Blogs & Comment

Unbearable heaviness of the tax system

The kerfuffle over recently proposed TFSA changesraises once again the question of whether or not our tax system is way too complicated with its plethora of differential tax rates and exemptions. Concerns include:
1) It leads to sub-optimal investment decisions. People, lured by the tax breaks, take their eyes off sound investing practices and make riverboat gambles with their money. A prime example is Labor Sponsored Investment Funds, where thousands of persons poured money into vehicles that went nowhere. A more recent example comes from blogger Michael James, who drew attention to the incentive thrown up by the TFSA to engage in speculation i.e. people over-contributing to the plan and investing in risky securities in hopes of beating the 1% a month penalty on over-contributions.
2) Its antithetical to low-cost investing. All the registered plans, exemptions, etc. create a demand for financial advisors to explain them. Being able to show us how to navigate through the labyrinth and reduce taxes, advisors get a foot in the door to sell a panoply of mutual funds and other financial products with embedded fees. If youve cast your lot with John Bogle, David Swenson, Larry Swedroe and other proponents of low-cost investing, it seems to me you have to take a stand against this absurd complexity in our tax system.
3) Look at the huge waste of productive resources that go into tax-planning strategies, the legions of tax lawyers, chartered accounts and other specialists. For a clue of what the costs amount to, look to economist James Payne, an authority on the costs of the American tax system: he estimates that, for every dollar his government collects and spends, individuals and businesses spend another 65 cents in collection and compliance costs, noted analyst Peter Holle. Wouldnt our economy be better off if these people were instead employed in more productive pursuits?
4) And dont forget the time and effort adult Canadians have to spend on comprehending and complying with the tax system often arriving at misunderstandings that harm them and their savings. Then there are those with the smarts, or the money to hire the talent, to find loopholes and implement tax planning strategies that make the incidence of taxes more regressive at the aggregate level. As a reader noted: Right now, there are office buildings where the cleaning staff pay more tax than the CEO & CFO. The cleaning staff have little or no tax dodges & loopholes.
Dont we need a tax system thats infinitely simpler? Im no expert in how to get there, but from my limitedmusings, things like a flat tax look worth considering. To be continued.