The Boomer generation, being those persons born between 1946 and 1960 may well be remembered as the greediest generation in history. Most of the Boomers are now in the process of retiring and the rest will soon follow. But the Boomers are not quietly leaving the stage. On the contrary, in North America as in all the other G-20 countries that demographic group is demanding ever more benefits from their governments. Because of the Boomer demands in decades past and in the present all G – 20 governments are in debt. All of the present Boomer demands for government benefits now have to be paid with borrowed money. And the biggest Boomer ask is just underway. The Boomers want every want and will need the best that health care systems provide. The costs of that health care is not payable, and is not even included in projections of what future government budgets may look like. The interest on that borrowed money keeps adding to the total debt and sane persons are saying, “…enough already…”. But the politicians who form the governments of the G-20 countries are not yet scared of their crippling debt. Many, if not most, of them are of the Boomer generation and will not support common sense monetary policies. In fact they are not shy of borrowing evermore to placate the Boomers that vote for them and to keep those perks coming to them and to their supporters. When the Boomer politicians bestow benefits they do not say that they will borrow the money to pay for the benefits they are promising to pay. They make it sound like the money is laying around. The Boomer politicians are so nonchalant about throwing money around, that many of the people of the G-20 countries even believe what their politicians represent, which is the money is there. What is not to like about endless money supply. The Boomers turn out at every election in vast numbers and vote for those who promise to placate their demands. The cornucopia of Boomer benefits will not likely end anytime soon.
The pandemic of 2020 has brought the various national financial pictures into sharp relief and it ain’t pretty. For example, in the U.S.A. the national debt totals an unimaginable $28 Trillion or $85,000.00 + per person or 134% of the annual national GDP. In Canada, the national debt totals $1.1 Trillion or $64,000.00 + per person or 105% of the annual national GDP. The rest of the G-20 countries have similar debts. Some more, some less but all of them unmanageable and completely out of control. And these are numbers from before the massive handouts to defeat the COVID 19 virus. Whenever someone or some group demands more government benefits it means that the children of Boomers and their children will have to pay for those demands. Paying the ever increasing interest on ever increasing debt is crippling. The G-7 countries are now borrowing to pay the interest due on their debts. Obviously something has to be done and the G-7 countries are now taking tentative first steps to raise the funds needed to make the debts manageable, to continue to pay benefits and pay for infrastructure replacement. On top of all that, in the U.S Medicare and Social Security plans are heading to insolvency. In Canada while the Canada Pension Plan is solvent, the health care plan is paid from current revenues and large scale borrowing. With the most expensive years for health care for the Boomers now here, the future ability to pay those costs is in doubt. Clearly new and better government revenues have to be found.
Yellen’s corporate tax rate proposal
During the past few weeks the federal government of the U.S.A. led by Janet Yellen, has led an effort among the G-7 countries to come to an agreement for G-20 countries to tax corporations at the same rate. The rate that is being discussed is at least 15%. That agreement is almost made. Then the G-7 will propose to the G-20 when it meets later this year, that they too adopt a similar corporate tax rate. The reason for the same corporate tax rate is to prevent multi-national corporations from setting up corporate shells in low tax rate countries to avoid paying taxes at higher rates elsewhere. For example Apple declares a substantial portion of its global income as earned in Ireland. Ireland has a corporate tax rate of 12.5%. By comparison the U.S.has a corporate tax rate of 21%. And Canada has a corporate tax rate of 26%. All the multi-national corporations play the same game. The result being that the countries where they actually operate and which provides them roads, bridges and land as well as military, police, security and health care do not even receive from the multi-nationals the value of the benefits that their employees enjoy and which benefits permit them to operate in those countries where they pay no taxes. In the U.S.A and in Canada the taxpayers pay the difference of what the multi-nationals and their employees actually cost the nation and what they pay in taxes. Free enterprise is now a race to the tax payers money. Clearly an overhaul of the national tax systems is long overdue. And the G-7s proposal to impose a minimum corporate tax rate is a positive, albeit timid, first step.
In addition to the effort of the U.S. to persuade G-20 countries to adopt a minimum tax rate for corporations, the European Community is preparing laws that would force multi-national corporations to pay tax on the earnings they make in each country of the European Community to the country in which those earnings are made. Again, this is a positive first step to bring the financial disarray of each G-20 country into some semblance of order.
Income tax history (brief)
Income taxes were first imposed in the U.S.A, Canada, Britain and other Western European countries to pay for the First World War. Income tax was touted as being a temporary measure. Few tax experts at the time had any experience with an income tax system. The tax system that they devised provided for individual incomes to be wholly taxable except for personal deduction from taxable income for child care expenses and health care. But corporate incomes were only taxable after expenses incurred to make that income. The race was then on to include all sorts of concepts as expenses. The worst of the conceptual expenses was a concept labeled depreciation. That idea holds that all property, except land, loses value over time and will have to be replaced. Each year that goes by the property loses some of its value and that loss is a future expense and therefore deductible from present corporate taxable income. The next worst concept is called depletion allowance. This posits that an oil well or a mine has value and each year as the oil is pumped out and the gold is extracted and they are sold, there is less oil or gold left and therefore the corporation that owns the oil well or mine has lost value and that is an expense deductible from taxable income. Finally, there is the concept that a capital gain be taxed at a lower rate than other income. The rationale for such a lower tax rate is not clear. But basically it means that all property owned that increases in value while owned and then sold for a higher price than it cost is not income. The difference between the cost price and the sale price is the capital gain. That gain is not taxed at the same rate as other income and is almost always taxed at a lower rate. Wage earners cannot deduct from their taxable income the loss of value of any of their property nor any loss of value of property depleted. And they have to pay tax on any capital gain.
Every corporation wants to keep all their income and everyone schemes to pay less tax. Extravagant incomes are shielded but charities and charitable foundations. If there is no avenue to reduce or avoid the income tax, the governments are lobbied, cajoled, or bribed to create an avenue by which taxes are reduced or not payable at all. In western industrial countries there is not tax code that is less than 3,000 pages. Most of those pages set out what are expenses thus deductible from taxable income, income eligible for lower tax rates, income not taxable at all and people, corporation and charities not subject to tax. Is it any wonder that corporations and people make business decisions based more on tax savings than sound business decisions that actually increase revenue. Only experts understand the tax codes. Few major business decisions are now made without consulting a tax expert. The largest armies in the world are the armies of tax experts. They are the lawyers, accountants and financial advisors who pore over the tax codes and look for loopholes or lobby governments to create loopholes where none can be found.
To exit this confusing and expensive morass will take much more reform than what is now being proposed by the G-7 countries. It will take a wholesale junking of the tax codes that have shackled industrial economies for more than a hundred years. The resistance to a fundamental change to the tax codes is well entrenched and their opposition will be fierce. There is a legion of experts who devote their lives and careers to ferreting out methods of tax avoidance. There are tax lawyers, there are tax accountants, there are financial advisors and tax lobbyists… All of them devoted to clients seeking to minimize their taxes payable. Such experts do not produce anything. They are pariahs. They do not advance the economies, they look for ways to reduce taxable income from actual income, they scheme to add expenses that are not actually paid and they colour income as capital gains, thereby minimizing taxes payable. A simple, sensible tax system would put all of them out of work. With that much at stake it is no wonder the tax experts predict that a simple, sensible tax system will be an economic nightmare. But the reality is that the present tax system is that nightmare.
Solution: Flat tax system
The most sensible tax system is also the most simple. The nations of the world should adopt a tax system under which everyone, both corporations, charities and individuals, pay a percentage of their incomes to their governments as taxes. It is now not possible to calculate what that percentage should but it can be calculated. The various governments add up what they will need to pay operating costs, military defence, social benefits and interest and debt payments and whatever else they need. That total amount needed is then calculated as a percentage of the total incomes for all individuals and corporations and that will then be the tax rate. With a simple, sensible tax system capital gains are income taxable at the same rate as all income. After all, it is the infrastructure and culture of a nation that generates capital gains. A capital gain is only inflation, if the country is not prosperous and desirable, there will be no capital gain. No expenses can be deducted from income. If a corporation has an income of, say, a hundred dollars and the rate of tax is set at 10%, then $10.00 must be paid to the government. If an individual has an income of one hundred dollars, $10.00 must be paid to the government. No individual gets to deduct child care expenses or medical expenses from their income. The percentage of the corporate and individual incomes that must be paid to the government can be adjusted from year to year. Imagine the reduction in that percentage should the happy day ever arrive that the nations have in fact paid their debts and balanced their budgets. As an added bonus of a simple tax system, governments will be limited as to how high they can set the rate because too high a rate will be politically unacceptable.
The main objection to this fundamental change in the tax system, apart from the tax pariahs, will likely be from the lower income earners. That is because from their income a percentage paid to tax is a greater hardship than the same percentage paid from a greater income. For example a person earning a minimum wage of $15.00 per hour earns $30,000.00 per year. To pay an estimated 10% tax on that amount would come to $3,000.00. Obviously to pay $3,000.00 from a $30,000.00 income is much more of a hardship than to pay 10% from an income of $100,000.00, even if the amount paid is a much larger amount. However, it has been suggested numerous times that an effective acceptable tax rate is a rate in the range of 15% to 20%. In fact the present system has an effective yield of plus or minus 17% of all incomes regardless of what the rates say. The problem is that the wage earner pays that rate while the entrepreneur pays a much lower rate. A higher rate is unacceptable and most tax payers will pay experts to find ways and means to reduce their tax burden. As a result the touted income tax rates as set out in the present tax codes are a mirage because such rates are rarely, if ever, paid. As a practical matter the present tax rates and system already instills the inequity of the same tax rate for every income. There are few high income earners who pay more than 15% because they can afford experts to arrange their incomes so as to pay less tax. But there is no need to be dogmatic about the rate. The tax rate will need to be adjusted from year to year in any event. Imagine the happy day when the taxes collected will enable governments to pay the national debts. But if the same rate for every income proves unacceptable, adjustments can easily be made to reduce the rate for lower incomes.
In addition to raising more money, the benefits of a straight percentage, simple income tax system will be that politicians will be elected based on their abilities rather than based on their promises to pay everyone benefits. Every voter will know that when politicians promise benefits, the costs of the promises will increase the tax rates for everyone the following year. No more promises of benefits that future generations have to pay. No more politicians making benefit promises to garner votes. The politicians elected will actually be the most capable. A straight percentage, simple income tax system has been promoted before. But its adoption has always been stymied by the tax avoidance industry. However, necessity is a hard task master and facing financial disaster should finally clear out the armies of tax avoidance experts who have brought us to this impasse. Contact your government representative and get the conversation going that what we are doing is financial ruin and it is overdue for a change to a straight percentage, simple tax system.