Wealth tax vs income tax: which is better?

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Machjo
Wealth tax vs income tax: which is better?

I was discussing income tax on another forum, and it was proposed that a wealth tax could solve some of the problems associated withincome tax. Some of the problems mentioned were:

 

1. An income tax can be made progressive in only one of two ways:

     a. By having tax arbitrary tax brackets, which might not be fair when we consider that a person with a slightly higher income could end up keeping less of his income than his neighbour just because he ust squeezed into another tax bracket, which is contrary to justice and democracy. or

     b. Come up with a mathematical means of calculating income along a curve graph. But then that wouldn't be fair to the more mathematically challenged, as any tax system should be easily understandable and calculatable by the general population for it to be truly democratic.

 

2. One way to avoid the problems above is to adopt a proportional income tax, meaning that everyone pays the same percentage of his income regardless of wealth. Such a tax system might put an unfair burden on the poor or, alternatively, excessively alleviate the responsibility of the rich.

3. Regardless what kind of income tax is used, income taxes are excessively simple in that they're incapable of taking various social complexities into consideration. For example, two persons earning the same income would pay the same amount in taxes, regardless of whether one has more dependents than the other, or if he might have other expenses unaccounted for in the tax. Of course this could be alleviated by all kinds of combersome government programs such as child-tax benefits, etc. etc. etc. but that's just very combersome and unnecessarily complicated. Either that, or he has to calculate all kinds of complexities into the equation to figure out how much he has to pay.

 

A wealth tax eliminates all of these:

 

1. Since it's based on wealth and not income, it's natural that the wealthy will be taxed, and not the poor. This could include a person with a low income but with a leisurely life devoid of many responsibilities, thus allowing him to save more money. A person with a high income but a large family or other social responsibilities would find it harder to save money, and so would pay less tax naturally. Also, sinse essential wealth is not counted, a large family could claim more property, such as a larger house, extra beds, etc. as essential.

2. Unlike income tax (except for the charity-deductible portions), a wealth tax takes charitable contributions into account automatically, without needind any further calculation of wealth. For example, a person who gives much of his money to charity would naturally have less wealth accumulated than the one who never gives, and so should naturally pay less in tax, as he automatically would with a wealth tax.

3. Because a wealth tax, unlike an income tax, takes extra family or other social responsibilities into account automatically, it elimiates the inefficiencies inherent in myriad separate government departments having to try to calculate every possible complexity of life to try to figure out how much money to give back through child tax benefits, etc.

 

What are your thoughts on this; would a wealth tax be an idea worth introducing as a supplement to income tax?

 

Another possibility that I could see would be a combination of a proportional income tax and a wealth tax, with the income tax being very low, and more weight placed on the wealth tax.

Tommy_Paine

because he ust squeezed into another tax bracket, which is contrary to justice and democracy.

In a land of secret trials and fellow citizens being sent off by CSIS and the RCMP to be tortured by proxy, I think it will be a while before I get my knickers in a knot over this affront to justice and democracy.  But, I'll  put it on my list. Let's see....yeah, it's item 103450696875.

Really, there should only be one tax.  A graduated income tax that everyone pays, based on what the government requires to run the country, harmonized with the three levels of government.  Regressive taxes, user fees, etc, should be rendered unconstitutional with the appropriate amendments.

There should be no loop holes, rebates, yadda yadda yadda. You made "X" and you pay "Y".  A one page income tax form.

However, the right wingers don't like this because they'll have to pay thier fair share, and the left detest my ideas because they want to use taxes for social engineering purposes.

 

 

Lard Tunderin Jeezus Lard Tunderin Jeezus's picture

Clearly, this is one of the offspring of this thread.

Machjo likes to design abstract ideological utopias, rather than discussing real-world issues. Kind of you to indulge him, Tommy.

Benjamin

@ Machjo

1)a) is totally wrong!  The progressive tax brackets do not squeeze people into a higher tax bracket, thereby making them pay a higher rate of tax on all of their income.  The individual only pays a higher marginal rate of taxation on that income that is above the tax bracket.

A hypothetical example, if I make $100,000 (I don't) and the tax brackets are as follows: 0-10,000 @ 5%; 10,000-50,000 @ 10; 50,000 @ 25%, I pay the following

5% on my first 10,000 = 500

10% on my next 40,000 = 4,000

25% on my last 50,000 = 12,500

Total = 17,000

I do not pay 25% on 100,000, i.e. 25,000.

 

Sean in Ottawa

The income tax system accounts for dependents.

A wealth tax would not account for people who live in luxury but spend their income.

The other problem is many assets cannot be evaluated until actually sold so how do you determine wealth? We have something like a wealth tax in cities-- the only asset taxed is property which effectively creates a tax on housing-- a perfectly stupid result when we have an affordable housing crisis in most of our major cities.

All tax methods have problems and the use of multiple taxes in moderation is usually the best solution.

I favour a moderate mix of a very progressive income tax, a speculation tax on the manipulation of money (currency, stocks etc.), a small consumption tax (less than we have now- say 10% total federal and provincial combined, a figure which can be calculated by consumers easily), an estate tax on inherited estates (with a reasonable deductable to avoid small estates), and an environmental usage tax (this does not have to apply like the Green tax but on certain targetted behaviours we wish to discourage). As well I have no trouble with moderate border tariffs (calculated based on environmental regulation and labour wage differences between our country and others so businesses could not profit by paying unreasonably low wages or damaging the environment elsewhere- this would effectively make minimum wage more associated with the products sold in Canada than with labour here so businesses here are not left at disadvantage because they pay better wages and observe environmental considerations).

At the same time user fees for health costs, education (including higher education) and public transist should all be completely eliminated. Property taxes on affordable housing should also be eliminated.

I am not even sure about business property taxes. I think I would prefer a higher income tax on businesses and no property tax, perhaps that tax could even be on gross income. A business should not be taxed too much before it is making money and property taxes for businesses encourage less manufacture and more importing. Even a business carbon tax might be better than a business property tax.

Tommy_Paine

Kind of you to indulge him, Tommy.

eh, what can I say.  I was in a mood.

Benjamin

@ Sean in Ottawa

What's your take on capital gains taxes?

Where would you draw the line for affordable housing property tax?

I have no problem with consumption taxes on non-essential goods, and see no reason to lower that tax rate, except for essential goods (food, clothing, shelter, etc.).

In addition to your speculation tax, I would add a tax on the capital flight of money out of Canada.

abnormal

Machjo wrote:
a. By having tax arbitrary tax brackets, which might not be fair when we consider that a person with a slightly higher income could end up keeping less of his income than his neighbour just because he ust squeezed into another tax bracket, which is contrary to justice and democracy.

I know this has already been commented on but I'm always amazed at the number of people that don't understand marginal rates and somehow think that being moved into a higher tax bracket will decrease their overall net income.  Makes it kind of tough to consider the alternatives if people don't understand how the existing system works.

Quote:
b. Come up with a mathematical means of calculating income along a curve graph. But then that wouldn't be fair to the more mathematically challenged, as any tax system should be easily understandable and calculatable by the general population for it to be truly democratic.

That's effectively what happens now (at least after you've calculated taxable income).  It's just expressed as a table instead of some sort of funky mathematical curve.

Quote:
2. One way to avoid the problems above is to adopt a proportional income tax, meaning that everyone pays the same percentage of his income regardless of wealth. Such a tax system might put an unfair burden on the poor or, alternatively, excessively alleviate the responsibility of the rich.

Flat tax regimes have been discussed ad infinitum on various boards and whether you're in favour of it or not this is one I wouldn't hold my breath on.

Quote:
3. Regardless what kind of income tax is used, income taxes are excessively simple in that they're incapable of taking various social complexities into consideration. For example, two persons earning the same income would pay the same amount in taxes, regardless of whether one has more dependents than the other, or if he might have other expenses unaccounted for in the tax. Of course this could be alleviated by all kinds of combersome government programs such as child-tax benefits, etc. etc. etc. but that's just very combersome and unnecessarily complicated. Either that, or he has to calculate all kinds of complexities into the equation to figure out how much he has to pay.

You manage to address the issue here - tax deductions and/or credits resolve that issue.  Whether or not the deductions and/or credits apply to the appropriate things or are in the appropriate amounts is a separate question.  Somewhere along the line these things get added to the tax code, either because they're deemed "socially good" (e.g., deductions for dependents) or because they encourage behavior that the government of the day wants to see.

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A wealth tax eliminates all of these:

 1. Since it's based on wealth and not income, it's natural that the wealthy will be taxed, and not the poor. This could include a person with a low income but with a leisurely life devoid of many responsibilities, thus allowing him to save more money. A person with a high income but a large family or other social responsibilities would find it harder to save money, and so would pay less tax naturally. Also, sinse essential wealth is not counted, a large family could claim more property, such as a larger house, extra beds, etc. as essential.

At the risk of being cynical, it's not difficult to manipulate net worth, especially if much (most?) of the assets in question are not actively traded.  What exactly is that house worth?  Depending on the state of the market it may well be half what it was last year or twice as much.  Or if you use purchase price you run into an even bigger problem - my parents bought their house immediately after WWII - they paid about five percent of it's current market value.  And you've got to recognize that not everyone owns their own home - so someone that rents doesn't get this particular deduction for an essential asset.  Or the family business (which could range from the mom and pop convenience store to a major manufacturing concern)?  Balance sheets are not representative of what the entity would be worth if it were sold so how exactly do you propose measuring this?  It's complicated, no matter how you do it. 

And you've just introduced another level of complexity when you say "essential wealth is not counted" - define "essential" - regional differences in housing costs aside, how do you decide what that means?

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2. Unlike income tax (except for the charity-deductible portions), a wealth tax takes charitable contributions into account automatically, without needind any further calculation of wealth. For example, a person who gives much of his money to charity would naturally have less wealth accumulated than the one who never gives, and so should naturally pay less in tax, as he automatically would with a wealth tax.

Again, this isn't as straightforward as you might think - we're back to valuing assets again.

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3. Because a wealth tax, unlike an income tax, takes extra family or other social responsibilities into account automatically, it elimiates the inefficiencies inherent in myriad separate government departments having to try to calculate every possible complexity of life to try to figure out how much money to give back through child tax benefits, etc.

It doesn't.  First, you've already raised the question of "essential assets" but it fails to take lifestyle into account - as someone else mentioned you're penalizing the individual that saves and rewarding the individual with a lavish lifestyle, whether that's simply spending money on "unnecessary" items, paying for private schools, or whatever the latter individual will accumulate less in the way of assets.  To top it off, the individual that doesn't accumulate assets is more likely to be dependent on government assistance/pensions in their old age so you're actually disadvantaging the saver twice, once for saving and accumulating some assets, and once by not providing him with those benefits.  [Fact is, the spender will need them at least in part because he/she spent their income - end result, no tax and a government supplied supplement at the end of the day.  In contrast the saver will pay tax and receive fewer supplements.  Somehow that doesn't seem right.]

 

Diogenes Diogenes's picture

Good post abnormal.  The progressive tax system does work exactly as you say but that seem to evade many. A flat tax appeals to many of these people but few of them realize that they would probably pay more were such a scheme to be implemented.  The wealthiest benefit the most from a flat tax so expect them to be the loudest advocates.

Moat everybody already pays a wealth tax.  It's called property tax and, under fair tax models, it is a tax based on wealth.

The GST is a flat tax but they created silly exemptions for 'essentials' that costs way more to manage (account for) and creates all kinds of problems and silliness too.  So the wealthy get to enjoy their filet mignon tax free and you pay tax on a single donut but not six timbits. Duh!.

A word on marginal tax rates though.  There are so many distortions to the MTR that our current system is not that progressive at all; in many ways it is very regressive.

Take the morally and financially bankrupt Employment Insurance plan in Canada.  Every wage earner (and employer) pays premiums into a plan on only the first $xx,000 of income.  All income beyond that is EI premium free.  That is a regressive tax, especially when you consider that for many years, the government pulled out $7 billion a year in excess premiums to 'pay down the debt'.

The last time I collected EI (1999), I had to pay most of it back throught an EI income tax clawback that kicked in on income over $50K.  I ended that year paying a marginal tax rate of 68.1%

Two years later, Conrad Black earned $80 million tax free because that income was in the form of 'non-compete' fees.

The income tax system need drastic reform, because it's a little too progressive in a regressive sort of way.

abnormal

The unfortunate thing about the EI clawback is that they run it through the tax mill.  If you think of it as "anyone that made over $X last year has to repay any EI benefits they collected" as opposed to increasing income taxes the idea makes sense - in other words if you think of EI as a means tested supplement to the unemployed it's no longer an issue.

Conrad Black is a different question but are you sure non-compete fees are tax exempt?  As far as I know they're income and hence taxable - if I'm wrong I'm restructuring my own compensation.

Chester Drawers

No one earning an income at the poverty level should pay income tax.   A flat tax is the simplest and the fairest.  The personal and family exemption should be what the poverty line is.  Joint filing in cohabitation family units.  Maintain insentives to invest and plan for retirement.    Also put in place a low consumption tax.

Eliminate capital gains tax and horrors of all horrors eliminate corporate taxes, but replace it with a low non-refundable consumption tax.

A wealth tax will only move money away from Canada, it will also hurt those that may be asset rich, but income poor.  Farmers come to mind, or people with substancial pensions etc.

Diogenes Diogenes's picture

abnormal wrote:

Conrad Black is a different question but are you sure non-compete fees are tax exempt?  As far as I know they're income and hence taxable - if I'm wrong I'm restructuring my own compensation.

They were for Conrad.  The CCRA closed up that loophole owing to some bad press.

 

Tommy_Paine

And then there was the case a few years back when Rev Can just decided to waive the rules for one wealthy family who wanted to move billions off shore without paying the required taxes.

Thing is, any complication to the tax system is there to specifically to be abused by the priveleged.  So, get rid of all the complications.

If we want to encourage behaviors in one direction or another, then address those issues with some other tool.

 

Timebandit Timebandit's picture

Chester Drawers wrote:

No one earning an income at the poverty level should pay income tax.   A flat tax is the simplest and the fairest.  The personal and family exemption should be what the poverty line is.  Joint filing in cohabitation family units.  Maintain insentives to invest and plan for retirement.    Also put in place a low consumption tax.

Eliminate capital gains tax and horrors of all horrors eliminate corporate taxes, but replace it with a low non-refundable consumption tax.

A wealth tax will only move money away from Canada, it will also hurt those that may be asset rich, but income poor.  Farmers come to mind, or people with substancial pensions etc.

Or people like my mother, who lives on a modest income from the interest from insurance payout and WCB entitlement from my father's death from a work-related illness. Technically, she's got some money, but there isn't any more where that came from.

abnormal

Tommy_Paine wrote:
If we want to encourage behaviors in one direction or another, then address those issues with some other tool.

Just be sure you don't shut Canadian investment down in the process.  A former employer (major European entity) jumped through some pretty amazing hoops to avoid contributing capital to their Canadian operation simply because they weren't willing to pay capital taxes on those funds and have them trapped by the Canadian regulators (income taxes on any investment income were also part of the equation but not the deciding factor).  The real negative to Canada was the loss of jobs that resulted - the Canadian operation was never allowed to grow and all the supporting functions were elsewhere.

Tommy_Paine

Then someone else grew and made the money they didn't want.  Nations that built their economies on handing out tax free or low tax status to industry haven't got much to show for it now.  Like Ireland's Celtic paper tiger.  All low taxes attract is fly by night industries.

I tend to think more of the creativity and industry of Canadians.  We don't have to whore ourselves out.

abnormal

Nobody else grew - my employer still did the work they wanted, just managed to keep the capital outside the country (the jobs were a total side effect).  And as I said income taxes were not the primary driver - capital tax and having capital trapped by a regulator were much more important.

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Nations that built their economies on handing out tax free or low tax status to industry haven't got much to show for it now.  Like Ireland's Celtic paper tiger.  All low taxes attract is fly by night industries.
 

That's the message that high tax jurisdictions are pushing but it's not true.  While it takes a lot more than low taxes to attract investment they definitely help.

Skinny Dipper

Dang it!  I have to start and finish my tax-filing tomorrow.Money mouth

theleftyinvestor

If we had a wealth tax, how would it account for negative wealth? If I have $500K in assets and $300K in debt am I taxed only on the $200K net? Am I rewarded for debt?

Or alternatively, if debt is not deductible, then someone who puts 5% down on a $500K mortgage will instantly be taxed as if they have the full $500K of wealth every year while they're still slogging at paying that mortgage down.

Something to think about.

Tommy_Paine

While it takes a lot more than low taxes to attract investment they definitely help.

And, they definitely hurt.

A_J

Chester Drawers wrote:
A flat tax is the simplest and the fairest.

A flat tax is no more simpler and a lot less fairer than what we have now.

It's not the percentages that cause complications.  It's just four brackets (15%, 22%, 26% and 29%). They are dealt with in one section of the Income Tax Act - or to put it into perspective, a physical copy of the act is 2,000 pages long and this takes up less than one page.  The complications come from all of the rules for inclusions, exclusions, deductions, etc.  Those will remain complately untouched by a flat tax.

EDIT: to add to some of the comments on this income/wealth tax distinction . . .

How does someone pay the taxes on a piece of property without selling it?  What do you do about the individual who earns, say, $10,000 a year farming a piece of land worth (let's say at the current market rate) a million dollars?

Why would someone who rents and earns $100,000 a year (let's say they don't invest, they live very well off of the consumption that income allows) pay less in taxes than someone earning $40,000 but owning their home or saving some of it.

Benjamin

Chester Drawers wrote:

Joint filing in cohabitation family units.

I take issue with much of your post, but this particular point warrants an interjection.

Joint filing in cohabitation family units can have negative impacts on women in society.  I am not saying that there should not be joint filing, but I think we need to be aware of some of the ramifications as far as the gender impact.

Where women are continuously discriminated against in the workforce, income tax splitting discourages their involvement in the labour force, because the marginal returns on the male partner working are higher than for the female working.  Coupled with a lack of affordable childcare in most provinces, this can discourage female involvement in the labour force.  Such disengagement from the work force can change the power dynamics within relationships (if monetary income buys bargaining power), and can also place women at a serious disadvantage in terms of CPP, and labour experience, which can in turn be disasterous if the relationship breaks down (again, potentially having an impact on the bargaining power within the relationship).

I know that there is an appeal to single family unit filing, and the income splitting that would result, but I would just caution that it is not without its short comings.

Chester Drawers

Joint filing is not about income splitting, but it would be a by-product of the system.  Poverty line in Canada is roughly 18,000 single and 30,000 for a family of 4.  I think we all agree that no one should pay taxes if they are at the poverty line.

A flat tax as I see it would be as such.  A single person earns $30,000 a year would pay a flat tax on $12,000.  A family of 4 with two parents earning $20,000 each would pay a flat tax on $10,000.  Now there would have to be some playing with the CPP so in essense there would be a CPP tax on incomed earned as it is now. 

Single earning 50,000 pays tax on 32,000, family of four with a 60,000 joint income pays tax on 30,000.  As the incomes go up a higher proportion of tax is paid compared to the gross income earned. 

Eliminate the RRSP and Pension deductions, but make the income tax free at retirement.

A_J

Chester Drawers wrote:
Poverty line in Canada is roughly 18,000 single and 30,000 for a family of 4.  I think we all agree that no one should pay taxes if they are at the poverty line.

A flat tax as I see it would be as such.  A single person earns $30,000 a year would pay a flat tax on $12,000.  A family of 4 with two parents earning $20,000 each would pay a flat tax on $10,000.

Sounds like you're mistaking a "flat tax" for the basic personal deduction (which currently stands at ~$10,000 or so).  It helps reduce taxes on people who are near or below the poverty line by essentially adding another 0% bracket.

You might think your "flat tax" is simpler, but it's not.

You still have to deal with all of the problems in the current Income Tax Act - such as what is income, what kinds of income are taxed and what kinds are not (employment benefits?  Insurance payments?  Lottery winnings?  Stock options?).

Sean in Ottawa

Benjamin wrote:

@ Sean in Ottawa

What's your take on capital gains taxes?

Where would you draw the line for affordable housing property tax?

I have no problem with consumption taxes on non-essential goods, and see no reason to lower that tax rate, except for essential goods (food, clothing, shelter, etc.).

In addition to your speculation tax, I would add a tax on the capital flight of money out of Canada.

Capital gains are only realized at the moment of a sale or transfer and paid only by the seller not passed down to tenants who are renting-- I have no problem with capital gains

Sean in Ottawa

I have often participated in debates about a flat tax and often they go like this conversation where people say that there is confusion between the basic deduction and the flat tax. In fact these can go together. A flat tax can in theory be as progressive as you want provided it is in conjunction with a high basic deduction. 

Many right wingers like a flat tax because with a low or no basic deduction it is the single most regressive approach to income tax. However some lefties like a flat tax as well because if you have a very high basic deduction then the system can be much more progressive than it is now. Of course then that bottom number would have to be indexed to avoid over time going from very progressive to very regressive as inflation eats away at the basic deduction.

The mechanism of a personal deduction can be far more progressive than a graduated system can ever be-- pull out a calculator and look. After all the bottom bracket (if you use that word) in a basic deduction scheme has a tax rate of zero and it applies to everyone and the more you make the lower that zero bracket is as a percentage of your overall income.

So much for theory. Here is the problem and the reason we need a graduated system as well as a basic deduction. If you consider the number of people in each bracket and the impact of using a flat tax plus deduction you will see that you would end up reducing the tax of the highest earners and having to make this up on the lower earners who are above the basic deduction--or you would bring in to the government a lot less many than it will take to provide social services. The distribution of numbers in each tax bracket is pear shaped.There are not enough people in the highest brackets to bring a basic exemption high enough to provide enough progrssivity through the tax system without reducing severely the national tax revenues. At the same time the highest earners would be paying less than they are now in a flat tax system even without considering the effect of the higher front end deduction.

A flat tax would hammer those in the lower taxable brackets and given the pear shaped profile of the income of Canadians you can't exempt income on up to 40k per year and still provide services. If you bring the exemption to 20k only (double what it is now) and used the highest tax bracket as the rate (29%), people earning 40k would pay 29% on 20k rather than 15% on 30k-- in otherwords face a 50% tax increase. It would not have to be the highest given the extra tax revenue from higher income people paying more of their income in the higher bracket but this benfit will tail off and you will find that lower income people will have to pay more in order to create one bracket. Again the key is to rememebr that with far more people in the lower brackets any tax you give up there will require a much higher increase on higher brackets to compensate and eventually you will completely run out of room.

I believe we should make our system simpler, I beleive we should double the basic exemption but I do not think thewre is any formula involving a flat tax/high basic exemption that can match the existing progressivity we have never mind increase it. The easiest way to fund a higher basic exemption is in fact through a more graduated system with higher tax on the wealthiest making the system even less flat than it is today. This I favour along with the other tax changes I proposed.

Machjo

Thanks for your ideas. Certainly there were flaws in my ideas. My main issue is just with making taxes simpler, more straightforward, and more easily understandable somehow. Overall, I find it easy enough to fillin a tax form, but if I'm trying to understand the overall tax system, we have so many different policies, RRSP, RESP, RRIF, corporate tax, personal tax, GST, proptery tax, etc. etc. etc. Then figuring out which taxes apply to what, and remembering how much this tax is and that one, and different taxes between provinces.

Then we have the same with government programmes. Social assistance is different in each province. If you cross a provincial border, you might as well be in a separate country as far as medical coverage is concerned. Then we have EI, this, that, the other thing, etc. etc. etc.

Could't the government try to create an easier and more streamlined system that can cover the same objectives without having such a complicated barage of policies?

Machjo

Another idea. What about a proportional tax combined with the following:

 

1. Workers get voting rights on boards of directors, thus making all companies operate in a similar manner to workers' co-ops.

2. Introduce a ceiling on personal accumulated non-essential wealth.

Granted a proportional tax is not progressive. But then again, with workers having voting rights on boards of directors, they could compensate by pushing for higher salaries, and the extra-rich would get their wealth skimmed from the top, or alternatively give to charity, raise workers' salaries, or do something to bring their wealth back under the ceiling. I'd think that this woudl compensate for the lack of progressiveness of a proportional tax while at the same time keeping it straightforward with everyone above a certain level of wealth paying the same income tax rate, thus making the whole system more straightforward.