With the recent debt crisis in the USA there have been renewed calls for “Simplifying the tax code,” and, “Cutting out private jet clauses.” I think a very similar case could be made for Canada. Has anyone looked at their respective tax codes lately? Those of you that have, will see a myriad of givebacks, handouts, and breaks. This is not good in the long-run. Sure, those of us that have kids in sports, or wanted to renovate our house, are happy with the little extra on the refund cheque in April, but the reality is that these “boutique tax-breaks” combined with the large-scale corporate loopholes, have combined to cost a lot more than they give in the long-run.
Tax Code – How We Got Here
How do we start with a progressive tax system where the basic concept is so easy to understand, and end up with these tax codes that require three degrees to figure out? Well, the reasons are simple and complex at the same time. The tax code is based around the idea that the more money you earn, the more you can afford to pay in taxes. If you only earn a small wage, you only pay a small percentage of your income, whereas if you’re in the top 5%, you pay a larger percentage of your income after a certain base level. Now people may argue back and forth about what levels should be taxed at what rates, but overall it’s a pretty simple concept. The other taxes to take into consideration when looking at the overall picture (on provincial/state and federal levels) are consumption taxes (such as the GST and/or PST) which people pay whenever they buy or consume a good/service, and corporate taxes that are charged on the profits of corporations within a country. With a couple hours of basic instruction I truly believe the vast majority of people could understand this tax system fairly easily.
So why mess with this beautifully simple structure? Sure, debate back and forth on the rates of tax, and what levels of income deserve to be taxed at higher rates, but overall, the basic idea seems fairly straight forward. That is until you introduce the complexity of bureaucracy and politics. You see, introducing tax breaks and tax credits is a political advantage on so many levels. First and foremost, it always more popular and less controversial to announce a tax cut, as opposed to new spending that will be paid for with a rise in taxes, or a cut to existing services. The fact that they have the same net effect on the public coffers (less money coming in, is the same net effect as more money going out) is often lost in the equation. In today’s Tea Party-dominated world, this basic reality has never been easier to discern.
It is also an easy way to target specific demographic groups in an age where winning over certain groups of people has become the preferred strategy for winning elections. With such precise records and polls now available, announcing a tax cut or tax credit benefitting a select niche of swing voters is often a brilliant political manoeuvre that all parties are guilty of capitalizing on. You want to get middle-class parents on board? Great, announce a fitness credit where they get money back for their kid playing hockey. Want to paint your party as the eco-friendly tree huggers? Rather than look for truly innovative, and sustainable solutions, just announce a large tax refund for people who put in solar panels or drive a Prius. The possibilities are endless. Not many people stop to think that those tax refunds and tax cuts have to come from somewhere, and there are really only three options. To fund these niche vote-buying ventures you either have to up taxes, take out debt (the worst long-term option, although strangely the most preferred), or cut other existing services. Once these little tax-goodies are in place, they are nearly impossible to remove without headlines screaming that, “ ________ is putting the screws to Canadian parents by taking away the fitness credit.” Any politicians want to take that one on?
Daddy, When I Grow Up I Want To Exploit Tax Inefficiencies…
All this, and we haven’t even got to the largest inefficiency in the tax system – lobbyists and corporate back-scratching. By subtly (and sometimes not-so-subtly) paying for politicians’ campaigns, and badgering them non-stop with paid professionals, big business are able to get thousands of little tax loopholes built into the system. Again, once they’re in, they are extremely difficult to remove. There is just not a lot of political capital (until maybe recently) to be gained by axing an old tax-break. These businesses can also afford teams of well-trained and better-paid lawyers/accountants to shave millions off of taxes that ought to be paid (or ought not to be, but let’s at least have an open debate about it!). Why don’t we simply decide on a fair rate and then actually enforce taxation policy! This isn’t news to most people, but it still bears mentioning.
Simple Tax Code System Advantages
Imagine a country where residents could actually understand the vast majority of their tax system? Where there wasn’t 1001 tax breaks you were supposed to try and find out about in order to take maximum advantage of. In this place people could learn the tax system, making their economic choices with a full knowledge of the consequences due to a transparent structure, and file their own taxes. This is a true economists dream. Basic free-market principles at work, not this clumsy, government incentive-laden, 2 billion page mess that we are currently stuck with. The government could save money by employing less bureaucracy to deal with such a complicated system, and there would be much fewer loopholes for lawyers to take advantage of.
Instead of waiting for our piece of the tax incentive pie, we should take a look at the big picture. A simpler tax system that is easily enforceable would make sense on so many levels. There is no way around the fact that we need government programming, and we need to pay for those services. Instead of rewarding the people who can bend tax code the best, lets simply lower tax rates to where they should be, and actually make people pay them! I know it’s a novel idea, but it just might work.