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Taxation

Abolish the Income Tax!

This article was originally published in The Break Out Report on March 20, 2005.
It is still online at Towards a Tax Free Canada

Nothing is certain but death and taxes goes the old saying. And we are making great strides towards delaying, if not exactly conquering, death. Our life spans are improving and many aging movie stars are still considered sex symbols in their seventies.

So if we can beat back the Grim Reaper, how come we arenít making any headway against the Tax Collector (a Grim Reaper if ever there was one!!!)

The reason is because we work from an old paradigm. A paradigm that considers government as necessarily financed from current revenues. A paradigm that looks at government as an agency that taxes and spends. What is needed is a paradigm shift, as Stephen Covey puts it. A different way of looking at things.  A different model for government.

And what model would make the difference? Well, take a look around you. What do you see?  People. Do people plan to work forever? Right down to their dying day? No. They plan to eventually retire from the work force. They save and invest to build up a nest egg to generate income for their retirement years. In fact, the government encourages us to do so with tax incentives such as Registered Retirement Savings Plans.

What if governments applied the philosophy guiding individuals to the financing of government? What if we made a paradigm shift from government as an agency that taxes and spends to government as an agency that saves and invests?  What if government built up a nest egg over time that would eventually be large enough to generate enough income to abolish the income tax forever?

Imagine Canada as a tax free country. A tax free country that still maintains the services we have come to expect from government Ė policing, law courts, defense, even domestic welfare, medical care and foreign aid. Investment would pour in. Businesses would relocate from the United States and elsewhere to take advantage of our tax free status. Canada could, conceivably, become the economic dynamo of the world.

A pipe dream you say?  Think again. Recently the government produced a new budget, the seventh consecutive budget with a surplus. Over the last five fiscal periods, the government showed revenues and surpluses as summarized below. Data is in millions of dollars.

 

1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

Revenues

$180,336

$193,825

$192,304

$191,418

$199,801

Surplus

$6999

$9213

$7351

$2780

$6779

The average surplus for those five years was $6,624,400,000. Thatís over $6.5 billion dollars a year. Interestingly enough, what few people know is that the government already owns investments. In fact, for those time periods, the federal government generated an average investment income of $6,837,800,000. Thatís over $6.8 billion dollars a year in investment income, even more than the surplus!

Generation of government revenue from investment is not a foreign concept. As the figures show, if the government had not been generating investment income, it would have been running a deficit.

Income taxes only contribute a part of government revenues, $124,178 million in 2003-2004. Letís suppose the government needs to generate $125 billion dollars a year to replace income tax revenue. Thatís slightly more than the 2003-2004 income tax revenue.  What would it take in investments to generate that?

The table below shows how much capital it would take to generate that sort of revenue at different rates of return. Numbers are shown in billions of dollars.

Rate of Return

6%

8%

10%

12%

Capital Needed

$2,083

$1,563

$1,250

$1,042

If the government saves $5 billion a year, the table below shows how long it would take for the government to build up a nest egg of $2,083 billion.

Rate of Return

10%

12.5%

15%

20%

# of Years to Build Up Nest Egg

40

34

30

25

# of Years Adjusted for 2% Inflation

50

41

35

28

In other words, if the government invests at the average rate of return of the stock market which is 12%, and after achieving the nest egg required to return a replacement for income tax at a money market rate of 6%, the Canadian government could eliminate the income tax in 35-45 years. In other words, if we started on this program today, a generation and a half down the road we would be an income tax free country.

But consider this, there are four mutual funds with a ten year history of better than 20% average returns. There are 53 over the five year period. If we applied a criteria for investing that would keep the government invested in the very best mutual funds, say our Power Performers or Super Power Performers, and if we continued to stay invested in funds generating at least 12% after the nest egg is achieved (85 funds with a ten year history of better than 12% and 188 funds with a five year history), in other words, we only needed a nest egg of $1,042 trillion and we managed a return of 20% or more a year by investing in Power Performers or better, we could be income tax free in just 23 years adjusted for 2% inflation. Any child born 3 years from now would be able to live his or her working life entirely free of income taxes.

Itís an achievable goal and would make Canada the envy of the world. So get off your duff, government of Canada! Say no to tax and spend! Say yes to save and invest!

 

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