A RADICAL ANALYSIS OF PERSONAL TAXATION (page 2)

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. 

Recommendations

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). 

Extensions     

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. 

From Family to Dependents

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’.

Whither the Corporation?

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’. 

Future Taxable ‘Persons’

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.

Intellectual Property Rights

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 20 ^th 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.

The Creativity Haven

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.