Wednesday, July 22, 2015

A taxation solution focused on investment income

This is a followup to my UBI/GLI implementation for Canada.  Its mostly applicable to the US and elsewhere too.  The simple version is to eliminate the double taxation complaint from investment income by making dividends a corporate tax deduction, and then capital gains and dividend income taxable as normal personal income.

Goals

  • Raise more revenue without the legitimate complaint of double taxation
  • Eliminate tax avoidance opportunities
  • If the investor class benefits from a UBI/GLI unconditional safety net, then they should face tax increases that pay for that safety net.
  • Ensure that the tax system does not discourage anyone from living in Canada.
It is the last point that makes this full article necessary to clarify the simple version tax proposal

The simple Canadian tax plan for GLI
GLI (as a specific implementation of UBI) is an annual cash grant of $15k ($1250/month) (from existing federal budget sources) paid equally to every Canadian adult (resident) citizen.  See top link, but it does require some tax system modifications.
  • Replace the various tax brackets for income below $88K to a single 22% (currently equal to tax on income from 44k-88k) tax rate.  Brackets above 88k income are unchanged.
  • Replace EI and CPP contributions (currently 7.5% paid by employees and 7.5% paid by employers) with a 7.5% statutory pay raise (maximum $6600 tied to 88k income level) and a 15% point tax replacement of these payroll deductions.  No effect on employee take home pay.
  • An 8% flat income tax to cover UBI costs.
  • No more basic deductions (including $12k personal amount, or dividend/capital gains credits)
This plan produces an expected budget surplus of $40B to $212B, and so there is significant room to add back cut programs or cut taxes further.

Justification of 15% payroll replacement tax (instead of keeping hidden 7.5% tax)
  • Hidden taxes are corrupt.
  • It taxes investment income more than would a hidden employment tax.
EI and CPP are no longer needed under UBI/GLI.  The UBI safety net is much stronger, and also applies to investors, and so that income class needs to also pay into it.  The safety net is better because it covers voluntary unemployment indefinitely including education and entrepreneurial development, and is not taken away by any discretionary bureaucratic process, or when employment is chosen.

For this better safety net, it could be argued that a 23% tax rate increase is worthwhile (replacing the separate 8% flat tax)

Justification for increased tax rates on the poor
The tax increase they will face is the removal of the personal exemption amount, and the removal of the bottom 15% tax bracket, The poor get the most benefit from UBI.  If I raise your taxes from $8000 to $16000, but give you $15000 cash, you should not say no.  You have $7000 more than if I did not make the offer.

Having a large tax burden on the poor has always been an important revenue strategy because that is where most of the people are, and if we don't give all our money to Donald Trump or Rush Limbaugh, they will flee to Costa Rica (or so they threaten).  I'll be addressing this second issue, but the large base does have to create a substantial portion of revenue.

Justification for increased taxes on incomes above $88k
Those over 88k income receive a statututory raise limited to $6600 (7.5% of 88k) but still face 15% "payroll" taxes on that income.  Effectively 7.5% higher tax rate on income above $88k than below.  While there is budgetary room to elimintate this extra tax I recommend lowering other taxes (if that is how the budget surplus is to be used) in other ways.

Incomes up to $120k will still pay less net taxes than they do today.  The extra tax above 88k just makes that gap narrow more quickly.

Higher income Canadians will take at least the same share of economic growth as the rest of Canadians.  That growth will be at least 9.4% (excluding statutory pay raises.  Source is in first article.).  The entirety of human history's income innequality suggests that they will take a greater share than average.  The income of all other Canadians flows up.

The better safety net creates a better society and communities.  The more money you earn, the more important security and safety should be for you to freely enjoy that income.  If Canada is a great place to live that also makes you rich, then the tax rate should not be a problem.

4.6% of personal income is investment income (in 2010)
2010 was a relatively poor investment return year, and the source is less reliable than revenue canada (household survey), but this is a very high number, and over half of that income was earned by earners in the top 10% of income.

A clearer source is revenue Canada's statistics for 2012.  The following lines highlight an income source ('000s) with a % extra tax that can be recovered (only through normalizationi of investment income and applying payroll equivalent taxes):

Taxable capital gains  17,245,600 (@ 40%) = $6898240
Dividends 62,893,371 (@25%) = $15723342.75
Rental income  5,125,518 (@15%) = 768827.7
Commission income  4,209,931
Professional income  18,699,562
Other Investment income  14,945,886
farming/fishing/partnership 2700000
4 item subtotal $40,555,379 (@ 15%) =  6083306.85

This is roughly $30B in extra revenue prior to an 8% UBI-specific tax.  The Federal government collects 12% of personal income through income taxes.  $30B is 1/6th of the total $180B, and means that taxes on everyone else can be lowered 1/6th.

The new simpler tax plan:  The Costa Rica threat
23% Social Safety Net (UBI/GLI) recovery tax
Regular (22% lowest rate) progressive taxes but with EI/CPP contributions removed.
Canadians and Foreigners pay 22% tax on investment income earned in Canada to Canada.
Canadians pay 23% (UBItax) of foreign investement gains and perhaps 0% additional tax.
Canadians pay full 23%+22% tax on Canadian investment income.
Dividends paid by corporations are a tax deduction (same as other expenses) to that corporation.

A gift to investor class: treatment of investment losses
Any investment income losses can be carried forward indefinitely to offset future income 100%, or carried back indefinitely to offset past gains 100%.  The carryback option affects only the regular (22%) taxes paid on past investment income.  Investment losses can fully offset other income in the same year.

This is much more generous than the current investment/business carryback/forward rules:  It applies to dividend and interest income as well.  If your income is reduced below 0 through investment losses, you would have the full $15k UBI, and if you choose to carry back losses, an additional immediate tax refund, or if you carry forward, future lower taxes.

The important philosophical justification of this gift is that any tax, no matter how high, on investments is completely fair and acceptable as long as the tax on rewards (gains) is symetrically offset by mitigation of risks (losses).

Reciprocal tax treaties
The tax treaty between Canada and the US (and AFAIK similar between most countries) allows Citizens/residents of both countries to deduct taxes paid to foreign governments from taxes owed to their own. 

The justification for imposing a 22% tax on foreigners investment income, is that by making dividends paid tax deductible to corporations, the tax on investment income is the replacement of the corporate gains.

The ideal international response to this new tax system would be for them to adopt the same dual component personal income tax system (portion for safety net/transfers and portion for general programs) with dividend deductibility.  The issue is relevant because foreign investors will be able to lower their national tax obligations by deducting taxes paid to Canada.

Dividend tax deductibility to corporations means 0 long term revenue from corporate taxes
All corporations eventually go bankrupt.  The tax rules already give substantial ways of recouping any taxes paid when they were profitable when they become unprofitable.  The tax code is complex partly to prevent investors from fully recouping such losses, but corporations always can, and sell their future tax credits in bankruptcy.

The policy of dividend tax deductibility would significantly accelerate government revenue collection regardless of corporate tax rate by encouraging dividend payments.

Importantly, respect by Corporations for shareholders is automatically granted through dividend preference.  This is an important national duty that is currently corruptly abrogated by securities regulators.

Capturing tax revenue from stock scams
Most stock holdings are based on the misrepresented hope of future dividends or other stockholder returns.  This does not seem oppressive to wolves of wallstreet if they can convince someone else of the lie and sell for more than what they paid.  Stock valuations tend to be hyped based on future profit hopes, and worth more than if modeled on past profits continuing at their old levels.

By taxing investment gains entirely with investors, government tax revenue can capture the entire future profitability hope, rather than just taxes on profits realized so far.

Recommended Corporate tax rate of at least 26% 
A 26% federal corporate rate is a decrease to large corporation, and an increase to small ones.  Its not important to change the rate due to previous point.

A 26% corporate tax rate with dividend tax deductibility allows management to argue to investors that it needs to keep retained earnings for future expansion, but it has no reason to seek any other tax avoidance scheme than to repay the investors who were kind or stupid enough to fund its past growth.

A 26% corporate tax rate leaves no room for tax arbitrage plays inside corporations (paying salaries vs dividends), for individuals making under $140k.

The argument for keeping large public corporate tax rates at 38% is fine, and puts more pressure on paying dividends.

Profitable corporations paying back shareholders lets the investor class allocate funds to new companies that need them, or usually more economically beneficial, spend like drunken sailors.

All payments to foreign related (co-ownership) entities would be subject to 22% Canadian tax which can be offset (for reciever) by other, future, or past, Canadian investment losses, and thtrough their national system for foreign tax credit deductions.

The benefit to foreign investors investing in Canada
A 22% investment tax rate instead of a 28%-38% corporate tax rate is better for their Canadian investment performance and attractive relative to 35% US corporate investments.  The tax payment is deductible from US/national taxes payable through tax treaty.

Foreigners also benefit from carryback/forward rules.  They would typically not have any non-investment income to apply loses to. 

UBI will create substantial economic opportunities in selling to Canadians.  Foreign subsidiaries can operate at an effective 22% tax burden here, and potentially employ Canadians at rates that are subsidized by UBI (though most people expect higher wage pressure).  The risk of Canadian operations that don't work can sometimes be compensated at higher Canadian corporate rate, or national home corporate rates.

The benefit to Canadians who threaten moves to Costa Rica
I mentioned a tax of 23% + 0% for Canadians on their foreign investment income. The reason for the 0% is that is a placeholder subject to change.

The 23% is for the safety net that the Canadian enjoys.  $15k of basic income in cash directly to him.  The safety and happiness level in the country.  The tremendous opportunities he has for earning other income.  

The 23% tax rate is competitive with the taxes on investment income he would pay in a shithole that is not Canada.  Property and private security premiums cost much more than natural harmony.  A lack of other opportunities is an unfavourable cost.

Non working spouse and future adults will get UBI, increasing net income, and substantially reducing education costs, or the need to subsidize their adulthood through the Costa-Rican-wannabe's own funds.

More importantly, this is a reduced rate that applies to all investment income (not just capital gains), and for people of real wealth, interest producing income always carries strong investor rights compared to the poor-rights scams in faraway lands that promise capital gains opportunities.  There would be no reason to participate in tax-preferred investor frauds (that apply even to publicly traded US stocks) instead of rights-holding-investments (bonds and other loans), and stockholder-respectful dividend payers.

Most importantly, the opportunity to apply losses to other income is a huge tax incentive.  Net losses would not only grant full $15k cash in UBI, but other income earned in Canada even in future years would be tax free up to those losses.


The +0%
A 23% tax on foreign income may be too competitive.  ie. too generously low.  As Canada prospers and becomes more desirable the + amount should be raised.

+7% is a reasonable starting number.  30% total tax on foreign investment income for Canadian residents.  This is justified primarily by the generous UBI benefit and loss application rules.

The whole reason why any discount to a 45% tax is offered on foreign investment income is that we are negotiating with terrorists threatening to leave the country if we serfs don't pay all of the taxes instead of them.  The rules and opportunities being provided just have to be enough of a bribe so that they don't leave.  But shame, disrespect, and social coercion against the slaver class should keep them politically irrelevant, and politicians who take up their cause and agenda, should also be disrespected.

The benefit to investors children's future adulthood may even justify making the additional tax rate variable on the number of children they have.

Dual income tax structure and foreign residents
Non citizens are not eligible for UBI.  It follows, that they should not pay the 23% portion of income taxes devoted to the UBI safety net (or personal transfers if a country does not adopt UBI).  The general/regular (22% progressive) tax portion does cover education and healthcare in Canada.

Effect on Canadian Businesses
There is no reason why profitable foreign corporations (google microsoft) and their owners and highly paid workforces would not choose to relocate to Canada, or entire progressive states to join Canada.  They would face only regular income taxes (23% less than Canadians) if they moved.  No corporate tax if they pay dividends.  We have a lot of room to welcome foreign workers, and the development contributes significantly to Canada's economy.

For Canadian statups, UBI is fantastic.  The founders and key employees can pay themselves in promises without needing to flip burgers or justify their tech project to investors or bureaucrats for funding permissions.  They will typically not need to obtain anyone's permission to create great tech if they are willing to rely on UBI for survival during development.

For successful Canadian small businesses there is no reason to move after they are successful.  A strategy to stagger dividends to manipulate UBI exists, as is simply stockpiling cash (and paying corporate taxes) as a safety net to pay dividends later (get corporate tax refund)

For successful large Canadian businesses, staying in Canada is attractive if they pay dividends to avoid corporate taxes.

International Reaction
The best possible international reaction is to adopt UBI and/or similar dual income tax structure.

For both anti-war and defense minded societies, there is a strong argument for making the defense and war budgets part of the UBI fund.  The more war spending, the less of a dividend would be paid equally to citizens.  This would be understood as a necessary sacrifice for just defensive wars, and would result in burned government building and disemboweled politicians when war spending is not seen as justified.  This ties into foreign workers and investors not having a say in such wars, and so not paying that portion of taxes.  Though its not impossible for war funding to have contributions from the general tax base.

I mention international reactions because Canada's alternative corporate tax structure will draw complaints regarding the 0 corporate tax on one hand being a tax haven, and the 22% investment returns tax as being socialist confiscation.  The complaints are utterly baseless because the 2 cancel each other out.  Effectively comparable to what was there before.  The complaints are utter corrupt fascism because it is clinging to corrupt inneffective tax systems that permit more avoidance and control by fascists.  Still, complaints will exist.

The best response to complaints is that if it is unfair for Canada to have this tax system, then your country should adopt it too.  International adoption also helps adjust the tax premium our nations need to bribe wealthy investors to keep a home in our country, and choose our politicians for us.  The more nations that adopt a local investment gains tax the fewer nations the money hostage negotiators can threaten to move to.  It also allows nations to capture the investment returns from the companies it likely assisted in creating.

Hillary Clinton's Dividend reform proposal
The US rules on dividends is that they become tax preferred if the investment is held for one year or more.

This is completely unnecessary in that investment banking and trading markets assets tend to stay in those accounts even when investments are sold.  People who have significant stock holdings do not celebrate the year anniversary of holding a stock by selling it to go spend it on hookers and blow.  Its generally transferred to new investments.  Since a company that takes investment banking money for business development (hiring/expansion) keeps it all even if investors sell their shares 1 second later, there is no broader economic benefit to the rule.

Its a corrupt policy in that it serves the investment industry.  IPOs look successful because most people will be made aware to hold for a year and hope the price level maintains.  This helps promote more sales to people with only the mental capacity to understand price levels.  It also helps promote loans as a way to get cash from an investment while waiting for it to "mature" into tax preferred status.  The loans create income and fees for the investment industry.

Hillary Clinton is proposing to extend the vesting period for tax preferential treatment to 2,3 and 4 years, presumably with different preferential stages at each level.  This is the wrong reform in the wrong direction.  It is a gift to the investment industry because it creates longer "self-imposed" prisons on investors.  This is the type of pretend-reform typical of US Democrats that would be positioned as pretend-leftism that results from needing financial industry friends and listening to their suggestions for policy spins.  The policy also helps general corporate insiders who are able to funnel corporate funds they control to political candidates.

related previous links on dividend policy and taxation
tax policy:
dividends:

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