Taxes are something we all live with and pay. This includes young earners and the biggest businesses in the country. I hear politicians say that we need to cut taxes, others say we need to tax some demographic and others want to give tax credits to incentivize certain activities. One thing that is rarely discussed is the overall complexity of the current tax code and how complex should it be.
The only time I heard of someone really talking about reducing the complexity of the tax code happened in the States by Rudy Giuliani in his 2008 Republican primary run. A lot of it reduced taxes, but the main premise behind it is that a person could do their taxes on a single page of paper . Other than Rudy, I haven’t seem someone advocate for that reduced complexity. *That’s not to say someone else’s plan wouldn’t reduce complexity - I’m emphasizing the advocation of such an idea.
Taxes are not an automatic process. You may have taxes automatically taken off your paycheck, but that doesn’t mean a business didn’t provide labour for this. You may use tax software to handle your taxes, but that doesn’t mean labour wasn’t used.
Beneficial labour is the labour that is used to create something that doesn’t exist (wealth). Every job from an engineer (designing something that doesn’t exist) to a janitor (making a place clean) is creating something that doesn’t exist. Labour dedicated to tax is wasted labour. It doesn’t benefit your standard of living. It doesn’t make us richer. Imagine going to the grocery story, but nothing had prices. In fact, your cost is based on very complex rules and you have to pay someone to figure out your exact amount. Crazy right, but that’s sort of what taxes are like. We also have to consider the lost labour on the government’s side to figure out whether people are doing their taxes correctly.
Spending time/money to figure out the cost of taxes is a loss to you and everyone else. Therefore it should be desired to reduce the amount of man hours spent on taxes - since this labour could be used for more important wealth building tasks.
According to the Fraser Institute, the size (text area) of the Income Tax Act and associated regulations grew 62% from 1990 to 2014. It is estimated that the average person invests roughly 8 hours to their taxes. And this doesn’t include the man hours that businesses and the CRA put into the tax process either. It has been estimated that the economy lost between $5.84 billion and $6.96 billion in 2012 .
Tax Revenue is independent of simplicity
This particular case isn’t trying to make the case for lowering taxes and shrinking the size of government. That’s a different discussion. Simple taxes can be used to raise revenue much more efficiently. If you think about roughly ~$6 billion in economic waste currently - to comply with filing complex taxes - being used in taxable wealth creation, we should see a net gain to the society with the exact same revenue.
It makes sense for both big government liberals and small government conservatives to support a simple tax code.
What would be a simple tax code?
The idea to simplify taxes is to make it more equal. We have a ton of tax credits for everything from putting your kids into sports (currently removed by 2016 budget), to adopting a child. The idea is to get rid of all, or at least most of these little tax credits being offered. Most of these little tax credits are not even understood by the average tax payer and require the paid expertise to guarantee they get it.
Business expenses are a type of deduction from their taxes. No a business shouldn’t have to pay for expenses, as it is a cost of doing business, but there are complexities within what is an expense and what is capital. Eliminating the concept of a capital cost depreciation would save a lot of headache. For those unfamiliar, if you bought a computer for $1000 as a business, you can only write off a depreciated amount of expense per year. Now multiply that for chairs, tables, monitors, printers, and other types of capital. There are easier ways to deal with such items.
Lastly, a simplification of the tax code. Flat taxes are very easy to administer and understand. It’s something that the Alberta government has had since the Klein era (though made progressive by the NDP government). It’s a simple tax for deductions on paychecks. That’s not to say that a simple tax code couldn’t be somewhat progressive, but typically the less brackets - the better.
The best part of simplifying the tax code is that we (all of us) can save taxes. Since there are less wasted man hours on the labour of taxes, there is less need to tax quite as much to get the same amount of tax revenue.
- Image from the Fraser Institute at Measuring Tax Complexity in Canada
- Rudy Giuliani on Tax Reform
- Cost to Canadians to Comply with Personal Income Taxes