31 TAXATION FAIRNESS
No tax system based merely on income earned can be simple, fair or good economics. Income earned is an individual’s remuneration for what he/she has done or has supplied to others. Income is a measurement of productive contribution to the nation as a whole. Ones' income, until it is spent, provides only a potential to benefit from one’s production. Is it fair to tax a taxpayer before the taxpayer receives any actual/measurable benefit from their work? Clearly no. Therefore in the interest of fairness, tax is better levied on consumption, on the actual benefit realized from earned income.
Our nation, and its citizens, benefit from their combined savings and investment. By taxing income, we reduce that portion that would otherwise be saved and thus invested. Through the accumulation of wealth and therefore economic expansion, savings and investment directly benefits others, not the investor who has, by investing, deferred benefit. Production and savings should be encouraged and wasteful consumption discouraged. By taxing consumption, not production, at an increasing rate as consumption increases, the same as with tax on income, individuals’ decisions to spend or not spend would determine their tax burden.
Historically, the introduction of an income tax was within the economic understanding and bureaucratic ability of the early 20th century. Economic understanding and bureaucratic ability, as well as the global economic and technological realities, have changed, and this necessitates a move to a more efficient, fairer and effective tax collection system. A graduated rate of tax, as with that on income, on the total amount that is spent, would both be fair and be seen to be fair. In the end, the more lavish the life style, the higher the rate, the bigger the tax bite. Simplicity would result from a person’s need to answer only 3 related questions in determining the taxable base: What did I receive? What did I save and invest? What did I consume?
This tax solution has been variously referred to as a cash flow (or cash equivalent) tax. The method of tax calculation determines consumption through a simple yearly cash flow analysis: annual cash earned plus cash received from past savings and investment, minus savings and investments made during the year. The simplicity of determining consumption would, as stated above, reduce inefficiency of collection and would also reduce errors and, psychologically, reduce hostility towards the yearly ritual. Some of this hostility is generated by the counter-intuitive nature of taxing work and not enjoyment, discussed above as lack of fairness. Current record keeping now provides the information necessary to determine what a person 1) receives, and 2) saves and invests.
One of the most complicated elements of the current tax rules is the allocation of incomes or expenses between taxation periods. If I may relate a personal experience which highlights this problem: a sensible wage earner indicated that his neighbor took home less money than him, but paid more income tax. The neighbor had a small but expanding business whose financing of new equipment, a larger inventory, unpaid customer accounts, etc. were all financed from what was left after paying income tax. My wage earning friend said, “That is crazy! He is doing just what our country needs, making jobs and building our economy”. Indeed, why should the small businessman pay more tax when his family has less on the table? This catch-22 is true of all other savings and investment. Why should tax be paid before the taxpayer receives any benefit? The benefit is by personally consuming the wealth received. Savings in a bank account is of benefit to the saver only when it is withdrawn from savings and in some way enjoyed, until then, it is of benefit to some other individual, organization or Government.
The cost of this solution to the government is nil, in fact administrative savings would be noticeable. The consumption tax rates would be set at whatever rates would provide the amount of tax necessary to support government expenditure programs, just as rates are set for income tax. This rate could easily be set as revenue neutral.
On the other hand, there would be immediate and practical time savings to the taxpayer. The hours saved and the frustrations avoided by everyone who files a tax return, and the frustrations avoided, would be substantial and, in some way, beyond a monetary valuation. Additionally, costs of professional and technical services to comply with complicated tax rules would no longer be necessary. As the mechanisms for tax determination and collection with this tax solution would be significantly less complex than the current tax procedures, efficiency would be realized. Redeployment of resources and professional talent from preparation, enforcement and collection to more productive endeavors would strengthen the national economy.
Another sizable advantage to the economy by taxing consumption would rest in redressing the current inequity of effectively taxing imported goods and services less than domestically produced goods and services. Goods and services produced in Canada, by Canadians, now bear a cost of government that imported ones do not, though these imported goods enjoy the same benefits of the Canadian political framework. By and large, costs of maintaining government services are currently recovered through added cost of domestic, individual and corporate, production. Imported goods and services do not share in supporting Canadian governments and institutions, nor do they include much of the cost for the provision of equal government services to their workers. Although domestic taxation of consumption would not completely correct this imbalance, it would help draw attention to the advantage of production in Canada, which now relies on excessive exploitation of its natural resources to pay for excessive consumption of foreign goods.