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Paper Abstract: Discusses the Canadian tax system. Conceptual review of taxation theory. Adam Smith's theories. Models of taxation systems. Debt interest. Taxation policies. Analysis and assessment of alternative models of taxation systems and policies. The effectiveness of Canada's taxation system. Desirable societal outcomes. Recommendations for tax reform. Income tax exemptions. Paper Introduction: ALTERNATIVE MODELS OF TAXATION, ALTERNATIVE TAXATION POLICIES, AND THE TAXATION STRUCTURE IN CANADA Introduction This study examines and assesses the Canadian taxation structure within the context of alternative taxation models and alternative taxation policies. A substantial proportion of Canada’s population assails the Canadian tax system, while simultaneously outside of Canada organizations such as the United Nations rank Canada at or near to the top of the list as the best country in which to live. Obviously, the country is doing something right. Nevertheless, there is always room for improvement in the realm of taxation. Further, changing environments frequently demand adjustments to taxation systems as a minimum and fundamental changes to such systems in some insta Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Washington, DC: International Monetary Fund, 1995, 185-198.Zee, H. When Schall'scontention is accepted, however, the inflationary distortion remains huge,with an effective tax rate on real interest income of 73.9 percent($3,325/$4,5 ). 332. This contention, however, overlooks the factthat the taxes paid on the capital gain recognized in year ten are paid indepreciated year ten dollars. Stotsky, "Taxation of Land and Property," in P.Shome. Both of these developments contributed to theconsolidation of a series of civil societies partly bounded by theterritories of states. Changes in nominal tax rates are not considered in assessing thedistortionary effects of inflation on taxes. London: The John Hopkins University Press, London, 199 , 439-454.Wane, W. E. BibliographyBleaney, M. Taxation Theory, Models of Taxation, and Taxation Policies: A Conceptual Review There exist strong interrelationships among taxation theories, modelsof taxation, and taxation policies. If, over that same 1 yeartime period, however, 1 percent price inflation has occurred in theeconomy, the $9 received in year ten had a purchasing power of only $45 in year one dollars. Assuming, for purposes of illustration, that theapplicable tax rate on the capital gain was 28 percent, the income taxliability on the gain would be $224. The data presented in Exhibits 1 and 2 demonstrate the heavy relianceplaced by the taxation system in Canada on income taxes and consumptiontaxes. In Canada, thenormal federal corporate income tax rate is 28 percent of taxable income.Canadian manufacturing and processing income, however, is taxed only at arate of 21 percent of taxable income. Rather, the primary driversfor taxation policies are providing benefits for constituencies necessaryfor re-election and delivering policy favours (regulation, deregulation,subsidies, and forth) to the entities that funded the last election effortand will hopefully fund the next campaign. Industries would remain privately owned, but the federalgovernment would promote modernisation and economic growth by buildingdams, highways, irrigation and electrification projects, and otherinfrastructure. Optimal taxation theory is applicable to all facets of a taxationsystem. Wane, The Optimal Income Tax: When Poverty is a Public Bad,Policy Research Working Paper No. An analysis and assessment ofalternative models of taxation systems and alternative taxation policiesfollows the conceptual review. Smith's suggestion that taxeson consumable goods essentially are voluntary[24] shows little sympathy forindigent people who must buy food and energy. Norton & Co., 1979.Mann, M. Washington, DC: International Monetary Fund, 1995,118- 121.----------------------- [1] C. Smith's concern thatexcessive taxation can induce people to break the law in some instancesapplies to the high taxes on cigarettes in Canada that some critics contendencourages people to evade the tax system in selling the product.Generational Transfers With respect to redistributing income across generations to help olderpersons with reduced income potential, A World Bank study found transfersbetween generations tend to be far greater that transfers withingenerations to achieve redistributive goals. Tax Policy Handbook. Exhibit 2 compares Canada's taxation structure with other developedhighly economies. Households are normally informal, private nonprofitorganizations, while voluntary associations are normally formal, privatenonprofit organizations. % ||Source: Organisation for Economic Co-Operation and Development, 1998 | Partnerships are taxed at individual rates in Canada on the basis ofthe income shares of the individual partners. Analysis and Evaluation of Alternative Taxation Models and Alternative Taxation Policies Ben Heijdra, Jenny Ligthart, and Frederick van der Ploeg pointed outthat inflation in the general economy can distort the outcomes of anytaxation program, regardless of the theoretical model or policyorientation.[16] Price inflation in an economy distorts the effectivenessand outcomes of the taxation structure, regardless of the tax modelimplemented. The Comparative Political Economy of the Welfare State. The exhibit provides proportional comparisons oftaxation types across countries within the context of a proportion of totaltax collections.|Exhibit 2 - Comparison of Taxation Structures Across Countries ||Tax Type as a Proportion of Total Taxes ||Tax Type |Canada |Germany |Japan |Sweden |UK |USA ||Income Taxes |44.1% |3 .8% |4 .5% |41.3% |35.1% |42.4% ||Consumption Taxes|24.4% |26.7% |12.7% |26.4% |33.6% |15.2% ||Social Insurance |16.6% |38.7% |33.7% |27.7% |17.9% |29.3% ||Taxes | | | | | | ||Other Taxes |14.9% |3.8% |13.1% |4.6% |13.4% |13.1% ||Total Taxes |1 . The effective tax rate would remain at 32percent ($224/$7 ) on the real capital gain based on adjusting theacquisition price to year ten dollars, because the taxes would also be paidin year ten dollars. > Effective January 2 1, the credit amount for caregivers of dependent relatives who are elderly, infirm or disabled was raised to $3,5 from $2,386. [23] Schall, 3. Taxes should be certain and not arbitrary. If this situationwere to be corrected, a reasonable assumption would be that nominalinterest rates would come down. Zee, The T986), p. New York: W.W. [2] "Human Development Index," The Economist (14 July 2 1): 2. The social institutions normally associated with these foursocial orders are households, private firms, public agencies, and voluntaryassociations or nonprofit organizations, respectively. "Inflation as Taxation: Theory and Evidence." Discussion Paper No. The World Bank concluded thatit is likely that young workers will receive lower pensions and negativerates of return on their contributions under pay-as-you-go public old agepension systems.[25]Land Taxation Land taxes produce relatively little revenue. Tax Policy Handbook. Schall contended that, during inflationary periods, a part of debtinterest payments represents the repayment of principal, because, as aconsequence of inflation, the value of the nominal principal repayment isreduced. Rather, he meant that taxes shouldnot be payable when the ratepayer's rent is due or when the crops are stillin the field. alternative models of taxation, alternative taxation policies, and the taxation structure in canada Introduction This study examines and assesses the Canadian taxation structurewithin the context of alternative taxation models and alternative taxationpolicies. Paris: Organisation for Economic Co-Operation and Development, 1998.Pestoff, V. "The Theory of Optimal Income Taxation." In Shome, P. Norton Company, 2 .Strasma, J. These two tax types tend to be the polar opposites of progressivityand regressivity. Equallyunfortunate is the approach of some people who propose dealing with theproblem of inflationary distortion of capital gains taxes by indexing taxbrackets to general price level changes in the economy. J., Ligthart, J. Following the assessment of alternativemodels and policies, a description of the taxation system in Canada as itexists in 2 1 establishes a baseline for further sections of this study,which (1) assess the conceptual position of the Canadian taxation systemwithin the context of alternative taxation models and policies and (2)evaluate the effectiveness of Canada's taxation system within the contextboth desirable societal outcomes and the recommendations of the CarterCommission for tax reform in Canada. Zee, "The Theory of Optimal Income Taxation," in P. [8] J. The Corlett-Hague Rule states that assuming there are onlytwo taxable commodities in addition to nontaxable leisure, the commoditythat is the stronger complement (or weaker substitute) of leisure should bethe more heavily taxed.Models of Taxation Two alternative approaches to model broad based taxation systems are(1) a well-designed income tax or (2) a progressive expenditure tax. W. Wane, "The Optimal Income Tax: When Poverty is a Public'Bad,'" Policy Research Working Paper No. Evaluation of the Effectiveness of Taxation Policy in Canada within the Contexts of Desirable Societal Outcomes and Recommendations of the Carter Commission for Taxation Reforms in Canada The Department of Finance introduced new taxation initiatives in 2 1that move the taxation system more toward progressivity. Three models of propertytaxation are as follows: (1) tax based on the annual or rental value of theproperty, (2) tax based on the capital value of the land and improvements,and (c) tax based on the site or land value. [2 ] Ibid. [22] Feldstein, 112. A tax system should provide verticalequity (e.g., individuals who are better able to pay higher taxes shouldbear a higher share of total taxes). Flexibility: A tax system, according to Stiglitz, shouldrespond easily to changes in economic conditions. The nominal interest incomefor the bank is $1 , , and it is that amount that the taxing authoritywill subject to taxation. [5] Smith, 371-374. Rather, it simply attempts toameliorate the effects of such distortion.[19] Any action that either moderated the effects of the inflationarydistortion over the long-term, or eliminated the inflationary distortion oncapital gains taxation, however, would have positive effects in theeconomy, because such action would stimulate investment. Bird and O. Valuation techniques appliedwith each of these models attempt to establish fair market values.[13] Another narrower taxation model is generational taxation. Kanz, "Second Thoughts," Harvard International Review 23 (Fall2 1): 9. In Western Europe, the vision heldthat the social contract would be implemented through the state. Adam Smith delivered his criteria for an effective system of taxationin 1776. [43]Gough, 56. W.Norton Company, 2 ), Chapter 17. Zee, "Theory of Optimal Commodity Taxation," in P. Eachapproach should seek to adhere to the ability to pay principle. Moderneconomies are complex, and while one sector may need demand stimuli, supplystimuli may be more appropriate for another sector of the economy. [12] H. As an example, if an asset were acquiredfor $1 in year one, and if that asset were sold in year ten for $9 , anominal capital gain of $8 has been realized. Ettlinger, "The Localization of Development in ComparativePerspective," Economic Geography 7 (April 1994): 151. Each has its own guiding principles,predominant actors and resources, principal motives, and pay-offs forsociety. This approach is a demand-side modelof taxation. Cecil, "Moral Values of Liberalism and Conservatism: TheHistorical Development," Vital Speeches 61 (1 April 1995): 37 . (Ed.). [31] M. [13] Wane, 21-22. Nevertheless, there is always room forimprovement in the realm of taxation. Elliott, "Challenges Facing Social Economics in the Twenty-First Century: A Radical Democratic Perspective," Review of Social Economy,51 (Winter 1993): 512. > A temporary investment tax credit is provided at a rate of 15 per cent for specified mineral exploration expenses incurred in Canada pursuant to a flow through share agreement. H. Nadeau, Taxpayers' Response to Tax RateChanges: A Canadian Panel Study (Montreal: Institute of Applied Economics,2 ), 12-16. Land taxes sometimes arecounterproductive, discouraging production. Lowi, The End of Liberalism: The Second Republic of the UnitedStates (New York: W. Schall pointedout, however, that indexing, as is true of tax rate reductions, does notcure the problem of inflationary distortion. Averting the Age Crisis: Policies to Protect the Old and Promote Growth. Hicks, The Comparative Political Economy ofthe Welfare State (Cambridge, England: Cambridge University Press, 2 1),2 1. "Challenges Facing Social Economics in the Twenty-First Century: A Radical Democratic Perspective." Review of Social Economy 51 (Winter 1993): 5 4-525.Ettlinger, N. [7] Ibid., 373. Bleaney, "Inflation as Taxation: Theory and Evidence,"Discussion Paper No. A progressive tax takes a larger proportion of income asincome rises. The resulting high real costs of borrowingdeter investment, and, in turn, deter economic growth. As the discussion of the rationale of thecontention that inflation distorts taxation illustrated, however, thedistortion, while real and significant, is not as severe as its criticsmake it out to be. 3rd ed. Further, government would fund housing projects, theSocial Security system, educational programs, welfare programs, andprograms to create jobs. The developments of political science in the early-twentieth centurywere the continuation of the process of liberal reform.[42] The politicalstructure that was developing was a form of statism. Feldstein, Inflation, Taxation, and Monetary Policy 4th ed.(Cambridge, Massachusetts: Harvard University Press, 1998), 1 1. The nominal capital gain is the one typicallyrecognized by taxing authorities; therefore, the tax payer in this examplewould be required to pay taxes on a capital gain of $8 , when the realgain was not that high. [42]I. Thus, according to Schall, thenominal interest income would amount to only $4,737, and the real interestincome would amount to only $4,5 ($4,736.84x.95 = $5, ).[22] Assuming that a 35 percent tax rate is applied to the $1 , nominalinterest income, the tax on the interest income would be $3,5 . [18] B. Additionally, the federal governmenteffects intergovernmental transfer payments, and both the federal andprovincial governments effect personal and family transfer payments.Canada levies taxes on the bases of both residence and source income. H. Within the context ofthe progressive/regressive, demand-side/supply-side, and Keynesian/Neo-Classical alternatives, Canada again is a middle of the road economy,albeit with a tilt toward progressivity, the supply-side, and Keynesianism. Britain differs considerably from the United States in degreeregarding the extent of government involvement in the social welfaresystem. The exception to this neo-classical maxim occurs when they have aproject that they want implemented but which has risk characteristics thatfrighten away private investors. The size of eligible investment increased to $2 million from $5 , and the size of businesses eligible for the rollover increased to $5 million in assets from $1 million. Economics of the Public Sector. [27] The World Bank, 311-313. Some 21 years later, Joseph Stiglitz provided contemporarytheoretical criteria for an effective system of taxation. (Ed.), Tax Policy Handbook (Washington, DC: International MonetaryFund, 1995), 185-198. [29] Yucelic and Stotsky, 185-198. Strasma, "Agricultural Taxation in Theory and Practice," in R.M. The lowest rate is 16 percent for incomesbelow $3 ,755. The development of industrial capitalism in Western Europe led tocitizen demands for a whole range of new state services for burgeoningcivil societies.[37] States first sponsored major communication systems,then mass education systems. Keynesians, in contrast to neo-classicists, recognize marketimperfections and failures. As the use of comparable datais required in valuations for such an assessment, so too tax rates must becomparable.Capital Gains A capital gain results from the appreciation in value of a capitalasset. E., and van der Ploeg, F. (Ed.). The Stiglitzcriteria did no differ markedly from those of Adam Smith. % ||Source: Organisation for Economic Co-Operation and Development, 1998 | Effective in 2 1, Canada's top income tax rate is 29 percent forincomes in excess of $1 , . The four optimal rules are asfollows:[12] 1. "Toward An Appropriate Politics." New Perspectives Quarterly 12 (Fall 1995): 56-63.Schall, L. [24] Ibid. "Economic Institutions and the Satisfaction of Human Needs." Journal of Economic Issues 28 (March 1994): 25-66.Heijdra, B. [3 ] R. The traditional European perspective ofstatism stresses the existence of states, as distinct from governments,that develop extensive capacities and a wide range of roles.[4 ] Amongother things, these states develop social policies to enhance socialintegration. "The Canadian Tax System." Retrieved from theInternet 2 1-12-19 at: http://www.frasierinstitute.ca/publ~ns/books/tax_facts11/chapter1.html [33]V. (Ed.). Such policies andprograms may include taxation, social security benefits, public services,wage and price controls, and training policies designed to alter thedistribution of primary incomes. The emergence of the welfare state was consistent with theseprinciples of liberalism. "Europe's Identity Crisis Revisited." Daedalus 123 (Spring 1994): 1-23."Human Development Index." The Economist (14 July 2 1): 2.Janowski, T., and Hicks, A. The inflationarydistortion on interest income taxation is real and it is significant;however, it is not the lenders who bear the burden of this distortion.Rather, the borrowers bear the burden of the inflationary distortion, as aconsequence of what may, at first glance, appear to be inordinately highnominal loan interest rates. These newinitiatives are as follows: > Effective July 2 1, the Canada Child Tax Credit for low- and middle-income Canadians increased by an additional $1 per child over the $2 -per-child increase in the 2 budget. Ligthart, and F. Recommendations for Canada's Taxation Structure The strongest recommendation for the future of Canada's taxationstructure is the introduction of an exemption of citizens and residentsfrom income tax when their annual incomes are below $3 , . [35]C. "The Politics of Triage: The Contract with America's Surplus Populations." Tikkun 1 (May-June 1995): 37-46.Elliott, J. Public oldage security programs designed on the generational transfer taxation modelseek to redistribute income across generations to provide equity in helpingpeople with reduced income producing capacity because of old age. An Inquiry into the Nature and Causes of the Wealth of Nations. For a system oftaxation to be otherwise, according to Smith amounts to a form of tyranny.Smith argues further that uncertainty in a system of taxation leads to bothcorruption in government and non-compliance by ratepayers. The private nonprofit alternative, as an example,implies that the delivery of social welfare services does not take placeunder the auspices of public agencies. [11] W. Theconcern of optimal commodity taxation is with determining the structure oftaxes on various commodities to raise a given amount of revenue with aminimum of a tax-induced efficiency loss. Based on this finding, Zee concludedthat costs to economic efficiency will be very high if a taxations systemrelies heavily on increasing progressivity to achieve redistributivegoals.[1 ] In contrast, however, a World Bank study found that taxationmodels based on optimal taxation theory produced negative marginal incometax rates for low-income workers that, in turn, motivate such workers toenter the workforce. During this period, thelegitimacy of the liberal state became closely associated with thesuccessful regulation of the economy. Gough, "Economic Institutions and the Satisfaction of HumanNeeds," Journal of Economic Issues 28 (March 1994): 55. [9] W. DP /3 (Nottingham, England: University of Nottingham, 2 ): 1- 28.Cecil, A. S. Cambridge, England: Cambridge University Press, 2 1.Kanz, M. While these alternative policy approaches are not tax models perse, they do reflect a dichotomy in theory between advocates of progressivetaxation and regressive taxation.[15] A government adjust tax levels, especially income tax, to pursue avariety of objectives. [6] Ibid. Transparency: There should be no secrecy in tax laws. Smith also suggested, however, that taxes on consumablegoods were different because people were "at liberty ... [4 ]S. As the welfare state developed, however, theproactive strategies of the state extended beyond the original principlesof liberalism and developed into statist capitalism. Cambridge, Massachusetts: Harvard University Press, 1998.Fraser Institute. 5. The Inverse Elasticity Rule states that if the ordinarydemand for every taxed commodity is independent of all prices except itsown, then the optimal tax rates on these taxed commodities relate inverselyto the absolute values of their ordinary own-price elasticities of demand. An alternative method of determining the amount of the realcapital gain in this example involves the revaluation of the acquisitionprice into year ten dollars. "Emigrating Canadian Workers at All-Time Low." Computing Canada 27 (23 March 2 1: 26-27.Lee, E. W-y. [15] Z. This approach is asupply-side model of taxation. Further, changing environmentsfrequently demand adjustments to taxation systems as a minimum andfundamental changes to such systems in some instances.[3] This study begins with a conceptual review of taxation theory, modelsof taxation systems, and taxation policies. "Theory of Optimal Commodity Taxation." In Shome, P. The liberalism that emerged during thisperiod was a philosophy of change and progress, of ascertaining thepositive role of the government in providing "the means for consciousinducement of social change."[43] Liberalism as originally conceived stressed the personal freedom ofthe individual and the right of the individual to dissent.[44] Itpermitted governmental interference only to alleviate disharmonies createdby individuals pursuing their own interests without regard to the interestsof others. Joseph Stiglitz offered five criteria for a fair and effective systemof taxation. Norton & Co., 1979), 42. [26] Ibid., 373. Land taxes are unpopular,costly to administer, and are plagued with corruption.[26] Yucelic and Stotsky concluded that, as the property tax incidencefalls on all owners of capital through movement of capital from high-taxedsectors to the low-taxed sectors, and since the owners of capital tend tohave higher income, property tax is progressive.[27] This conclusion tendsto equate variations in taxes paid on property with progressivity, whilefailing to recognize the flat tax characteristic of the typical propertytax. R. "Fiscal Policy, Distortionary Taxation, and Direct Crowding Out Under Monopolistic Competition." Oxford Economic Papers 5 (January 1998): 79-88.Hoffmann, S. H. [38]N. The exhibit providesproportional comparisons of taxation types in two contexts - as aproportion of GDP and as a proportion of total tax collections.|Exhibit 1 - Canada's Taxation Structure ||Tax Type |Proportion of GDP |Proportion of Taxes ||Income Taxes |15.7% |44.1% ||Consumption Taxes |8.7% |24.4% ||Social Insurance Taxes |5.9% |16.6% ||Other Taxes |5.3% |14.9% ||Total Taxes |35.6% |1 . Nevertheless, the argument that the real capital gainshould be taxed, as opposed to the nominal capital gain, is a soundone.[18] Unfortunately, many politicians attempt to deal with the distortionthrough tinkering with the rate at which capital gains will be taxed, asopposed to dealing directly with the cause of the distortion-taxing thenominal capital gain, as opposed to the real capital gain. van der Ploeg, "Fiscal Policy,Distortionary Taxation, and Direct Crowding Out Under MonopolisticCompetition," Oxford Economic Papers 5 (January 1998): 8 . Positioning of Canada's Taxation Structure within the Context of Alternative Models of Taxation and Alternative Taxation Policies The position of Canada's taxation structure within the context ofalternative models relates to the role of the welfare state in Westerneconomies. Derber, "The Politics of Triage: The Contract with America'sSurplus Populations," Tikkun 1 (May-June 1995): 37. Feldstein contended that inflation "distorts all aspects of thetaxation of personal income but it is particularly harsh on the taxation ofcapital gains."[17] Feldstein contended further that the taxation of thenominal capital gain, as opposed to the real capital gain, can cause someinvestors (during an inflationary period) to receive less in real terms foran asset than they paid for it. Economics of the Public Sector. Gagné and J-F. Lenders, of course, are aware of the distortionary effects ofinflation on loan principal, interest income, and effective tax rates.Because of this awareness, the nominal interest rate on a loan isstructured to provide for both the depreciation of capital, and theincrease in the effective tax rate on interest income. 3. Equal opportunities legislation, publicsupport for child care, and other family-support policies can diminishgender inequalities, while employment programs of various kinds can reduceunemployment and thus directly enhance economic participation with benefitsfor individual autonomy. Two applications especially relevant in the Canadian context areincome tax and commodities taxation. Thedistortion represents an effective income tax increase on capital gainsapproximating 14.3 percent. Taxpayers' Response to Tax Rate Changes: A Canadian Panel Study. [25] Smith, 571. A contemporary conceptual approach to taxation is optimal taxationtheory. M. Taxation theory provides a basis forthe development of models for taxation systems. These criteria areas follows:[5] 1. DP /3 (Nottingham, England: University ofNottingham, 2 ): 3-4. Combined with indexation, these increases will bring the maximum benefits for the first child to more than $2,5 by 2 4. In this instance, the acquisition price wouldbe adjusted to $2 , and the real capital gain in year ten dollars would be$7 . Washington, DC: International Monetary Fund, 1995, 71- 74.Zee, H. New York: W. Nor is the assumed 1 percent inflation overa 1 -year time period unrealistic. To do otherwise,Schall contended, is to tax principal as well as interest income.[21] The inflationary distortion on interest income may be illustratedthrough the following example. Proponents of the concept of an inflationary distortion on taxes wouldcontend that the preceding example illustrates that the effective tax rate,when the capital gain is determined by the difference between nominalvalues only ($8 ), is 64 percent ($224/$35 ) on the real capital gainbased on adjusting the sales price to year one dollars, or 32 percent($224/$7 ) on the real capital gain based on adjusting the acquisitionprice to year ten dollars. Thus, the $3,5 tax payment is worth only $3,325 in beginning of the loan dollars. Under such circumstances, the neo-classicists are willing to fund the project with taxes. Yucelic and J. Montreal: Institute of Applied Economics, 2 .Gough, I. In the United Statesduring this period of the twentieth century, the country was transformedfrom laissez-faire capitalism to managed capitalism. "Taxes, Inflation, and Economic Decisions." Digest 6 (1989): 1- 4.Smith, A. A regressive tax takes a smaller proportion of income asincome rises. Shome.(Ed.), Tax Policy Handbook (Washington, DC: International Monetary Fund,1995), 71-74. The income tax is the primary revenue source at the federal level inCanada. OECD Revenue Statistics. These criteria are as follows:[8] 1. Considering the depreciatedvalue of the taxes paid, the effective tax rate, when the capital gain isdetermined by the difference between nominal values only ($8 ), is 32percent ($112/$35 ) on the real capital gain based on adjusting the salesprice to year one dollars. During the 197 s (197 -1979), theConsumer Price Index (CPI) increased 97.6 percent, while during the 198 s(198 -1989), the CPI increased 7 .7 percent, and during the 1 -year timeperiod 1974-1983, the CPI increased 124.1 percent. The income tax in Canada is levied on the incomes of individuals,partnerships, corporations, estates, and trusts.[3 ] Exhibit 1 details Canada's taxation structure. (Eds.). > Tax-free rollovers were expanded and made available to more businesses. Shome.(Ed.), Tax Policy Handbook (Washington, DC: International Monetary Fund,1995), 118-121. S. 2. Allratepayers should be able to determine varying degrees of tax liability. [17] J. With respect to vertical equity,however, Stiglitz contends that vertical equity should not apply to benefittaxes wherein tax levels correspond with the level of benefits derived froma governmentally provided service. Taxes levied in Canada include (but are notlimited to) the following: personal income tax, corporate income tax,capital gains tax, goods and services tax - GST, social insurance taxes,and sales taxes (in three provinces). Thegenerational transfer taxation model permanently transfers income from ayounger generation to an older generation.[14]Alternative Taxation Policies Two pre-eminent taxation policies in capitalist economies in thecontemporary period are (1) the Keynesian model and (2) the neo-classicalmodel. It is not unrealistic, therefore, to assume that, at some point inthe future, decreases in the general price level will, once again, occur.In such a situation, the real capital gain would be greater than thenominal capital gain, and the deflationary distortion on taxes wouldbenefit the taxpayer. A secondrecommendation in this progressive vein is the extension of a GST exemptionin income tax to ratepayers with annual incomes below $4 , . "The Localization of Development in Comparative Perspective." Economic Geography 7 (April 1994): 144-166.Feldstein, M. Hoffmann, "Europe's Identity Crisis Revisited," Daedalus 123(Spring 1994): 1 . The state became an institution foreconomic and social management. The federal government became actively involved in theregulation of the economy through as monetary stabilisation, financialassistance, and social welfare programs. [41] T. Structure of Taxation in Canada Canadian governments - federal and provincial - levy taxes across thespectrum of taxation types. In theUnited States, New Deal liberals in the 193 s believed in a form of thesame vision. There are pastexamples of Keynesian stimulus taxation policies continuing well past theattainment of the original objective, thereby causing an unnecessaryincrease in price inflation. Mann, "Nation-States in Europe and Other Continents:Diversifying, Developing, Not Dying," Daedalus 122 (Summer 1993): 116. The real capital gain in year one dollars, therefore,was $35 , as opposed to the nominal capital gain of $8 in year tendollars. One school ofthought would contend that the real interest income of $9,5 should besubjected to taxation, as opposed to the $1 , nominal interest income.Schall, however, would go further. [4] A. W. H. If changes are made to the tax law to assure thatthe real capital gain is taxed, as opposed to the nominal capital gain,however, the effective tax rate on capital gains will be higher than thenominal rate in deflationary periods.Debt Interest Debt interest refers to the fee earned by lenders. Lee, "Political Science, Public Administration, and theRise of the American Administrative State," Public Administration Review 55(November-December 1995): 541. Although it does not exclude publicfinancing, neither does it mean that such provision can be equated with themotives of for-profit organizations. The $1 , interest paymentwas worth only $9,5 in beginning of the loan dollars. Assume further, however, that the rate ofinflation during the year of the loan was five-percent. The last time that the general price level in the economy decreasedon a year-to-year level was 1955. Washington, DC: Development Research Group - Public Economics, The World Bank, 2 .The World Bank. either to buy, ornot to buy, as he pleases, it must be his own fault if he ever suffers anyconsiderable inconveniency from such taxes."[7] 4. > Effective January 2 1, the disability tax credit amount was raised to $6, from $4,293. Stiglitz, Economics of the Public Sector (New York: W.W.Norton, 1986), p. Realistically, however, significantreductions in nominal interest rates would likely occur for only thesophisticated corporate borrowers whose knowledge and awareness wouldcaused them to demand interest rate reductions. [14] H. 227 (Washington, DC: DevelopmentResearch Group Public Economics, The World Bank, 2 ), 4. [19] M. In the foregoing example, one has a choice of three capital gains-tworeal and one nominal. Whenthe deflated value of the tax payment is considered, there is no distortionon the tax rate of a real interest income of $9,5 . Within the context of this maxim, Smithbelieved that it was possible for government, through taxation, to create atemptation to break the law and then punish people for giving in totemptation. 4. Heijdra, J. The incometax, however, is a progressive tax, whereas the typical expenditure tax isa regressive tax. Smith also believed that taxes should notdestroy the incentive to engage in productive business activities, orpenalties for evading taxes should be so high as to send unsuccessfulevaders into financial ruin. London: Penguin Books, 1976.Stiglitz, J. 227 (Washington, DC: DevelopmentResearch Group - Public Economics, The World Bank, 2 ), 4. The $1 , principal repayment,according to Schall, would be worth only $95, in the end of the loandepreciated dollars. Fairness: The tax system should be fair in its treatment ofdifferent individuals. Other taxation models tend to focus on narrower goals and objectives.One of these narrower models is the property tax. [21] L. Optimal income taxation theory seeks a trade-off point where themarginal enhancement to equity from an additional unit of income transferis just worth the marginal efficiency cost of that transfer.[9] Howell Zeefound that, as the income range moves upward, the optimal marginal tax ratefirst rises and then falls at some point at high-income levels, ultimatelyfalling to zero at the highest level. A substantial proportion of Canada's population assails theCanadian tax system,[1] while simultaneously outside of Canadaorganizations such as the United Nations rank Canada at or near to the topof the list as the best country in which to live.[2] Obviously, thecountry is doing something right. Asis true of every other aspect of economic activity, Smith has a view oftaxation. % |1 . W. Taxation in Developing Countries 4th ed. Thus, in real terms, the $224 tax paymentrepresents only $112 in year one dollars. Canada is a middle of the road welfare state. During the seven-year time period 1949-1955 inclusive, however, the general price level decreased in two of thoseyears. [16] The World Bank, Averting the Age Crisis: Policies to Protect theOld and Promote Growth (Washington, DC: The International Bank forReconstruction and Development/The World Bank, 1994), 311-313. A major objective is the state in a welfare statism strategy is tomodify the distributive results of market mechanisms combined with privateownership through redistributive policies and programs.[41] These policiesand programs are designed to address the lack of entitlements of the poorand the maldistribution of resources according to need. % |1 . The national integration ofthe United States lagged behind that of most European countries. Thus, as the preceding example illustrates, inflation does distorttaxes, but not to the horrendous extent claimed by some economists.Nevertheless, the distortion in the example (from a nominal tax rate of 28percent to an effective tax rate of 32 percent) is significant. Siegel, "Toward An Appropriate Politics," New PerspectivesQuarterly 12 (Fall 1995): 56. "Second Thoughts." Harvard International Review 23 (Fall 2 1): 9- 1 .Lancit, C. [3] M. Progressive politics first appeared at the beginning of the nineteenthcentury.[33] The French revolution had abolished feudal privileges andestablished certain basic human rights. The Proportionality Rule states that if all commodities aretaxable, then the optimal tax structure would be the one where the tax oneach commodity, expressed as a proportion of its price, is the same for allcommodities. [44]E. [39]M. H. As was pointed out in the discussion of the rationale underlying thecontention that inflation distorts taxes, however, the taxes paid on thenominal interest income are paid in depreciated dollars. An easily understood illustration of theeffects of this differentiation in an inflationary environment with respectto taxes involves a capital gain. Social liberalism underlies the case for state intervention.The strategy of welfare statism emerged in social democratic politics fromthe bases of statism and social liberalism in the twentieth century.Within the strategy of welfare statism, the state's role is proactive andegalitarian. "Political Science, Public Administration, and the Rise of the American Administrative State." Public Administration Review 55 (November-December 1995): 538-546.Lowi, T. The flow- through share investor will be able to use this tax credit to reduce federal tax otherwise payable on eligible expenses incurred prior to 2 4 (measure described in detail below). The welfare mixpertains to the interrelatedness of these social orders and institutions. Lancit, "Emigrating Canadian Workers at All-Time Low,"Computing Canada 27 (23 March 2 1): 26. A Keynesian taxation model may provide forvariations in the level of taxes to try to influence the level of aggregatedemand and therefore economic growth. The End of Liberalism: The Second Republic of the United States. Public agencies are normally formal,nonprofit organizations, while private firms are normally formal, for-profit organizations. Every resident of a state should contribute to the supportof the government, "as nearly as possible, in proportion to theirrespective abilities; that is, in proportion to the revenue which theyrespectively enjoy under the protection of the state."[6] 2. 3. If the same tax rate were applied tothe capital gain applicable to the valuation of both the acquisition costand the sales price in year one dollars ($35 ), the income tax liability onthe gain would be only $98, while, if the same tax rate were applied to thecapital gain applicable to the valuation of both the acquisition cost andthe sales price in year one dollars ($7 ), the income tax liability on thegain would be $196. In contrast to the Keynesian demand model of taxation, a neo-classicaltaxation model would attempt to minimize taxes in the hopes that such ataxation policy would motivate people to produce more. [28] J. [36]C. Smith alsobelieved that uncertainty in a system of taxation was more damaging to theeffectiveness of taxation than inequities introduced by a failure to heedthe taxation in relation to an ability to pay maxim. W-y. Tax Policy Handbook. The borrower,thus, paid the bank in depreciated dollars. New York: W. London: Strahan and Cadell, 1776, reprinted in Adam Smith: The Wealth of Nations, Books I-V. Smith held that taxes should be payable at a time that isconvenient to the ratepayer. 3. > The capital gains inclusion rate reduced from three-quarters to two-thirds on February 28, 2 - was cut further to one-half on October 18, 2 . 4. M. A tax system should provide horizontal equity(e.g., individuals who are the same in all relevant aspects should betreated equally by the tax system). > Effective January 1, 2 1, the education amount on which the education credit is based doubled from $2 to $4 per month for eligible full-time students and from $6 to $12 per month for eligible part-time students. The rise of largeindustrial corporations gave rise to an oligarchic mode of economiccompetition and the replacement of entrepreneurship by managerialexpertise. Stiglitz, Economics of the Public Sector 3rd (New York: W. The WestEuropeans through the mid-197 s distinguished their welfare states based ona mix of Socialist and Christian Democratic convictions, from the morelaissez-faire society in the United States, especially in relation tohealth care, labour practices, and unemployment benefits.[38] Canada'sapproach to the welfare state blends the European and Americanapproaches.[39] Theoretical Explanation A combination of traditional liberalism and statism best explains theemergence of the welfare state. The welfare state refers to the interaction of various socialinstitutions and orders.[31] The basic social orders are community,market, state, and associations. Smith believed that a tax collection system should beefficient, i.e., the cost of collection should be the least amount requiredto do the job efficiently. Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 1994.Yucelic, Z., and Stotsky, J. % |1 . "Nation-States in Europe and Other Continents: Diversifying, Developing, Not Dying." Daedalus 122 (Summer 1993): 115-14 .Organisation for Economic Co-Operation and Development. R. There are, however, majoradministrative hurdles in the path of the implementation of such astaxation system. "Third Sector and Co-operative Services-An Alternative to Privatization." Journal of Consumer Policy 15 (March 1992): 21-45.Siegel, C. One last commentis in order on the distortionary effect of inflation on capital gainstaxes. "Agricultural Taxation in Theory and Practice." In Bird, R. Keynesians are, therefore, aware thatgovernmental intervention, at times, is essential to manage the economy orto assure the attainment of essential societal objectives. [37]J. A progressive expenditure tax would attempt to increase therate of tax as expenditures increase. "Taxation of Land and Property." In Shome, P. "The Optimal Income Tax: When Poverty is a Public 'Bad.'" Policy Research Working Paper No. "The Canadian Tax System." Retrieved from the Internet 2 1-12-19 at: http://www.frasierinstitute.ca/ publ~ns/books/tax_facts11/chapter1.htmlGagné, R., and Nadeau, J-F. Schall, "Taxes, Inflation, and Economic Decisions," Digest 6(1989,:1-4. Administrative simplicity: Stiglitz holds that a tax shouldbe easy and inexpensive to administer. Janowski and A. Consistent with this change, the deduction for employee stock options was increased from one-third to one-half. The Ramsey Rule states that, for a commodity tax structureto be optimal, the proportional tax-induced reduction in quantitiesdemanded of a taxed commodity, as measured along its compensated demandcurve, should be the same for all taxable commodities. E. Then if theproject is successful, they pressure the government to sell it at a lowprice to the private investors who were unwilling to risk their own fundsto launch the project. Next, states organised health systems, followed bythe first stirrings of modern welfare systems. The interrelatedness of these social orders involves differencesbetween public and private, for-profit and nonprofit, and formal andinformal institutions.[32] Each of these institutions illustrates a uniquecombination of characteristics. The entry of low-income workers into the workforceincreases total output in the economy and moves those workers into positivemarginal rates in the income tax structure.[11] Howell Zee identified four optimal commodity taxation rules. A. Economic efficiency: Stiglitz holds that a tax should notprevent efficient allocation of resources. A. [34]Pestoff, 23. [46]A. Taxation policies reflectthe emphases in the implementation and functioning of taxation systems.Taxation Theories Adam Smith is an iconic figure looming over capitalist economics. Therefore, Schall would not only apply taxes only to realinterest income, as opposed to nominal interest income, he would alsoreduce the level of real interest income by an amount appropriate topreserve the real value of the amount of money loaned. % |1 . Assume that a bank loaned $1 , for oneyear at an interest rate of 1 percent, and that the borrower paid the bank$11 , at the end of the one year period. [32] Fraser Institute. 2. Forthis reason, regardless of what politicians may say most tax policies thatare effective include both demand-side and supply-side components, althoughthe overall policy may tilt in one direction or the other.[29] Third,fairness, equity, and economic efficiency seldom are the primary driversfor tax policies (demand-side or supply-side). Thus, in line with this reasoning, approximately$5,263 of the $1 , interest payment would represent a repayment of theloan principal ($5263.16x.95 = $5, ). [45]T. E. "Moral Values of Liberalism and Conservatism: The Historical Development." Vital Speeches 61 (1 April 1995): 368-373.Derber, C. M., and Oldman, O. The welfare state in the United States emerged largely through NewDeal and Great Society social legislation that guaranteed all Americancitizens entitlements to food, shelter, and other basic necessities.[34]In the pre-1973 period in the United States, a tacit social contractdeveloped, wherein capital, at least in the large and successful corporatesector, accepted collective bargaining and provided a regime of high wages,employment, and fringe benefits and labour accepted managerial prerogativesin the organisation of work and largely refrained from strikes.[35] In contrast to the United States, Western Europe has a history ofexplicit interconnectedness between the public and private spheres.[36]Following the end of the Second World War, universal social security andfree national health service were institutionalised in Britain, wheregovernment has been decidedly oriented to redistribution and socialwelfare. 332. Norton, 1986.Stiglitz, J. This conclusion distorts a rationale for property taxation based onthe ability to pay and the benefit principles of taxation.The Keynesian - Neo-Classical Dichotomy in Taxation Policy With respect to the dichotomy between demand-side (Keynesian) andsupply-side (neo-classical) models of taxation, there are several caveats.First, the implementation of either model will produce both demand andsupply effects, although the emphasis in the implementation policy can tiltthe effect in one direction or the other.[28] Second, it is seldom that amodern economy that needs only demand effects or supply effects. If the taxation policy caninclude some features to promote fairness, equity, and efficiency withoutcompromising the primary policy drivers, the politicians may include them.Fourth, the reason that they may include them rather them will include themis the strength of the ideologues in their parties. Oldman, Eds., Taxation in Developing Countries, 4th ed.,(London: The John Hopkins University Press, London, 199 ), 439-454. % |1 . The essence of the rationale underlying the contention thatinflation exerts meaningful effects on taxes lies in the differentiationbetween nominal and real values. Inflation, taxation, and monetary policy 4th ed. Theoretically, the major difference between Keynesian and Neo-Classical policy advocates is that Keynesians reject the naïve Neo-Classical belief that the functioning of markets will solve all economicproblems. In the context ofthe inflationary distortion on taxes, the contention is that real interestincome, as opposed to nominal interest income, should be taxed. [1 ] H. Corporations, however, aretaxed at rates differing from individual income tax rates. Smith did not mean that people should paytaxes at any time of their choosing. Keynesians,however, must be sufficiently alert to know when to stop. Land taxes seldomachieve their non-fiscal goals. To illustrate this point, he pointed to high taxes on importedgoods that tempted people to engage in smuggling, who the government thenpunished severely. On the underlying principles and theory of an effective systemof taxation, Smith Said: Before I enter upon the examination of particular taxes, it is necessary to premise the four following maxims with regard to taxes in general.[4] Adam Smith stated four criteria for levying taxes. Feldsteinpointed out that, with respect to debt interest, the increase in nominalinterest income that results from inflation not only subjects an increasedamount of income to taxation, but, under a progressive income taxstructure, also, increases the nominal rate of taxation.[2 ] Since theadoption of the tax reform over the past several years, however, the numberof tax brackets has been reduced, and the problem of bracket creepresulting from inflation has all but been eliminated. 227 . If thereal interest income were assumed to be $9,5 , the effective tax rate onthe real interest income would be 36.8 percent, as opposed to 35 percent.If Schall's contention is accepted, however, real interest income is only$4,5 , and the effective tax rate is 77.8 percent on real interest income. Because neo-classicists have this faith in the infallibility ifmarkets, they tend to reject any governmental intervention, especiallytaxes. Pestoff, "Third Sector and Co-operative Services-AnAlternative to Privatization," Journal of Consumer Policy 15 (March 1992):22. E. Nominal consumer interestrates, by contrast, would likely remain high, providing windfall profitsfor lenders.Adam Smith's Maxims Adam Smith's maxim that the tax burden should reflect an ability topay[23] argues against both the so-called flat tax concept and thearguments that taxation should be voluntary. Smith, An Inquiry into the Nature and Causes of the Wealth ofNations (London: Strahan and Cadell, 1776), reprinted in Adam Smith: TheWealth of Nations, Books I-V (London: Penguin Books, 1976), 371. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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