I think it'd be good to simplify the tax system in general, so that we can spend less money and time doing tax paperwork and reduce spending on the bureaucracy. I'm thinking something along the lines of only having income, sales and a carbon tax. (Income here including capital gains and investment income). So we'd get rid of property taxes and corporate taxes.
And along the same line of thought of reducing spending on bureaucracy, I'd like to see a lot of our welfare systems rolled into the tax system as tax credits. It'd hopefully be more efficient than having entire separate bureaucracies for them.
Going to post an illustrative example because I know most people here don't understand how corporate taxes work. You can’t just remove corporate tax without creating all sorts of problems.
Ontario individual earns a salary of $220k and also holds investments that generate $10,000 in interest income (keeping this simple by not using dividends or capital gains). Every dollar of taxable income
over $220k is taxed at 49.53% (this is the top 2015 federal + Ontario rate).
This individual pays $4,953 in tax on $10,000 of interest income and has $5,047 of after tax dollars to reinvest.
If the individual instead transfers the investments to his wholly owned Ontario corporation (which can be done without triggering any tax on the transfer), the corporation pays tax at 46.17% on the $10,000 of interest income and has $5,383 to reinvest if it does not pay out a dividend right away.
But let’s say it does pay out dividend. The corporation will get a refund of $2,667 on the taxes it paid on the interest income, so the actual amount it can pay out in dividends is $8,050, not $5,383.
Individual receives a dividend of $8,050 and pays tax at 40.13%, leaving after tax dollars of $4,820. The rate is 40.13% and not 49.53% because the 40.13% is net of a dividend tax credit the individual receives.
The $4,820 of after tax dollars is $227 less than the $5,047 of after tax dollars the individual would have had if he earned the $10,000 of interest income directly without use of the corporation. This $227 difference is the cost of earning the income through the corporation.
One of the government’s objectives is to make this difference $0 since that would make individuals indifferent between earning income directly or through a corporation (this is called “perfect integration”
. It’s not possible to get perfect integration since provinces set their own rates, but in Ontario it’s pretty close.
Now let’s say corporate taxes are eliminated. In the above example, the individual transfers the investments to the Ontario corporation, and with a 0% tax rate the corporation has $10,000 of after tax earnings to reinvest. This is a huge difference from the $5,047 of after tax dollars to invest by earning the income at the individual level. There is much less incentive to take the money out of the corporation.
Everyone with investments would just hold them through corporations, and the wealthy would benefit the most since they can just let their investments and wealth compound tax free for life.
This example dealt with investment earnings. Business earnings work differently and create a larger tax deferral at the corporate level so more after tax dollars are available to reinvest back into the business. I’m not going to go through a whole example on that since this post is already too long.
This post is just for educational purposes and is not tax advice.
