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A RADICAL ANALYSIS OF PERSONAL TAXATION
Harry Hillman Chartrand
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The Final Report and Recommendations of the Saskatchewan Personal Income Tax Review Committee was published in November 1999. In addition to recommending the Province investigate other issues raised during conduct of the Committee’s work (R#7), it recommended that the Province: (a) adopt a ‘tax-on-income’ approach to personal income tax allowing the Province to set its own tax brackets, deductions and definitions of taxable income independently of the federal government (R#1); (b) reduce income tax on all income classes (R#2, 3, 4, 5 & 8) (c) reduce the rate but broaden the coverage of the provincial sales tax (R#6); and,
(d) compensate lower income citizens for the regressive impact of the broadened sales tax through increased
public spending (R#6). Constrained by its mandate and professional optic, the Committee’s recommendations fail, in my opinion, to address the near revolutionary times faced by public finance in Canada - on both the spending and tax sides of the public finance coin including: a) the definition of ‘person’ is changing as:
b) the increasing incidence of ‘self-employment’ and a corresponding increase in income tax avoidance and evasion; c) consumer sales taxes become increasingly important as a source of Government revenue just as they too are likely to decline as e-commerce grows and the Internet remains a ‘tax free zone’’; and,
d)
the
economy continues its transformation into a global knowledge-based economy in which intellectual property becomes an increasingly important source of both corporate and individual income. The shift from a ‘tax-on-tax’ to a ‘tax-on-income’ approach for Saskatchewan personal income tax does, however, offer a significant opportunity for the Province to creatively adapt, adjust and evolve in response to the changing reality of public finance. Among the adjustment I recommend are: a) a shift from a personal income tax focused on ‘support of the family’ to one focused on ‘support to dependents’; b) a shift from a strategy (including tax expenditures) of encouraging a ‘corporate tax haven’ to a ‘creativity haven’ approach designed to attract and retain highly qualified talent in the arts, sciences and humanities by, among other things, exempting income earned from intellectual property rights from individual income taxation; and, c) a shift from compulsory to voluntary taxes (that is, sin taxes on what are currently treated as punishable ‘victimless crime’) that citizens are eager and willing to pay and which, unlike consumer sales tax, will not decline in response to the growth of e-commerce, self-employment and the globalization of corporations.
0.01 This paper was written in response to the Final Report and Recommendations of the Saskatchewan Personal Income Tax Review Committee (Regina, November 1999). The paper is composed of four parts. The Introduction places personal income tax within the broader context of public finance that includes public spending (fiscal policy) and taxation (tax policy). 0.02 The second section critiques the Committee’s mandate, constraints and criteria. It also questions the Committee’s conventional definition of ‘person’. 0.03 The third summarizes the Committee’s recommendations and extends them into the emerging global knowledge-based economy. 0.04 Finally, Conclusions sum up my observations and opinions regarding ‘personal’ taxation in the future.
0.05 While the situation of Saskatchewan is specific, my extensions, observations and opinions are generally applicable to any jurisdiction in Canada.
In addition, it is my hope that the paper will induce a broad public debate about personal taxation and the cultural maturity and economic competitiveness of Canada – all the Canadas – North, East, South and West.
Pleasure & Pain of Public Finance 0.06 I begin with five assumptions. First, there are two sides to the coin of public finance – pleasure and pain. The pleasure (including relief from pain) flows from spending public monies – fiscal policy. Pain flows from collecting private monies to pay for public spending – tax policy. Like carrot and stick, a democratic government-of-the-day uses public finance to adjust, adapt and evolve society and the economy towards its ‘ideological’ goals and objectives. 0.07 Second, the only way to gain more pleasure without more pain is through a growing economy. In the long run, however, a growing economy can be maintained only if public finance does not “kill the goose that lays the golden egg”. 0.08 Third, rational citizens will do their best – in or out of a growing economy - to minimize their pain and maximize their pleasure through lobbying, protests and voting. 0.09 Fourth, in their annual budgets, federal, provincial and local governments flip the coin seeking a politically workable, socially desirable, balance between the ‘heads-I-win’ and ‘tails-you-lose’ of public finance. 0.10 Fifth, the game of public finance is worth playing, at a minimum, because of ‘market failure’, that is:
(a)
there
are some goods and services (public goods) essential to modern life that cannot be produced by the private sector, e.g. municipal bridges and roads, compulsory mass education, contagious disease immunization, national defense, etc.; and,
(b) perfect competition is not common in
the ‘real world’. Usually some players in the economy (typically a small group or oligopoly) exercise market power over the price and quantity of goods and services available to consumers. The existence of such ‘market power’ justifies a public response including
spending, e.g. funding anti-combines agencies, and, taxation. 0.11 Beyond the constitutional reality that public finance is conducted in the name of Her Majesty in right of Canada and in Her right of each of the ten Provinces, there are five ‘ground rules’ for this annual coin toss: (a) the Constitution establishes, in broad terms - subject to varying interpretation: · on what federal and provincial governments can spend; · by what means they can raise public monies; and, · in subordinating local to provincial government; (b) three legal systems interactively define persons, property and taxation in Canada: · criminal law, the prerogative of the federal government but with administration shared by the Provinces; · civil law, essentially the responsibility of the Provinces with Quebec being the extreme case governed by a variation of the European Civil Code rather than Anglo-American Common Law as in other Provinces, e.g. torts (non-contractual damages) based on precedent (Common Law) rather than principle (Civil Code); and, · tax law, a shared responsibility of the federal and provincial governments; (c) the federal government ‘owns’ the coin through the Bank of Canada and influences its value through exclusive control of monetary policy; (d) the federal government can define and redefine what are legitimate sources of public monies, e.g. income tax introduced during WWI as a ‘temporary’ war measures act, and, the 1970 amendment to the Criminal Code permitting lotteries (gaming in general including ‘video lottery terminals’ or slot machines) to become an increasingly significant source of public monies for the Provinces; and,
(e) the federal
government indirectly influences settlement of public finance disputes with citizens and the Provinces through its prerogative of appointment to the Federal (formerly the Exchequer Court) and the Supreme Courts of Canada. 0.12 Within these ground rules, each senior level of government annually puts the following questions to the people: · who or what will enjoy public funding: the poor and needy; the average citizen; the corporate citizen; city or rural dwellers; foreigners, i.e. foreign aid; and/or, abstract policy categories such as education, the environment, health care, protection of persons and property, etc; · what pleasures will they enjoy, e.g. direct dollars in the pocket (grants in aid), civil service employment, public infrastructure and essential services, investment and/or loans in support of private and/or semi-private ventures, and/or relief from taxation e.g. tax expenditures including refundable and nonrefundable tax credits; · how much pleasure will be allowed, e.g. marginal or significant to the life of citizens – corporate or individual; and,
· when will the pleasure be provided, e.g. weekly, monthly,
quarterly, annually? 0.13 Similarly, each government annually puts the following questions about the pain of public finance - direct and indirect, ‘near’ and ‘voluntary’ taxes - to the people: · who will suffer so they and/or others may ultimately enjoy the pleasures of public spending; · what forms of pain must citizens endure, e.g. corporate, excise, income, near taxes (e.g. fees-for-service), sales and/or voluntary (e.g. lotteries) taxes; · how much pain from any one and/or all taxes - should one person or any ‘class’ of taxpayers bare (tax burden); · when and by what means should they suffer, e.g., monthly, point-of-sale, quarterly and/or withholding-at-source; and,
·
at
what threshold should the quality and/or quantity of pain change or stop, i.e. what are the tax brackets?
1.0 The Committee and Its Mandate 1.01 The Review Committee received its mandate from the Minister of Finance of the Province of Saskatchewan in May 1999. It was to investigate the structure of Saskatchewan’s personal income tax and consider alternative strategies. In this regard, it was specifically asked to review the ‘tax-on-income’ approach to Saskatchewan’s personal income tax. The Committee issued its final report in November 1999. 1.02 The current Saskatchewan personal income tax is a fixed percentage of federal income tax (currently 48%). This approach accepts existing federal tax brackets, deductions and definitions of taxable income. The Provinces can then apply special taxes on federal taxable income, e.g. the Saskatchewan flat tax. Provincial income tax revenue is collected by Revenue Canada (except Quebec) and then redistributed to the Provinces. This is called the ‘tax-on-tax’ approach. 1.03 The ‘tax-on-income’ approach would allow the Province to set separate tax brackets, deductions and definitions of taxable income. Federal income tax would continue to be determined using federal brackets, deductions and definitions. Revenue Canada would also continue to collect provincial income tax revenues and redistribute them to the Province. The ‘tax-on-income’ approach was made possible by changes to various tax collection agreements between the Provinces and the federal government.
1.04 Shortly after beginning its efforts, however, the mandate of the Committee was extended to include all ‘personal taxes’ in Saskatchewan, not just income
tax. The expanded mandate encompassed corporate taxes (capital, income and payroll), health insurance premiums (a near tax), and the provincial sales tax. Only limited reference was granted, however, to review resource revenues,
e.g. mining and timber taxes as well as related user fees. 1.06 All three members of the Committee were ‘accountants’. As with all disciplines of thought and practice, accountancy molds practioners to ‘see’ through a shared paradigm or ‘window frame on the world’. In addition, professional practice required the Committee (like all public commissions) to operate within its Ministerial mandate. 1.07 From within this conceptual goldfish bowl, the final report proposes (with the notable exception of a move to a tax-on-income approach) incremental variations on existing categories, schedules and themes. It is not a radical report. 1.08 This paper, however, offers a ‘radical’ assessment of Saskatchewan’s system of ‘personal’ taxes. It is radical in that it goes to the root meaning of the terms and concepts used by the Committee including the elemental one: who is a person and therefore who is the ‘source’ of personal taxation? 1.09 In effect, the Committee accepts two Common Law ‘legal fictions’: · corporations are ‘persons’ with the same rights (but generally greater means) than a flesh-and-blood human being. Under the Civil Code, by contrast, there are certain ‘rights’ that only ‘natural’ persons can enjoy and responsibilities that only ‘legal’ persons (corporations as defined under Common Law) must bear as ‘corporate entities’; and, · families are ‘persons’. Traditionally, a family is formed when two consenting adults – male and female - ‘marry’ (legally or under Common Law they become ‘one’) and who may, or may not, have children (by adoption, natural birthing and/or other means) who automatically become ‘minor’ members of the family subject to parental control. 1.10 The definition of ‘marriage’ is, however, now at issue before the courts and subject to intense political debate at both the federal and provincial levels of government in Canada. There is even speculation that the ‘not-withstanding clause’ of the Canadian Constitution may be invoked to prohibit widening the legal definition to include ‘same-sex’ couples in Alberta. This controversy is raging at the same time that the biogenetic revolution is transforming the concept of ‘having children’ and a social revolution is witnessing the ‘single-parent’ family (usually with a female head) becoming more common and accepted as the status of women continues to rise. 1.11 Two other demographic factors are redefining ‘family’. First, an aging population is leading more adult children to become principal ‘care givers’ and custodians, not only of their children, but also of their aged parents. In addition, the number of workers, as a percent of the population, is declining meaning fewer and fewer taxpayers will support more and more dependents.
1.12 Second, with declining youth employment more and more adult children are remaining at home longer.
In France, this has led the government to offer tax incentives to parents willing to house and care for dependent adult children. 1.13 The Committee applied four criteria in assessing Saskatchewan’s system of personal taxes. They were, in alphabetic order: (i) competitiveness; (ii) fairness; (iii) simplicity; and,
(iv) support of families. 1.14 As used by the Committee, competitiveness refers to ‘tax competitiveness’, i.e. how much pain does Saskatchewan inflict on various categories of taxpayers relative to other Provinces, especially Alberta. With respect to this criterion, the Committee essentially restricted itself to the corporate income tax rate and capital gains particularly from the sale of family farms. 1.15 The term ‘competitiveness’, however, has been imported from market economics where it has a wider and evolving meaning. Contemporary usage extends competitiveness beyond traditional price competition to embrace ‘working smarter’ in response to demand for higher quality, more customized goods and services, globalization and technological advance. 1.16 Competitiveness is often expressed in sports metaphors such as that of former federal Finance Minister Michael Wilson’s expression "skating where the puck is going, not where it is”. This captures the anticipative nature of contemporary economic competitiveness.
1.17 From a public finance perspective, competitiveness means anticipating the industries of tomorrow and encouraging their growth and development by creating
a favourable fiscal and tax environment. Ideally, it involves identifying and encouraging development of critical ‘factors of production’ required by these emerging industries. A plentiful supply of such factors encourages
firms to locate in a jurisdiction leading to increased employment and economic growth.
1.17 ‘Fairness’ as used by the Committee encompasses the three public finance concepts of horizontal and vertical equity and tax burden:
·
horizontal
equity refers to ‘like treatment of persons in like situations’. It is reflected in the Committee’s concern about one- and two-income families earning the same income but a one-income family paying more in personal income tax;
·
vertical
equity refers to ‘unlike treatment of persons in unlike situations’. It is reflected in the Committee’s concern about the ‘progressiveness’ of provincial income tax, i.e. the rich should pay more than the poor; and,
· tax burden refers to the accumulated tax impact on
citizens. It can be measured objectively as the difference between earned and disposable income, i.e. take-home pay after taxes. It can also be measured subjectively as a sense that taxes are too high relative to the pleasures of
public spending received. If this sense becomes great enough then tax avoidance and evasion become general - up to and including ‘tax revolts’.
1.21 Simplicity, as used by the Committee, refers to the ease with which a taxpayer can pay. The Committee argues that simpler tax forms are better in that taxpayers can easily understand what and how to pay. Simplicity,
for the Committee, means minimizing the pain of extraction to the taxpayer. There is, however, another dimension to tax simplicity - tax efficiency. Tax efficiency involves the ease and certainty of collection and tax incidence. 1.22 A traditional appeal of personal income tax is that it can easily, with great certainty and over a long period (especially for fulltime, long-term employees) be regularly extracted ‘at source’ on behalf of the government by employers. It is much easier to audit a few employers than many individual taxpayers. There is similar ‘simplicity’ to sales taxes (retailers doing the collection) and other ‘withholding taxes’. 1.23 With ‘downsizing’ of business and government, self-employment has, however, become an increasing common way of earning a living. Furthermore, the shift from a goods- to a service- to a knowledge-based economy is making the job of the taxman more difficult, i.e. counting widgets is easier than counting appointments which is easier than counting the value of knowledge.
1.24
Furthermore,
voluntary income tax compliance by the self-employed is declining; tax avoidance and evasion are rising. A ‘gray market’ for the exchange of goods and services, e.g. a dentist providing services in return for an artwork or home repairs, is also growing.
This trend was one reason for introduction of the federal ‘GST’ in the 1980s. The shift from income to consumption taxation is now a major trend across North America. In Europe, income taxation has always been a secondary source of public monies. Instead, reliance is placed on ‘value added taxes’, i.e. consumption taxes. 1.25 Another dimension of tax simplicity is tax incidence, i.e. is the tax being collected from the intended party or is it being shifted to another? One tax in particular is subject to controversy concerning incidence – corporate income tax. While a ‘corporation’ is a ‘legal person’ and is taxed as such, it is also a collection of shareholders and managers each of whom pay ‘personal income tax’ on their earnings from salaries, dividends, stock options, etc. This is the ‘double incidence’ of corporate income tax. Furthermore, there is evidence that corporations treat income tax as ‘a cost of doing business’ and simply shift its burden or incidence to consumers in the form of higher prices, i.e. shifting tax incidence.
1.25 The questionable incidence of
corporate income taxation is one reason many governments (national, regional and local) willing concede ‘income tax forgiveness’ as an incentive for corporations to set up business in their jurisdiction. In fact, ‘tax forgiveness’ has become a major tool in ‘tax
competitiveness’, as defined by the Committee. 1.26 As noted above, the demographic, legal and tax definition of family is becoming ever more clouded. Nonetheless, the Committee chose to use ‘support of families’ as a criterion in its assessment of Saskatchewan’s system of personal taxation. 1.27 A clearer and more useful criterion, in my opinion, would be ‘support of dependents’. This criterion can be applied to all situations in which a working adult citizen (male or female) has persons – adults or minors – dependent upon them for the essentials of life. This embraces, without discrimination, the traditional nuclear family, the single parent family, same-sex couples, adult children dependent on aging parents, as well as aging parents dependent on adult children. 2.0 Recommendations & Extensions 2.01 Using these four criteria, the Committee held consultations, deliberations and drafted a report which contained eight formal recommendations to be fully implemented by 2003. 2.02 In addition to requesting the Province to investigate various other issues raised during conduct of the Committee’s work (R #7), it recommended that the Province: (a) adopt a ‘tax-on-income’ approach (R #1); (b) reduce income tax on all income classes (R #2, 3, 4, 5 & 8) (c) reduce the rate but broaden the coverage of the provincial sales tax (R #6); and,
(d) compensate lower income citizens for the regressive impact of the broadened sales tax
through increased public spending (R #6). 2.03 Constrained by its mandate and professional optic, the Committee’s recommendations fail, in my opinion, to address the near revolutionary times faced by public finance in Canada - on both the spending and tax sides of the coin. 2.04 The nature and number of taxable ‘persons’ is changing and mutating rapidly. The nature of the economy is transforming before our eyes on the World Wide Web - a 21 st century railroad that is changing our concept of ‘factor of production’, market, product, sales tax and space/time delivery. 2.05 To extend the Committee’s work into these turbulent seas, I offer a ‘strategic’ vision of the Saskatchewan ‘personal’ tax system in the form of three ‘change’ profiles. All three stress the role of the individual ‘person’ as the focus of public finance – spending and taxation. The three profiles are: a) Person: From Legal Fiction to DNA; b) Property: From Hand to Head; and, c) Crime: From Punishment to Voluntary Taxation.
a) Person: From Legal Fiction to DNA 2.06 The Committee accepts the Common Law fiction that a corporation and a family are ‘persons’. In my opinion, this fiction severely inhibits development of a fairer, simpler and more efficient and competitive system of ‘personal’ taxes in Saskatchewan. It also compromises the current and future effectiveness of fiscal policy in fostering and promoting a growing economy. 2.07 The nature of the family is changing rapidly. The ‘traditional’ nuclear family of husband, wife and children (traditional only since the Industrial Revolution) is being complemented by a diversity of associations between individual human beings. What they share in common, however, are ‘dependents’ on a taxpayer. Such dependents may be minor or major children; they may be aging parents; they may be househusbands or housewives; or, they may be same-sex partners. 2.08 If the Committee had adopted ‘support of dependents’ as its criterion rather than ‘support of families’ then a ‘married’ couple - both of whom earn taxable income - would be treated as individual ‘persons’ for purposes of taxation. Only two questions of equity would remain: how to define levels of dependency – partial, total or otherwise ‘graduated’; and, how, if both partners earn taxable income, will ‘dependency deductions’ be divided up? 2.09 In my opinion, a personal income tax system based on ‘dependents’ is fairer, simpler and more efficient than one based on ‘marital status’ and/or ‘children’. 2.10 Due to its questionable incidence (‘double’ and ‘shifting’), corporate income tax is not a fair, simple and efficient tax. But beyond these inherent limitations, a growing number of general and special tax ‘right offs’ offered by all levels of government has reduced the effective corporate income tax rate to zero for many major corporations. Abroad, as noted in the Committee’s final report, the Republic of Ireland (Eire) now routinely negotiates rates with potential corporate citizens. In fact, all jurisdictions – national, regional, local - engage in bargaining with corporate citizens if and when the number of jobs and happy voters is high enough and current social costs are low enough. When all is said and done, individual human beings elect politicians who ultimately, as Government, control the tax code and its regulation of real ‘persons’ and corporations (i.e. legal ‘persons’). The twist, of course, is that these very same voters are effectively becoming the only taxpaying ‘persons’ left in the ‘personal’ income tax equation. 2.11 On the other side of the public finance coin (i.e. fiscal policy), ‘free trade’ is eliminating the traditional economic growth strategy of favouring one’s own corporate citizens over ‘foreigners’, e.g. through quotas, subsidies, tariffs, and preferential tax rates. The World Trade Organization (WTO) is shaping a ‘new world economic order’ under which this traditional strategy is not tolerated. Countervailing measures can, with the approval of the WTO, be imposed on any jurisdiction that continues to apply this strategy. Recent examples include the WTO’s response to the European Union’s effective exclusion of Central American bananas from its market and American split-run magazines in Canada. In effect, free trade is reducing the attachment of the business corporation as a citizen or ‘legal’ person of any nation state and highlighting it as a ‘citizen of the world’.
2.12 If the definition of the ‘family’ is increasingly unclear and the corporation is becoming a citizen of
the world, who is a ‘taxable’ person? The legal system now recognizes DNA as the best test of a person’s identity. But even this definition of a ‘flesh-and-blood’ human being is subject to emerging questions. Medical
science, for example, is on the verge of posing tax-relevant questions like: is a clone the same person, an additional taxpayer or a dependent? The insurance industry now offers policies (with accumulated principal plus interest) to preserve the body, head or DNA of a person and revive that ‘person’ sometime in the future. Should the interest earned by a dead ‘person’ be subject to
taxation? The corporate sector is on the verge of ‘patenting’ human genes. If such material is derived from a living human being, should it be the exclusive and inalienable property of that person, his or her descendents or
fall into the public domain? Should such ‘property’ be subject to taxation on its sale or transfer to another ‘person’? Taken one step further: should the individual own his or her own DNA without limit or reservation?
(b) Property: From Hand to Head 2.13 Property is the basic resource from which income flows. In its traditional forms property includes capital (physical and financial), labour and land. Through time the economy has evolved and the nature of property has changed. When new types and forms of property appear the economy, i.e. what can be bought and sold, changes. The emergence of new forms of property generally propels the economy to new heights.
Three Mountains of a Knowledge-Based Economy 2.14 Today one speaks of the emerging global knowledge-based economy. But what does one mean by ‘knowledge’? Today there are essentially three distinct types of knowledge. Each flows down like water from glacier-clad mountains to mingle and mix in the lowlands of the economy where they are put to work. The three mountains are: the natural & engineering sciences; the social sciences & humanities (including law and religion); and the arts (including the literary, media, performing and visual arts). Each has its own distinct standards; each progresses in its own distinct way; each can be used to earn income. 2.15 Knowledge becomes an income-earning property in one of two ways: as a ‘trade secret’; or, as intellectual property rights (IPR) legalized and regulated by the State – copyrights, registered industrial designs, patents and trademarks. Each type of IPR embodies new or novel ‘knowledge’ either as: a utilitarian thing or process (patents); artistic or literary ideas fixed in material form (copyright in books, records, software, etc); a mix of utilitarian function and artistic design (industrial design); or, the identity of a ‘legal’ person or corporation (trademark). Such ‘rights’ generate streams of income based on application by their owner or through royalties paid by others for use of another’s intellectual property. 2.16 New forms of intellectual property (or variations on their themes) are constantly emerging. In the New Year, a levy on blank audiotape and cassettes came into force in Canada with revenues distributed to ‘copyright owners’ of musical works. This is, in all probability, only the beginning of a wave of new levies on all forms of blank recording material – audio, video and computer. Legal debate is heating up around the world over ‘cyber-squatting’ i.e. registering a domain name on the World Wide Web (WWW) using the ‘trademark’ name (or a closely related term) of a company or prominent public figure then selling or leasing the domain name to back to the company or personality. In the USA, Internet ‘patents’ are increasingly be issued by the Patent Office and used in the courts to preserve and protect new forms of intellectual property by their owners. 2.17 As manufacturing increasingly moves to low wage countries and domestic employment decreases in response to increased ‘automation’, manufacturing is going the way of the agricultural workforce – down, probably to the same level as agriculture which began the 20th century at about 50 to 60% and ended at 3% of the total labour force. The number of knowledge workers, however, will continue to grow. IPRs will become an increasingly important source of income for corporations, individuals and nations. 2.18 As the knowledge-based economy grows a number of questions arise: · How should Government tax ‘persons’ who created, own or control IPRs? · Should the Internet remain a ‘tax free’ zone for the sale of traditional goods and services as well as intellectual property? As e-commerce grows traditional sales tax is declining. At present no sales tax is levied on sales over the Net. The implication for Saskatchewan is potentially enormous as sales tax becomes more important as personal income tax, as recommended by the Committee, declines. The WTO is considering the issue and may propose a solution during the current round of world trade negotiations that got off to a shaky start at Seattle in November 1999. However, the United States remains opposed to any tax on Internet activity given its huge lead in e-commerce. · How can ‘micro-royalties’ earned on the Internet be taxed? Micro-royalties are tiny payments (e.g. ½ a cent) paid each time a work is accessed on the WWW, e.g. an artwork included on a WWW site generates a micro-royalty every time it is ‘clicked’. Such micro-royalties will be earned not just by corporations but also by a growing number of self-employed knowledge workers. 2.19 Created out of nothing but the imagination and insight of a creator, Anglo-American legal scholars have long recognized, in theory, that there is no form of property more ‘personal’ than intellectual property. The ‘real world’ situation is, however, quite different. Thus the European Civil Code is much more sensitive to the ‘maternal’ relationship between the creator and the created. Unlike Anglo-American Common Law, under the Civil Code there are rights that are inherent in and inalienable from the individual creator. Such rights cannot be bought or sold; they cannot be ‘owned’ by a corporation; they cannot be extinguished by contract. This difference reflects the impact of the French Revolution and the ‘rights of man’ movement that went much further than the American Revolution in sweeping away aristocratic concepts and institutions. With respect to intellectual property, for example, the famous American architect Frank Lloyd Wright noted that the American Revolution is incomplete. 2.20 Intellectual property has become the new ‘gold’, the source of wealth in a global knowledge-based economy. A community, region or nation will eventually run out of nonrenewable natural resources like oil and gas, gold and silver. Even renewable natural resources such as agricultural land, timber, fish and water tend to diminish in quality through time. Only creativity can conjure up substitutes to turn lead into gold, sand into silicon chips, or a first novel into billions of dollars as a movie, CDs, records, tapes, T-shirts, toys, and other ancillary sales and royalties. 2.21 Generally, it is individuals or a small ‘team’ who generate this new gold – whether it is the artist, the basement inventor, and the scientist, et al. Such creative individuals are the true source of wealth in the new economy. Examples abound: Bill Gates working in his garage to become the richest person on the planet; Armani fuelling the design and textile economy of Milan; Agatha Christie and the Beatles earning millions in cultural export sales. 2.22 With the eclipse of the corporation as a viable instrument of economic policy, it will be the individual creator who inevitably becomes the focus of economic policy – including fiscal and taxation policies. In the 21 st century the change from a strategy of ‘corporate tax havens’ to ‘creativity havens’ will accelerate. As the Committee reported, the Republic of Ireland (Eire) now negotiates and bargains concerning the level of corporate income tax paid by new corporate citizens. The Committee did not report, however, that all copyright income (royalties) earned by individual residents (not corporations) is also exempt from personal income tax in Eire. 2.23 A ‘creativity haven’ policy aims at promoting and retaining local talent and attracting the best minds from afar by creating communities, regions and countries in which such talent wants to live, love, work and belong. Seeded by an initial influx of talent a vortex is created that feeds on itself. Like attracts like in the case of creative talent. Thus a vibrant arts and cultural community tends to attract and retain high tech talent in the natural and engineering sciences.
2.24
Saskatchewan currently collects virtually nothing in income tax on intellectual property income earned by its citizens. Exemption of IPR income – earned by individuals from copyright, patents, registered industrial designs and trademarks - would cost nothing.
It would, however, attract talent from other jurisdictions who would then pay property, sales and other taxes including income tax on
non-IPR income. In addition, the Province can institute innovative types of intellectual property rights available only to its
residents that would further enhance Saskatchewan as ‘the place to be’. A detailed list of such innovative IPRs is available from the author on request as is the explanation of why and how the Province can constitutionally implement them.
Crime: From Punishment to Fiscal Morality 2.25 Before 1970 lotteries were essentially illegal in Canada and monies flowed out of the country to foreign ‘ticket’ lotteries such as the Irish Sweepstakes and to foreign casinos, for example in Los Vegas. Illegal lotteries (for example, the numbers game) also fueled criminal activity across the country. Since the 1970 amendments to the Criminal Code, lotteries have become a significant revenue source for all Provinces. What once was a crime is now a ‘sin tax’, or, as Mayor Jean Drapeau, father of lotteries in modern Canada called them, ‘a voluntary tax’. 2.26 Before amendment to the Criminal Code, lotteries, and gaming in general, was a form of ‘victimless crime’. The concept emerges from John Stuart Mill’s seminal 19 th century book: On Liberty. In it, Mill argues people should be free to do whatever they want as long as it does not cause harm to others. Today, there is a range of ‘victimless crimes’ that include activities contemporary society considers immoral and/or unhealthy – drugs, pornography, soliciting prostitution, etc. In each case, organized crime has filled the void between the demand of consumers and the prohibitions of the law. Such criminal activity is not taxed and it fuels violent crime in pursuit of the enormous amounts of money consumers are willing to pay for their sins. Jails and prisons are bursting with perpetrators of victimless crimes as well as a much smaller number of violent offenders who earn their living from such currently illegal activities. The cost of law enforcement and incarceration are an enormous drag on public finances. Furthermore, there is no indication that such victimless crimes are ever going to be successfully suppressed. 2.26 It is important to note that Mill drew one important limitation to his concept of freedom, that is when the freedom of adults impacts on the well-being of children, or minors. It was based on this distinction that Mill urged compulsory public education because he concluded that it was not necessarily in the interest of parents to have children in school when they could be earning income for the family. Thus child pornography and child labour are not ‘victimless crimes’. 2.27 Since 1970, Canada has eliminated ‘gaming’ as a crime. In the process, a major source of revenue for organized crime has been removed and both government and the nonprofit sector have gained a significant new source of revenue. While the problem of gambling addiction remains (as it did when gaming was treated as a crime), various compensatory measures have been taken to help and assist those suffering this ailment. Other jurisdictions have, however, gone much further in ‘decriminalizing’ victimless crime. 2.28 In France, for example, the problem of pornography has been addressed through levying a higher value-added tax on such works (in print or in media formats) than on other types of works. In the Netherlands (and increasingly in other European countries), ‘soft drugs’ have been decriminalized and their sale effectively taxed. In the State of Nevada (and many European countries), organized, medically supervised prostitution is legalized, regulated and taxed. It is probable that this pattern of converting ‘victimless’ crimes into taxable sins will continue in all jurisdictions. Voluntary taxes are willingly paid; they are levied only on those who engage in such activity; organized crime is cut out of the profits; the cost of enforcement dramatically declines as law enforcement agencies can concentrate on violent offenders rather than consumers. 2.29 The political inhibition on tapping voluntary ‘personal taxes‘ is the ‘cultural maturity’ of voters. If Canada is a Christian country then sin is a crime; if it is a secular, multicultural society, then sin should become taxable, not punishable by criminal penalties. For example, it is a sin for Moslems to drink alcohol; it is not a sin, however, for them to use ‘soft drugs’ like hashish. In Canada, drinking is legal; smoking pot is not. As corporate income taxes continue to decline and as personal income and sales taxation is increasingly resisted by the public, pressure on Government to demonstrate ‘cultural maturity’ will inevitably lead to a change in our sense of fiscal morality.
3.01 The Final Report and Recommendations of the Saskatchewan Personal Income Tax Review Committee was published in November 1999. In addition to recommending the Province investigate other issues raised during conduct of the Committee’s work (R#7), it recommended that the Province: (a) adopt a ‘tax-on-income’ approach to personal income tax allowing the Province to set its own tax brackets, deductions and definitions of taxable income independently of the federal government (R#1); (b) reduce income tax on all income classes (R#2, 3, 4, 5 & 8) (c) reduce the rate but broaden the coverage of the provincial sales tax (R#6); and,
(d) compensate lower income citizens for the regressive impact of the broadened
sales tax through increased public spending (R#6). 3.02 Constrained by its mandate and professional optic, the Committee’s recommendations fail, in my opinion, to address the near revolutionary times faced by public finance in Canada - on both the spending and tax sides of the public finance coin including: (a) the definition of ‘person’ is changing as: · the traditional family is complemented by new forms of dependency including single-parent families, same-sex couples, adult children remaining dependent on aging parents and aging parents becoming more dependent on adult children; · the corporation becomes more a citizen of the world and less a corporate ‘citizen’ of any given jurisdiction leading to tax competitiveness between jurisdictions; and, · medical genetics and the insurance industry extend the definition of a flesh-and-blood human being to include clones and cryogenic ‘persons’.
(c) consumer sales taxes become increasingly important as a source of Government revenue just as they too are likely to decline as e-commerce grows and the Internet remains a ‘tax free zone’’; and,
(d) the
economy continues its transformation into a global knowledge-based economy in which intellectual property becomes an increasingly important source of both corporate and individual income. 3.03 The shift from a ‘tax-on-tax’ to a ‘tax-on-income’ approach for Saskatchewan personal income tax does, however, offer a significant opportunity for the Province to creatively adapt, adjust and evolve in response to the changing reality of public finance. Among the adjustment I recommend are: · a shift from a personal income tax focused on ‘support of the family’ to one focused on ‘support to dependents’; · a shift from a strategy (including tax expenditures) of encouraging a ‘corporate tax haven’ to a ‘creativity haven’ approach designed to attract and retain highly qualified talent in the arts, sciences and humanities by, among other things, exempting income earned from intellectual property rights from individual income taxation; and, · a shift from compulsory to voluntary taxes (that is, sin taxes on what are currently treated as punishable ‘victimless crime’) that citizens are eager and willing to pay and which, unlike consumer sales tax, will not decline in response to the growth of e-commerce, self-employment and the globalization of corporations.
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