Should Canada Change Its Tax Code?
Strip Back To The Essentials
I've got a philosophy that to get to the best result we should strip back to the essentials — what Elon Musk calls the "first principles” — to understand what's going on.
Then, based on those first principles — where the world is much more simple — we can reach clear insights better, faster, and with more accuracy.
Yet, for all the talk of taxes on self-employed people in Canada, I've yet to hear anyone examine the fundamental assumptions to get to root point from which we can build.
What would it take to create such a change?
The Tax Revenue Equation
With all the talk about tax changes in Canada, it's worth considering the tax revenue equation.
Number of taxpayers X average income X average tax rate
So basically, you've got three levers to pull to increase overall tax revenues. The question about whether increasing tax revenues at all makes sense coming in another post.
Why is it worth looking at this equation?
Well, increasing taxes can come in 3 ways, only one of those ways involves raising taxes. Increasing the number of
Increasing the number of taxpayers by attracting taxpayers to the country, or increasing the average income of those taxpayers has an equally dramatic and more valuable effect... in particular increasing incomes.
Let's consider the alternatives.
We could increase people's incomes by 10%, which would actually raise tax revenue by more than 10%. This is because of progressive tax rates.
So what would this do?
Well, you'd have more revenue.
But you'd also have several other benefits such as more disposable income for the populace, which is likely to result in more spending.
Furthermore, more spending results in more jobs and higher wages. It also means those with higher incomes are able to afford more services for themselves… potentially taking the burden off lower-income individuals and improving things across the board.
Rising Tax: Should We Or Shouldn't We?
Now let's consider the alternative of raising taxes 10%.
You'll typically raise revenues by less than 10%.
Well, you'll increase the incentives for avoidance for one.
Second, you'll invariably leave less disposable income within the system (income is now consumed by tax dollars), which means there's a lower average income.
You'll also have some people who will choose to move themselves or their businesses outside of the country thereby reducing the number of taxpayers.
Further, those who will leave will tend to be disproportionately high-income earners (most negatively affected by the higher taxes), which will decrease the average income further reducing an increase in tax revenue.
Increasing the average income of those taxpayers has an equally dramatic and more valuable effect.
Michael Bruce Rosmer
This doesn't mean taxes should be raised or lowered.
Clearly, there are incremental increases or decreases, which might have an effect. If you taxed 100% you'd bankrupt the country and if you taxed 0% you probably would as well.
However, to put such huge emphasis on tax rates instead of looking at other methods of boosting revenue seems pretty foolish.
Increased Incomes Has The Highest Impact
Since increasing average incomes is by far the highest impact part of the equation it makes sense to devote the most energy to this area of the equation.
How do we do this?
- Elevating practical education: There's a lot of value in a higher educated populace but not all forms of education are equal. Encouraging stem subjects (for example) is high value, while liberal arts are better learned at home on Youtube.
- Increasing innovation, which can be exported: Ultimately you've got a pie available to share and the way we grow the pie is by increasing exports relative to imports. This is partially facilitated through increasing education, but there are also other factors such as improving the capital system, encouraging entrepreneurship, creating incubator programs, etc.
- Investing in infrastructure that boosts productivity: along with this would be decreasing bureaucracy. This allows local companies to be more competitive compared with their foreign rivals and as a result gain market share globally.
- Providing a tax and regulation-friendly eco-system for businesses encouraging them to relocate from abroad: Part of this is providing an educated populace. Part of it is favorable immigration policies for talented foreign workers. Part of it is ease of doing business. Part of it is a competitive tax system.
Canadian Taxes Relative To OECD
To give you some idea on this Canadian corporate taxes currently sit at around 26% comparing favorably to the US (about 40%) and Australia (30%).
However, it is well above the European and Asia average of around 20% including UK 19%, Ireland 12.5%, Sweden 22%, Norway 22%, Hong Kong 16.5%, Singapore 17%, Japan 23.4%, Finland 20%, Estonia 20%, South Korea 22%, etc.
Unsurprisingly, a lot of major international companies are setting up or relocating to UK, Ireland, Hong Kong & Singapore.
Tell your politicians to focus more on what we're getting and less what they are taking from us.