (property, capital and estate taxes), and 
  • Consumption (sales and commodity taxes and user fees). 

The result is a combination of benefit-based taxation (where tax is proportional to benefits received from government programs) and ability-to-pay taxation (where the more you have, the more tax you pay).

Tax systems are very political, since capital moves globally where the tax is lowest, all other things being equal. No government wants its tax system to be significantly out of line with neighbouring states’, or it will lose taxpayers, individual and corporate. Over-hyped and convoluted tax credits deliberately obfuscate their ‘real’ tax benefits for political advantage.

The following system would probably therefore never work under current laws, because it is too honest and transparent. If however citizens were to enact laws that required tax regimes in their jurisdiction to be as simple as possible, fair, enforceable and transparent, a system like the following could be instituted:

  1. Corporations would cease to be tax paying entities. Instead, their profits would accrue automatically and immediately to their individual shareholders in proportion to shareholdings, regardless of whether they were paid as dividends or retained in the company. All tax ‘shelters’ would therefore disappear.
  2. Payroll and social services taxes would be eliminated. They are unduly complex and regressive and inadvertently act to discourage employment.
  3. Consumption taxes would be replaced with production taxes, which would be paid based on the ‘full added cost’ (i.e. including the replacement and remediation cost for all materials and energy resources consumed and waste produced, using calculations developed by economist Herman Daly), rather than on actual out-of-pocket cost or retail price. The tax would be paid by the producing individual or enterprise at the time of production (extraction or manufacture) at one of three rates: 
    • Zero-impact products and services — those that have no social or environmental impact (zero tax rate)
    • Sustainable products and services — those that consume renewable resources (taxed at x% of full added cost)
    • Non-sustainable products and services — those that consume non-renewable resources (taxed at 4x% of full added cost)

The general principle is to tax ‘bads’ not ‘goods’, and hence simultaneously achieve two socially desirable objectives: the raising of money for public infrastructure and governance, and the discouragement of activities that are socially objectionable (e.g. dislocating labour in favour of capital or foreign labour) or environmentally unsustainable. The production tax rate would be set to recoup the current cost of government infrastructure and social programs, so that the tax on current ‘bads’ ays for current public ‘goods’.

  1. To recoup the unpaid cost of past government programs and infrastructure (i.e. the interest on the national debt), and to recoup the cost of reclamation and rehabilitation of public lands and the environment (i.e. to pay for past ‘bads’) a progressive wealth tax (not an income tax) would be charged to individuals with net worth in excess of one million dollars. 

The diagram above contrasts this tax system to the current one. It would result in large increases in the retail cost of goods that consume natural resources, pollute or use non-renewable energy. Everything else would become cheaper. There would be no income or consumption tax (though user fees would remain). This would drive both a production shift (to cleaner products and processes) and a tax burden shift (to the wealthier).

Simple, fair, responsible, enforceable and progressive. And revenue-neutral (total overall tax paid would not change). What more could one ask for from a tax system?

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  1. Rob Paterson says:

    Good Point DaveTaxes send a message.They can be a powerful tool for changing behaviour or for holding the pattern

  2. Dave Pollard says:

    Thanks. The challenge in any change to the tax regime is of course two-fold: (1) making sure the change is revenue-neutral, and not merely a means of grabbing more tax dollars without giving anything back somewhere else, and (2) making people believe that the change is really revenue-neutral, since they’ve been lied to so many times before about tax ‘shifts’.

  3. kyte says:

    Love the look of this revised tax system, we could do with having it in Oz. Don’t you think the tax-paying producers will see it as an opportunity to pass taxes to the consumer and avoid paying any themselves? Would there be some control over that so that it didnt happen? Did I miss something crucial?

  4. Dave Pollard says:

    Kyte: Yes, the producers will (as they always do) try to pass on the tax to consumers. But eventually the law of supply and demand kicks in and consumers stop buying the now-expensive resource-intensive products (like hydrocarbons) and entrepreneurs invent new cleaner (and hence lower-tax, and thus lower-cost) technologies that consumers buy instead (like hydrogen fuel). Ultimately the consumer pays, but they have the final choice to buy something else. Trying to legislate price controls or wage controls never works. Taxes are a much cleverer way of achieving the same result. Did I explain that coherently? ‘Cause it’s important.

  5. Keith Dawes says:

    There is a simple tax system which no-one has yet given a legitimate argument why it won’t work. The system is a Direct Tax Debit whereby every transaction going through the banking system is taxed at .03%. Funds are transfered from the bank to the Tax Department. Enough revenue would be raised to abolish all taxes. Simple! Maybe too simple for some.

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