Tax Issues – Canadian Style

I believe that the economic crisis, currently experienced in the western countries, has the roots in the way the creation of value is stimulated and incentivized.

The present taxation system - in most of these countries – includes a number of components, of which the following are the most relevant:
• Consumption tax (VAT)
• Sales tax (PST)
• Corporate and Individual Income tax
• Property tax

Value Added Tax (VAT) – the Canadian GST is just a version of it - is meant to penalize the companies for their contribution (value added), as the net VAT is proportional to the gross margins. And here is where the anomaly starts. The more value you create in the supply chain the more taxes you pay. Our crisis is not that we create too much value (I mean real material value, not transactional utility), but that we don’t create enough. Therefore, what needs to be taxed – hence penalized or discouraged - is not the value added contribution to a product or service, but the lack of value added. In other words who should pay more is the business that only transacts the product, as opposed to creating it.

Contrary to this common sense assertion, the most rewarded businesses, these days, are operating in the transactional domain (investment banks, insurers, law firms, retailers of expensive merchandise). The material value creation is mostly outsourced and off-shored. Unfortunately, what the western world specialized in doing is to transact those goods and commercialize them.

If the government is seriously concerned about turning this trend around, the logical thing to do would be to implement a taxation system that would put more burdens on the companies not adding enough value into their offering – the types of commercial agents, or transactional contributors in the channel.

The taxation system is complicated the way it is. So any attempt to simplify it should be saluted and supported. The imminent introduction of the Harmonized Sales Tax will only increase the tax load to the consumer. Shifting the tax burden from businesses that actually create value to the ones that are just inserting themselves between the creator and the consumer - thus inflating the prices and altering the perception of true contribution - would be the only logical, responsible and effective way of stimulating the real value creation.

In a time when – due to accessible financial speculation and affordable house flipping – the public developed a false perception that the GDP could grow out of nowhere, and money could be easily made just by buying and selling, the second corrective measure should be a differentiated income taxation rate for investment money (higher) than for profits resulting from legitimate business processes (lower).

Human beings react to stimulus and incentives. Behavior could be influenced – to a certain extent – by the attributes of the system within which it takes place. Any advanced society should accept the need for dynamic changes, and be tenacious enough to implement the necessary adjustments, able to improve its economic functionality, financial equity and social fairness. The taxation system is one of the most effective tools for reaching these desiderates and restoring the balance.