Categories
Taxation

Ten principles of sound tax policy

The Tax Foundation’s Ten principles of sound tax policy are a must-read for those influencing tax policy. I think the list can be further refined down to about half that, but maybe they wanted to get an even ten.

For instance, maintaining the neutrality of the system (#2) will result in broad bases (#3). It’s when the system gets less neutral (i.e. favours certain groups or behaviours) that the base is narrowed. Various special interest deductions put in place to encourage desirable behaviour or punish undesirable behaviour have narrowed the base and caused rates to be kept high unnecessarily.

Harmonization of federal, state/province and local/municipal taxes (#10) is part and parcel with creating a simple tax system (#4). The provincial government has been criticized recently about its reluctance to harmonize Ontario’s sales tax with the Federal GST. The premier’s misguided reasoning for the reluctance? It would place a tax on certain exempt items, thus eliminating some of the complexity and non-neutrality in the tax.

Tax stability (#5) is important because it makes them predictable, which is also aided when there is no retroactivity (#6). When politicians can make changes to taxes retroactive, tax is not predictable. The Canadian government announced recently the retroactive increase in the Basic Personal tax credit. You’re unlikely to hear anyone complain about this, but nonetheless it isn’t ideal tax policy.

Transparency (#1) is important no matter what government initiative we’re talking about, and an open process (#9) is one manifestation of this requirement. All the workings of a democratic government must be open to its citizens and open to criticism and debate. Tax is no different from anything else in this respect.

So I humbly put forward my own principles of sound tax policy: simplicity, neutrality, transparency, and predictability. I think that basically covers it at a more abstract level than the Tax Foundation’s ten.

Categories
Taxation

Why the estate tax is a good thing

You can count on only two things in life – death and taxes. Actually, more like two and a half things, because there is also taxes upon death. The estate tax raises revenue by taxing the wealth people leave behind when they die.

That’s a good thing. If we could, I would suggest only taxing dead people. Dead people can’t complain about all the taxes they have to pay. The people who complain about the estate tax are the people who inherit less because of it.

The Tax Foundation has a recent blog post in which they again try to attack the estate tax. They link to a “provocative new study,” in their words, that

“undermines a central argument made by proponents of the estate tax: that it helps reduce the concentration of wealth in the economy.”

Seems to me that if estate taxation fails to reduce the concentration of wealth, that would be a reason for opponents of the tax to pipe down, not up.

The study: “It is commonly assumed that inheritances are a major source of wealth inequality and that the offspring of wealthy families tend to be as rich as their parents due to bequests.” Dude, I don’t need to assume that – I see it every day. That’s not an assumption, it’s a plainly undeniable fact.

“For most estates larger than $5 million, the effective tax burden is only 13.5 percent to 17 percent of estates; in fact, the burden tends to fall primarily on smaller estates.”

Well, heck, if the small-fries are getting hit the hardest, why are the big guys so up in arms? If the rate is so darn low, what’s the problem?

As far as I’m concerned, as long as we’re still primarily raising revenue by taxing income, capital and property value (all very flawed methods), we might as well keep taxing dead people.

Categories
Taxation

Abolish the property tax rant

Not mine, but that of historian John Steele Gordon (via Tax Foundation):

In the 18th century, real property was probably the best measure available of a person’s ability to pay taxes. That’s because it generated income from farming or things like water mills, ship yards and stores. Only the very rich had residences on town lots.

But in today’s suburban world, property is a terrible measure of a family’s ability to pay taxes. Almost all privately-owned property today is income-absorbing. And it’s also grossly unfair.

The result is that the middle class family pays a much higher proportion of its annual income in local taxes than does the zillionaire across town.

Also, property taxes are highly visible as they arrive in the mail at least twice yearly. Visibility alone is a good thing when it comes to tax because it allows those who pay it to be more aware of it, but in this case is outweighed by the fact that we’re also being reminded of how arbitrary the tax can seem most of the time.

Another negative is that property tax is unrelated to behaviour, as it depends most often on macro factors outside the taxpayer’s control.

Categories
Taxation

Buffett donates fortune to charity, is accused of avoiding estate tax

A few days ago, super-investor Warren Buffett announced he would be donating the majority of his considerable assets to Bill Gates’ Foundation, and he’s been rightly commended in the media for his generosity.

But for some reason, the ordinarily smart-minded folks at the Tax Policy Foundation have a bone to pick with Buffett over his support for the estate tax:

Warren Buffett has famously campaigned to keep the federal estate tax, but he apparently will avoid the tax himself, despite owning the world’s second largest personal fortune. Advocates of estate tax repeal were cynical but not surprised by the announcement that Buffett would avoid the tax that he has helped protect. They have long contended that the largest fortunes usually escape the so-called death tax.

I’m dumbfounded that a blog which I’d previously held in high regard would go out of its way to make such ugly remarks about one of the most benevolent acts in recent history. I’m also confused as to why the author believes Buffett’s estate should be taxed on wealth that will never be property of an estate.

Buffett ain’t dead yet, so why would his (non-existent) estate be taxed on charitable donations? Talk about putting the cart before the horse.

I shouldn’t be so surprised. The blog strongly favors repealing the estate tax.

I’m ordinarily a staunch supporter of our neighbour to the south – I’m half-American myself – but the estate tax needs repealing like I need my root canal redone. Except that I actually do need my root canal redone. I guess that wasn’t a great analogy.