Taxation Postscript; Not just one tax.

Some responses I received to the previous post[1] prompt me to add some comments.

Lower taxes

 One respondent seemed to get the idea that I was in favour of higher taxes. That is clearly not the case.  My underlying theme of a conditional preference for the market[2] means that we should limit the role of government as much as possible. That implies that taxes automatically will be lower than when one favours a more interventionist government. All government activity has to be paid for by taxes—if not now than later.

As I noted in the last post, the Bible clearly supports the government’s right to tax its citizens in order to finance its activities. Although some Christians have argued that there are biblical limits to the purposes for which a government can raise taxes, I have found that contention to be unsupportable. There are, however, practical reasons why taxation should be limited. Beyond some point, if tax rates are increased further, the total tax collected will decrease because of unlawful tax evasion and unproductive structuring of activities merely to avoid taxes. Moreover, excessive taxes will reduce our ability to exercise our personal responsibility and reduce incentives to exercise our stewardship through productive work. Finally, taxation is limited by the tax burden in neighbouring or other accessible countries and states (provinces) since smuggling and emigration will, otherwise, occur.

Consequently, the article was not a plea for more taxes but, by implication, for choosing among taxes.

One Best Tax?

Another responded wrote:

Correct me if I’m wrong but you didn’t have anything positive to say about any type of tax.  Isn’t the point of an article like this to pick one and say why it’s superior to other types of taxation?[3]

Now, I believe, I did point out the merits of some taxes as opposed to others. However, as to choosing one as the best, that is impossible for various reasons:

Needs too great.

While we should try to reduce the overall tax burden, it is impossible for me to visualize that we could cover all the government’s expenditures by one kind of tax. Is it politically feasible to double or triple , for example, the sales tax? For each particular tax, we must recognize the tax level in neighbouring jurisdictions. For example, in Ontario we cannot raise the sales tax significantly higher than Michigan, Manitoba or Quebec without causing problems with cross-border shopping and smuggling.

Different levels of government

Moreover, we can discuss taxation in general, but in practical terms we must recognize that there are at least three levels of government with different legal and/or traditional taxing powers-national, provincial/state and local (municipal). Not all could use the same tax.

Compromise

As I’ve said in the original post, some of the Christian principles that I’ve derived conflict and compromises must be made. For example, the sales tax while least affecting the motivation to work does not consider ability to pay (neighbour love).

 Conclusion

I suggest that, economically speaking, consumption/sales tax are best since they do not negatively affect the motivation to work or invest. However, they do not consider ability to pay. Personal income taxes, however, do take this into account. Consequently, recognizing the other various recommendations I made before, I believe that the majority of government taxes will and should come from a combination of sales/consumption taxes and income taxes.  

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[1] Is one type of Tax more Stewardly than Another?

[2] Choice of Economic Systems: A Conditional Preference for the Market—what does that mean?

[3] Thomas Napers- comment at  http://www.writerbeat.com/articles/12796-Is-one-type-of-Tax-more-Stewardly-than-Another-

Is one type of Tax more Stewardly than Another?

In my first blog post^[1]  setting out the purpose of this blog, I noted that:

Our task, as God's stewards, is to develop the world to enable man to glorify God. As stewards, we have been entrusted with the temporary use of God’s property which we must use to carry out His mandate. In developing political policies, we must, I think, seek to ensure that government actions also further that goal.

Being good stewards of God’s property also includes the tax system. As we ponder our choices in casting our votes at election time, we must also keep in mind the politicians’ stance on taxation. Is one kind of tax better than another? Is there a more or less Biblical system? In this post, I share some propositions (summaries) about a Christian perspective on taxation. Each of these can be expanded at some future time but, at this time, I refrain from extensive argument to support these propositions.

1. Pay Ceasar

I expect that most of you will accept the basic right of a government to tax its citizens^[2]. The specific command of our Lord Jesus in Math. 22:21, to "give to Caesar what is Caesar's", makes that clear, as does Paul's exhortation in Rom 13:6,7:

this is also why you pay taxes, for the authorities are God's servants, who give their full time to governing...if you owe taxes, pay taxes.

Questions remain, however, about how and how much government can tax. Does the Bible tell us anything about that? To answer these questions, I first derive some principles.

2. Stewardship- 

The principle of stewardship has various implications for the tax system. They include:

2.1 Motivaton to work

             One of the greatest stewardship concerns is tax policies that "encourage individuals to withhold their labour from the market, denying their God-given abilities from finding expression in creative activity."Therefore, income taxes should not be so high that people choose not to search for work or work harder because “the government gets it all anyway”.

2.2 Impact on job-creation.

          We must also consider which taxes are likely to have the greatest impact on job creation. Since, in the final analysis, only businesses can create jobs, that means we should keep payroll taxes and corporate taxes low (Donald Trump has this one right).

2.3 Not waste God-given resources

            The tax system should not provide incentives to waste time and money devising  complicated tax avoidance or evasion schemes. We should choose those taxes that have-low collection cost.

2.4 Not overly complex  

            Taxes should not be over complex. They should be broadbased--not having a lot of exemptions for certain types of individuals, etc.

2.5 Benefit principle

           

            Those who directly benefit from specific government services e.g. the provision of electricity, water or waste disposal should be “taxed”; they should pay fees that relate to the amount of service received. -The charge for the service provides an incentive to use the service in a stewardly manner. This also implies a tax to ensure the “polluter pays” the true cost of pollution^[3]. Carbon taxes and “cap and trade” schemes are one way to do this.

3. Must be fair-

 Fairness or equity is also considered to be a basic principle of taxation—a principle that would certainly be Christian as well. This means that individuals in similar economic circumstance should pay similar taxes. Fairness explains why tax credits are better than tax deductions .

 4. Ability to pay

This principle justifies generous initial exemptions in a progressive tax system rather than a flat tax. While application of this principle will lead to some income and wealth distribution, this redistribution should not be the goal of taxation.Recognizing ability to pay implies that progressive income taxes should generate the bulk of government revenues. We should not rely exclusively on regressive consumption taxes. Nevertheless, personal responsibility should be considered; the poor should pay something.

5.Tax  families –not individuals

Recognition of the Biblical institution of marriage favours joint tax returns or income splitting. It also suggests providing incentives to have one spouse stay at home, rather than tax credits for day-care.

         

6. Must obey the authorities God has placed over us

This principle implies that we choose tax policies that reduce tax evasion, that limit the illegal, underground economy. It also implies that tax rates cannot be too high; there is a limit!

7. Limits

There are no Biblically derived limits to the government’s right to tax. However, the issue of tax evasion, denoted above, provides a practical limit. In addition, governments are limited by tax rates in other countries as some individuals and businesses will move to more favourable tax climates.

It should be recognized that these principles cannot all be attained completely. Governments may well have to trade-off one for another. Increasing fairness, for example, may increase complexity.

         

These principles have led me to the following recommendations.

1. Income tax

Income taxes, particularly at high rates, is demotivating for work. While some may work hard to serve the Lord, the average sinful person will likely reduce work effort if the government gets most of any incremental earnings. Consequently, income tax rates should not be too high. Ability to pay suggests that we should seek to increase the basic amount which can be earned tax free and advocate a more gradual progression of tax rates by introducing more tax brackets. The system should be simplified as much as possible by reducing special provisions--particularly those that benefit only people with higher incomes-- unless there is strong justification to continue them. The income tax system is particularly useful to provide means-tested payments, e.g. refundable tax credits

2. Sales(consumption) tax

Sales taxes are-regressive; they do not consider “ ability to pay”. The burden of sales taxes bear heavier on the poor than the rich. A $5.00 tax on an item means a lot more to someone who barely gets by on $10,000 per year than to someone who earns $200,000. This burden can be reduced by exempting certain necessities (as in Ontario) but that does makes the tax more complex to administer. It can better be offset through the income tax system with a tax credit.

On the other hand, sales taxes are less prone to tax evasion^[4]. “The only way you can tax a drug dealer is when he buys his Mercedes.” They also do not discourage work behaviour—perhaps even encourage it.^[5] Consumption taxes can also be used selectively as a “sin” tax, to try and reduce consumption. Of course, if too high, that can also encourage illegal production and smuggling, as is the case with cigarettes.

3. Wealth tax

Taxes on wealth should be avoided because, among other things, they discourage saving and investing and cause wealthy people to move to other countries.

4. Inheritance & gift taxes.

Inheritance taxes do not provide a significant portion of government revenues. They have pros and cons ; there is no strong reason to introduce them again.

5. Corporate tax.

Corporate tax should, theoretically, be abolished[6] since corporations are just a legal fiction; they are not cash cows. It is only people that bear taxes–not some faceless business entity. When corporations are taxed, consumers pay higher prices for products, employees receive lower wages and shareholders receive less in dividends and/or see the price of their shares drop; since corporate taxes reduce expected profits a major result of increasing corporate taxes is lower employment. It is a matter of comparing apples and oranges, to claim as Clinton and Sanders do that “corporations should pay their fair share”--individuals and corporations are totally different.

6. Real estate taxes

Real estate taxes are somewhat regressive and do not adequately reflect the benefit principle. Services such as education and welfare should be funded from sources that better reflect ability to pay: e.g. income tax; that may mean that higher levels of governments must fund such services. User fees and congestion charges are more likely to encourage stewardly use of services. Land and buildings should be separately taxed with the tax on land at a higher rate. This will provide the incentive to use the land for its best purpose and to reduce the incentive to leave property vacant and decaying. Real estate taxes should not encourage anti-environmental urban sprawl.

7. Payroll taxes

Payroll taxes such as employment insurance and social insurance premiums are particularly bad taxes since they are “job-killers” and reduce the incentive to work

8. Tariffs(taxes on imports)

Tariffs should be avoided. Consumers pay higher prices and/or do without. Tariffs  are regressive in nature; on necessary goods, they hurt the poor more than the rich. Poverty in less developed countries is worsened since they are unable to export. In addition, tariffs will protect inefficient companies from foreign competition causing consumers to pay higher prices and reducing exports in the long run.

In Sum

This post has shared some propositions about a Christian perspective on taxation. Each of these can be discussed at more length. Please let me know—via “comments” or direct email which you would like to hear more about.

Please see the following further comments:

 

Taxation Postscript; Not just one tax.

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[1] Introduction: Political-Economics as God's Steward 

[2]  I recognize that there are still Christians who deny that right claiming that all taxation is theft. For a discussion on that, see the comments following the blog post of David Robertson Is Socialism Satanic?

[3] See “neighbourhood effects” in My Market Preference is Conditional because of Market Failures

[4] I said “less”—not perfect. A person selling his services for cash can evade both  income tax and sales tax.

[5] If the tax paid makes a person feel the pinch and causes him to work later.

[6] With user fees set to recover the cost of actual services provided to corporations.