invert-the-tax-code.md

Invert the Tax Code: Encourage Good, Discourage Evil

Quants need to step up and take over the tax code: a single, flat tax, skewed towards consumption and not income. This would be the opposite of current approach of flatly taxing consumption and selectively taxing income.

Consider two primary classes / sources of taxation:

• income
  • types: payroll tax, capital gains tax, dividend taxes, etc
  • range: ~ 0-55%
• consumption
  • types: sales taxes like HST, GST, and PST, provincial sales tax
  • range: ~ 8-13%

In 2015/16 saw more attention paid to an old idea of basic income. The goal is to provide welfare in a more simple and efficient manner. Ideally, a single, minimum income is guaranteed for all citizens, no special classes, exceptions or carve outs. Reduce the costly bureaucracy required to administer welfare.

Income for poor people is good, but the welfare state is a mess.

So is the state of financial accounting. Every suffers while navigating hundreds of special rules for thousands of different income sources. For a standard T2 Corporate Income Tax filing there are over 8000 possible fields. This is a costly joke on taxpayers.

Free the Human Capital

There is another large penlaties society pays for complexity in its tax code: multiple classes of business professional are needlessly dedicated to managing taxation (accountants), audits and authentication (lawyers, other accountants), and general management of large corporate financial statements (CFOs, CGA, CMA, etc).

How many wasted hours of human capital are wasted doing taxes?

Too many.

A simple, progressive (tiered) system on personal income would suffice. A set amount based on the total income earned from all sources, all treated equally. 0% corporate tax. Some ambitions country needs to incubate this ideal (one that seems trivially managable with modern software and a digital economy.)

Incentives

• Costs are huge

  • human and financial capital diverted into tax planning and management could be reduce by several orders of magnitude. Free up that capital to be put to work elsewhere in the economy, perhaps consuming goods and other discretionary services.

• Consumption is not created equal:

  • we already tax certain forms of bad consumption prohibitively (cigarettes, gasoline). we like income, why tax it (taxing payments from the government?!), or double tax it (dividends)
  • Selectively (and prohibitively) taxing entities know to cause harm makes sense. A carbon tax is predicted on the knowledge that certain types of consumption are better than others.

An example of a tax on something good: dividend income. Does this sound like an effective way to tax a business?

GRIP: A Canadian-controlled private corporation (CCPC) or a deposit insurance corporation may pay eligible dividends to the extent of its general rate income pool (GRIP)—a balance generally reflecting taxable income that has not benefited from the small business deduction or any other special tax rate—without incurring Part III.1 tax. The GRIP is calculated at the end of the tax year. However, a corporation can pay eligible dividends over the course of the year as long as, at the end of the year, the eligible dividends paid do not exceed its GRIP.

Solution

Excess complexity create inefficiency. A simplified approach to taxation would benefit everyone domestically, and attract investment from abroad. Whomever figures this out first wins a global chess match for (productive) white-collar workers, not the accountants*. For to read more on the negative income tax, aka 'The Revolutionary Subsidy' as coined by Milton Friedman.

The Catalyst

Generally technology and spefcifically bitcoin will likely be the enabling technology to make this happen. Innovation in the tax code is coming, because capital always seeks equilibrium, and permissionless ledgers with units of account like bitcoin are novel media given the job to be done.

Several converging trends make the time ripe for such innovation:

1. Bitcoin

   • a global currency for the Internet

2. Cashless Economies

   • cashless nation states are emerging organically and through high-level politics. Digitizing the global payment infrastructure is only a few decades old and rapidly evolving. Cashless economies are coming hard and fast, even for those who prefer to hold paper notes and coins.

Whether you call your money Greenbacks, Rupee, bitcoin, or m-pesa, it's probably not going be physical for much longer. This has dramatic implications for commerce due to ease of taxation and simplification of accounting.

Sorry accountants and tax professionals: a simplification of the tax code will significantly hurt your industry. However, you're all smart folks with business savvy, so you'll do fine. The rest of the economy will thank you.