Saturday, December 21, 2013

There is no such a thing as a “perfect” System of Taxation

Marc Faber
Marc Faber

First, we need to accept that there is no such a thing as a “perfect” system of taxation. As Andrew Jackson observed, “The wisdom of man never yet contrived a system of taxation that would operate with perfect equality.”
“In such experience as I have had with taxation… there is only one tax that is popular, and that is the tax that is on the other fellow”.
The Swedish Nobel Laureate, economist, sociologist, and politician Karl Gunmar Myrdal opined: “Taxation is the most flexible and effective but also dangerous instrument of social reform. One has to know precisely what one is doing lest the results diverge greatly from one’s intentions.” (He won the Nobel Prize in Economic Science with Friedrich Hayek in 1974 for their pioneering work on the theory of money and economic fluctuations, and for their analysis of the interdependence of economic, social, and institutional phenomena.)
Everyone will agree that taxes should be fair, but what is fair is hard to determine. Your friend inherits a high income-producing property that allows him a lifestyle of leisure and pleasure, whereas you earn your living on the factory floor through hard work. Assuming your incomes are equal, is it fair that your fortunate friend’s tax rate is the same as yours, or should it be higher or lower?
On the surface, someone could argue that, since you work for your income, you should be taxed at a lower rate than your friend, who does not work for his income. Someone else might argue that, on the contrary, your friend should be taxed at a lower rate since his parents have already paid taxes on the income that allowed them to purchase the property. (This question also relates to taxes on dividends.)
The English philosopher and political economist John Stuart Mill took the view that “unless … savings are exempted from income tax, the contributors are twice taxed on what they save, and only once on what they spend.”
Canadian politician and Cabinet Minister Sir Thomas White had it right when he said, “In such experience as I have had with taxation — and it has been considerable — there is only one tax that is popular, and that is the tax that is on the other fellow”.
Personally, I have spent a considerable amount of time on taxation issues. My doctoral thesis was on the financial reforms of Sir Robert Peel, which when implemented in 1842 included the introduction of an income tax as a permanent tax on high income earners. (The top rate was 7%.) At the same time, numerous indirect taxes and import duties were eliminated, which greatly simplified the tax system.
In my humble opinion, the probably fairest tax is a flat tax on incomes (no deductibles such as the interest payments on debts, children allowances, or investment tax credits, and no subsidies for any interest groups) which is levied on all income earners and corporations, churches, missions, charities, pension funds, government officials (and governmental organisations), etc. at a maximum rate of between 10% and 15% per annum (no exceptions).- in The Daily Reckoning

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

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