How Tax Policy Works

Tax policy as we see it today, is not really about tax policy at all. It is a tool for the government to exercise power.

What people think it is

Most people think the government organizes taxation in the most efficient way. The idea is to minimize the negative effects on the people, the economy, and the future of the country. Wouldn’t it be wonderful if they did that.

Ultimately the only rule is it is like plucking goose feathers. “get the most feathers with the least hissing.”

The questions that actually decide

  1. What do we want to do?
    1. Could be ideological ideas
    2. Could be ways to help friends or harm enemies
    3. Could be to preserve programs that have failed
  2. What must we do?
    1. Could be fundamentals like security and law
    2. Could be legacy programs the people want or need
    3. Could be promises made to get elected
  3. What of the must do category can we minimize or delete?

In simplest terms, the spending drives the revenue they wish to have.

Getting revenue

There is no limit to their imagination when it comes to raising their revenue.

Some of it the people know about.

  1. Income taxes
  2. Sales taxes at point of purchase
  3. Sometimes we see an import tax.

There is much more and most of it is unseen although not invisible.

  • In Ontario taxes on gasoline exceed 50 cents per liter. That doesn’t count any royalties paid on the cured oil extracted.
  • The price of cigarettes, liquor, and cannabis is mostly tax
  • Corporate tax is unknowable for most, although often discussed. The important element is corporation are merely conduits. What they pay in tax they extract form their customer sin their prices.
  • Payroll taxes to finance unemployment, retirement, and on the job injury. Employes pay it indirectly as employers look at pay packagers when assessing what they can afford. Salary or wages is just one part, albeit a big one.
  • Insurance premiums contain a premium tax. Some are subject to sales taxes.
  • The tax to dispose of used tires. You’ve likely seen that one when you buy a new tire.
  • What about all the fees? Passports, drivers licence, car registration, and tradesperson licences, all add up.

Politicians talk about them as “revenue tools.” I suppose they think we can’t see through that trick.

What is the key

They want it to be “fair.” Of course they never quite explain that idea. They like to have us believe fair means the tax attaches to money people can readily afford to part with.

Does graduated income tax work

Of course not and any thinking person knows it doesn’t. The problem is people with a lot of income have more ways to deal with their potential tax bill. As it is now now the top 1% of income earners pay 40% of the total tax paid by all. The top 10% pay about 70%.

The thing to notice is this is the amount they choose to pay. Any wealthy person has tax minimizing options open to them and they use them. The question is does income envy make it easier for the government to have high rates on high income?

You should think that one more step. Arthur Laffer and others have pointed out the obvious. Tax rates are not the same as tax money. The government controls the rate, but high rate taxpayers have some control over what it applies to. Which is better for the government. 60% of a million or 20% of three million? It looks neutral but that is the rationalist in you speaking. For the politicians, 60% of a million is much better because it makes it look as if they are on the side of the little guys. The voters.

The little guys should notice that the big guys pay their wages. The more the big guys make, the better they can afford their employees and the more they invest. Most wealthy people spend a small share of their income. They invest the rest and despite the rhetoric, investment helps us all.

Does a consumption tax work?

It looks reasonable. You pay when you buy. If you don’t smoke the cigarette tax is zero. if you buy a $20,000,000 yacht, you pay millions more in taxes.

Except! Consumption taxes are not related to ability to pay. They apply to almost everything other than rent and  food, While wealthy people must buy essentials, the essentials don’t take up a large share of their income. For low wage earners they do. High wage earners beyond a point choose to buy and pay taxes. Low wage earners must buy and must pay taxes out of much smaller available cash flow..

What other ways are there?

There have been flat tax proposals. A small rate on money that comes to the taxable unit. It could be a person, or a family, or a corporation, or a trust. Something less than 20% after large exemptions, seems to raise more money than the current maze of taxes. It would be far cheaper to maintain too.

Why don’t we just do it? Politicians can’t do it because it changes the whole theme of taxation. It just raise money. It does not reward or punish any particular behaviour or investment. It does not favour any group. It deletes one of their power tools.

Another technique, never tried, is spend what you can bring in. If spending on pet p[rojects was tied to revenue, you would think there would be fewer of them. On the surface their could be but if the idea of raising money instead of rates took hold, income tax rates would likely fall. Look at the Laffer Curve idea. There are two rates that raise the same amount of tax. For example, 0% on a very alrge base raises no money. Similarly 100% payable will raise nothing because the base will disappear. Taxpayers are not fools. Somewhere between 0% and 100% there is an optimal rate. It is much lower than the overall tax rate we pay now. It could be different for different forms of taxation.

The takeaway

Tax policy has turned into political policy

Politicians want to use higher marginal income tax rates that raise less money to gather political favour. They  want to spend on many unnecessary projects. Within objective reality, they can only do one and should do neither.

The voters condition their behaviour. If you use envy as a way to decide what a fair tax might be, you will lose.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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