The Case for Tax Reform
This is Megan McArdle, writing in The Atlantic:
Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service… estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That’s equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.
Not only is the Tax Code massive — 3.8 million words by Olsen’s count — but it is a constantly moving target. Her report estimates there have been more than 4,000 changes in the law over the past decade, and 579 last year alone. It is no wonder nobody understands it.
Amen!
That’s an excellent piece by Megan. She nails it.
Filling out all those forms. It’s a taxing exercise.
Sounds like a sad case of capital punishment to me.
Attila, a capital observation.
How many of the 579 changes were a result of PPACA?
Simple administrative change = Revolution in taxation.
Case for the Composite Business Levy.
By Richard Hombek
The taxes we know today can be traced back millenniums, as far back as the Egyptians who were taxed in the form of crop percentages as recorded on papyrus around 3000 BC. Since then several forms of taxation have evolved and continue to do so as the system become ever more complicated and consequently, ever more inefficient.
The same business or individual can be taxed several times, even on items that are already taxed (i.e. gasoline). We have income tax, sales tax, real estate tax, property transfer tax, health tax, Employment Insurance, the Pension Plans, capital gain tax, capital tax, excise tax not even including licensing fees and tolls that could easily fill a page. The number of taxes imposed on Citizens and the level of taxation will soon reach historical highs once the full impact of the budget deficit is taken into account. And yet, we’re still ‘in progress’ as the system continually grows more complicated.
Tax codes and regulations are thousands of pages long and businesses and citizens are expected to know these regulations. It seems an absurdity, considering even specialists have to consult one another when examining the fine print of the law and even then, full compliance with all of the regulations is not a guarantee.
Imagine for a moment, the vast amount of administration costs associated with the imposition, collection and enforcement of each tax, toll and fee. To help understand this better, let’s take a look at real estate tax. To simply put a value on every piece of real estate property in a very small jurisdiction like Ontario costs $180,000,000/year and the cost of collection comes on the top of it. Annual real estate taxes in Canada amount to approximately 3% of Gross Domestic Product. Real estate properties are gradually becoming more liabilities than assets.
By using a personal experience, I can illustrate this example better. Several years ago, I was offered a research position in Westchester County in New York State. I was very excited about this opportunity and after some consideration, decided uproot my family from Ontario for a few years. One sunny spring weekend, our real estate agent took my wife and I house hunting. After visiting a few properties, a large bungalow with a swimming pool attracted our attention. The price was an extremely tempting $130.000. We couldn’t believe our luck! However, if something feels too good to be true, it probably is. The real estate tax was $26,000 a year. What does that mean? It means that if I bought the property, I would essentially be paying the local government of Westchester County the price of my house in taxes every five years. The situation in other US jurisdictions and in many Canadian municipalities has not yet reached that extreme however, we are moving in that direction.
A recent study from 2008 by Fraser Institute, estimated that the cost of compliance of tax regulations for businesses and individuals in Canada, as well as the administrative costs for the government, could reach over $30 billion per year. In the US this number is over $350 billion. The number does not include differed costs and unfunded liabilities such as pensions and benefits for the government and business employees. Also not included are the costs of lost business opportunities caused by a complicated taxation system.
The total amount of taxes collected by all levels of government in Canada is around 33% of Gross Domestic Product or in the range of $450 billion. Most people accept the fact that society needs certain levels of government and that we pay our taxes to support government activities. This should not mean however, total acceptance of wasteful and complicated methods of tax collection.
Many organizations and individuals are trying to improve the situation and offer solutions for the simplification or total overhaul of the taxation system (i.e. the Flat Tax, Fair Tax). Many of these suggestions however are politically dead at the start line because they change the current level of taxation, which would of course be opposed by all who would be subjected to increased tax obligations. For a while, I thought that any meaningful reform on the current taxation system was futile but I was wrong. What if I told you that a simple administrative change could eliminate all the taxes and complicated bureaucracy that goes along with it?
This administrative change is illustrated by using a simple mental exercise. Lets imagine that final price of the product or service to the consumer consists of the following major components:
– the cost of manpower to produce it (net pay plus all the payroll deductions)
– the cost of raw materials (net cost plus all the sales taxes)
– the cost of facilities ( rent or capital cost plus real estate taxes)
– the net income of the business
– the sales taxes.
The question is, what would happen if all net costs are separated from the taxes associated with them, then the remaining taxes are combined into one single charge?
The answer is: the creation of a new and sustainable taxation system. Let’s call this lumped together taxes and fees the “Business Levy” (BL). Created this way, the BL is not a new tax on business. It is simply a replacement as a single charge of all existing taxes already paid by the business or collected by the business on behalf of the government. This collection of all government revenues from a single source of gross business revenue will create a stable source of government revenue. So, how do we determine the BL to guarantee that the same level of government revenue collection? The solution is very simple. Let’s start with the definition of Gross Domestic Product (GDP). GDP is “the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports”. If we take the sum of government budgets at all levels: municipal, provincial and federal, and subtract from it any transfers between governments, divided by the GDP, we get an average rate of “Business Levy.”
For a country like Canada, with complex taxation jurisdictions, we have to slightly complicate the system by introducing a “Composite Business Levy” (CBL), which consists of a federal, provincial and municipal component. The level of CBL will be determined for each sector of the economy and in each jurisdiction to reflect the current level of taxation. This will be a one-time exercise at the introduction of the new system. By taking this approach, taxes collected in specific provinces will be allocated to the respective province. Each taxation jurisdiction will retain freedom of changing their part of the CBL.
This system, very simple in nature, is able to replace all the tax codes and regulations. As a consequence, business and personal financial decisions will be made based on the outcome of transactions without tax implications.
Since business payroll deductions are included in this system, employees will receive the net pay under the new system to avoid changing of the total money supply in the economy and avoid inflation. All programs and benefits provided by the government will be fully financed and the administrative savings will give the governments new resources for extra stability. Capital gain and interest income are not considered as business revenue under this system. The combination of that and net employment income will allow individuals not involved with business activities out of the tax regulations and obligations. Business real estate taxes are automatically part of the BL system. Residential property taxes are also included in the scheme and financed partially by administrative savings offered by the new system. A slight increase in BL (1-2%) could be transferred to consumers in the form of a price increase.
The positive consequences of this approach will touch every citizen and business. Specific outcomes for each sector of economic activities will be described in separate articles. Displaced employees involved in the current taxation system could be transferred to other government departments, which experienced manpower deficit or presented with generous transition packages.
This approach to the taxation system reform is a realistic, politically and economically attractive for many reasons:
– saves more than $30 billion in Canada and $350 billion in USA a year
– eliminates all tax regulations
– makes country with such taxation system, very attractive place to do business
– does not change the level of taxation of any party involved
– does not change the money supply in the economy
– reduces the cost of services and goods manufacturing
– keeps individuals not involved in any business out of taxation system
– stable source of revenue related to GDP.
The economic impact of this reform can significantly reduce the budget deficits on federal and state/provincial levels. The governments can focus on governing and not be preoccupied with the revenue generation.
The collection and distribution system of government revenues is fully automated. The governments will have real time economic statistics for each sector of economy and each jurisdiction.
The implementation of this reform is very simple at negligible cost. What will be required to be a reality?
On the government side: determination of the average Composite Business Levy for each sector of economy in each jurisdiction (one time exercise), voiding all tax regulations and dealing with displaced employees.
On the business side: opening the special bank account called “Business Gross Revenue Account”. Any business gross revenue must be deposited to this account. The only functions of this account will be: retaining the information on the source of the revenue and redirecting the money to Government General Revenue Account according to Composite Business Levy and to business operating account.
Besides, can they really MAKE everoyne get weighed and measured? The laws in the U.S. are pretty much firmly on the side that no adult can be forced to go to a doctor or to take their children to one, or accept any kind of treatment or testing, except in rare instances like a danger-to-self-or-others temporary psych hold or getting kids required immunizations for school. That pretty much means we can refuse to be weighed or have our children weighed. Maybe there are a lot of people who don’t know that they are allowed to refuse, but I have seen enough medical records to know it happens all the time. (And when someone is over about 400 pounds or so, a general practitioner doctor’s office is unlikely to have the right equipment to weigh them; even a lot of hospitals don’t have it.) Yes, we have the right to refuse care *now,* but do you really, honestly think it will stay like that? Do you really think that people, who are paying for your healthcare with their tax dollars, are going to care much about your rights if you develop a disease that’s *allegedly* lifestyle-related? Besides, we’ll never, ever have complete government control of health care in America. The corporations would never allow it. Furthermore, the major corporate interests involved in health care — Big Pharma and the insurance companies — are at direct odds with one another. The former wants people to have as many prescriptions and surgeries as possible; the latter wants us to never set foot in a doctor’s office or hospital, ever. Which, as far as I’m concerned, is a good thing. I feel a lot less anxious knowing that that is the case, even though it’s not a whole lot of comfort to me. But the “fatties use up too much health care” blame game is just as much a tool of the insurance companies as it is of any government body — and it’s not like anyone actually has a shot at better coverage unless they are young, thin, and in perfect health, and carry their own private policy as opposed to their (or their partner’s or parent’s) employer’s. The HCR exchanges might enable you to carry a different company’s card if you’re unemployed, but they all pull the same shenanigans. Really? Why, I had no idea.:)You’re missing a crucial point, though. First, while you are right in that corporate America is hardly blameless in its abuse of fat people, you have yet to establish how government control of healthcare would solve this problem. Governments can be ruthless in their seeking of money, power, and prestige just like corporations, especially when acting at the behest of such a fat-phobic voting bloc. And, just like corporations that choose not to hire fat people or insurance companies that charge higher premiums, governments can fine, imprison, force medical treatment on, or refuse to cover noncompliant people. With corporations, at least, you have more options and a legal recourse. The government is a true monpoly. And what legal recourse do you have when your government is the oppressor? BL is arguing from a libertartian point of view and, as such, she will advocate deregulation of the health care industry. I’m not arguing for that, necessarily, but I AM arguing that government-run healthcare won’t be any better. Really, we are trading one set of problems for another.What about doctors? Like it or not, doctors need to make money in order to practice medicine. How much are they really going to be paid under government healthcare? The people only have so much money to pay in taxes, and third-party payments may or may not be allowed. Trust me. I’ve been on Medicaid, and it’s next to impossible to find doctors that accept new patients on Medicaid. Why? Because they are reimbursed by the government, which doesn’t pay nearly as much as private insurance. Don’t get me started on the weight lists and their managed care plans.