April 23rd is Tax Freedom Day in the United States, the day when the US as a whole has earned enough money to pay its tax bill for the year. We have it a little worse up here in Canada, ours isn’t until June 19th (or at least that’s when it was in 2023)1. As a Canadian I find it appalling that the average person has to work almost half the year to pay their taxes. The fact that there’s a name for this day tells you many people feel the same way. Taxes have been reviled for so long that even the bible has a poor view of them, grouping tax collectors with sinners (Mark 2:15-16) and pagans (Matthew 18:17). However, I’m not here to cast judgement on how someone chooses to make a living. Unfortunately, I’m also not here to tell you how to do away with taxes either. If it were possible to do away with them someone would have done it already. As Benjamin Franklin is alleged to have said, nothing is certain but death and taxes. While I can’t rid us of them, what I can do is suggest a way to make them a little more palatable, specifically, by implementing tax choice.
What is tax choice?
Tax choice is perhaps less a “spoon full of sugar” than it is a “pick your poison” process. As taxes currently stand citizens earn money and the government taxes them based on their tax bracket.
Canadian Tax Brackets – 2024
US Tax Brackets – 2024
Note: Yes, if it was really that simple, we wouldn’t need accountants, but this isn’t an article on getting to a flat tax (never going to happen) or simplifying the tax code (also never going to happen) but about how paying taxes can be made a little less painful.
Tax Choice is a policy that allows taxpayers to determine where some or all of their taxes go. For example, I would like to see Canada meet its military spending requirements (per NATO this would be 2% of GDP), so would prefer more of my taxes allocated to National Defense and less to the CBC which is funding programs I don’t value or watch and which, when not producing programs I have no interest in, functions as little more than the propaganda arm of the Liberal government and is a giant waste of over a billion dollars per year (excuse the editorializing).
How would it work?
Modern governments are extremely complicated (and wasteful…sorry, editorializing again) so a process that required a taxpayer to determine exactly where every dollar of their taxes went would be asking too much of the taxpayer. However, it should be possible to define broad categories for taxpayers to pick from and the percentage of their taxes to go to each category leaving the IRS/CRA to work out the details. For example, using National Defense again, it is not unreasonable to ask a taxpayer to determine what percentage of their taxes they wish to go to the military, but it would be too much to ask them which to determine which particular programs within the military they wish to fund. Leave that up to the bureaucrats (however distasteful that might be…damn, editorializing again). Using the US as an example, the major areas might be outlined similar to what is in this graphic:
Ideally, the process would limit the list of options to a reasonable list for ease of use which the diagram does by providing 12 categories (excluding the final “All other” category). Or the system could provide a high-level list and let the taxpayer drill down as they desire (but I would limit it to one additional level). For example, as a US taxpayer I would love to see a system that allowed me to send more of my money to NASA which the above list does not include but which may fall under “Science and medical research” or “All other” (but I might be wrong). Users would also be given the option of ignoring the process entirely, leaving the decision of how to allocate their taxes entirely up to the government.
Clear category definitions would be essential for any tax choice system. To prove my point here is an example of a breakdown of where Canadian taxes go:
As I stated earlier, I want to fund the military and not the CBC and this breakdown puts both organizations in the same piece of the pie, “National defense, crown corporations, and other direct programs.” There’s also the “other direct programs” portion leaving me to wonder, where exactly would my taxes go if I chose this category?
How much control should the taxpayer have?
That’s a good question and the answer likely depends on how much trust you put in the individual taxpayer, the government, and how comfortable you are in risking that something didn’t get any funding. Would a system that allowed users 100% control over where their taxes go and the results were that no one wanted to fund the military (or pay the debt, or fund Social Security), would this be a good idea? While it is an unlikely scenario, it’s a risk that should be avoided. An argument can also be made that the elected representatives should have some power over allocated taxes to fund the initiatives they ran on. For these two reasons I prefer a 50/50 split between taxpayers and the government. Obviously, arguments could be made to shift that split one way or the other.
How does Tax Choice help?
In addition to providing people a greater sense of control, tax choice would:
Reduces the impact of lobbying – a 50% reduction in what the government controls means a 50% reduction in the influence of lobbyists. enables individuals to compete more effectively with moneyed interests in policymaking. Trying to bribe, sorry, lobby the 538 members of Congress is a lot easier than trying to do the same thing with the 90 million or so Americans who paid taxes in 2023.
Promote individual choice – The process is more democratic. Yes, you currently get to vote for who will decide where your money goes, but how often have politicians said one thing and done another? “Read my lips: no new taxes.” This system would provide assurances that at least some of your money was going where you wanted it to go.
Promote more civic involvement – I’ll grant you that this one is a “maybe,” but it is likely that if people had control over their taxes at least some of them would investigate the various categories. It would also encourage those in the government to explain why they wanted X amount in each category (“you don’t understand, we need to send $70 billion in foreign aid to other countries because…”)
Provide the government more insight into peoples’ preferences/provide a way to grade the government against the peoples’ preferences - Currently its only possible to determine how people feel about government spending through polls (and occasionally voting). And this only provides a general overview. Tax choice would enable a direct comparison between where taxpayers are allocating money and where the government allocates it. It
Deescalate tensions between political sides – Watching “the other side” win an election is painful, but it might be less painful if you knew you still had some control.
People might pay more – Ya, this one’s a stretch however it is an argument put forth by Ethan Porter in “Can't Wait 'Til Tax Day!: It's a heretical thought, but would people pay more taxes if they could designate where a portion of their money went?” Could it happen? Sure, Americans are given the option of to pay additional $3 to presidential election campaigns when they submit their taxes and some people do contribute. I don’t know how much this generates but the number of people selecting to do it is declining. I think the government already gets too much in taxes but if you want to give them more, you do you, as they say.
Conclusion
In Buddhism desire is the root of suffering but I’m going to suggest taxes are a close second. It is easy to want tax choice, getting it is another question and the biggest hurdle to this type of system would be the government. Politicians and the bureaucracy currently have absolute control over all taxes and prying even part of that away from them would be difficult. There is also the problem of…sigh I’m going to editorialize again…government competence. Or to word it more accurately government incompetence. While a tax choice could be relatively straightforward from a design standpoint and rolling out a website and/or smartphone app is something that private companies do (relatively) competently on a regular basis, both the American and Canadian governments have a history of, shall we say, challenges in these areas. The Obamacare website cost between $840M and $5B depending on whose accounting you believe (correct answer: nobody’s), and it famously crashed the day it was launched. That’s slightly less than half of what it costs to build an aircraft carrier, but at least those float (coding is hard!). More recently in Canada the ArriveCan app, which allowed travelers entering Canada to electronically submit travel documents and customs declarations during COVID, exceeded its $80,000 budget by a mere $54 million (no, that’s not a typo), most of which the government can’t account for (accounting is just as hard as coding I guess). How much would a tax choice website and app cost? I don’t know, how much you got? Still, nothing worth having comes easy and like peace in the Middle East, it may seem impossible, but is worth pursuing on principle.
Ironically, this used to be United Empire Loyalist Day, a day designated to celebrate those who fled the United States for Canada following the American Revolution. Their loyalty to the crown has been rewarded with a higher tax burden. You get what you fight for, I guess.
Interesting though exercise. As I am based in the United States, I will speak from that stance. Many people complain about taxes in the United States and with a tax code of over 8,000 pages how could you blame them, then there is all the graft & waste. It makes you think like there is no remedy and you are under consistent assault. However in the Land of the Free-pun intended-you have tax choice when you understand the tax code. The actual tax code is only 3, yes 3, pages long. the other 7,997 pages are incentives, exemption, loopholes, credits-whatever jargon-that tells you what you need to do to lower your and eliminate your tax obligation-income, foreign, estate, capital gains, dividend, & excise-to the Federal government. There is even a provision that allows you to send monies for an income tax reduction for the debt of the Federal government. Review the tax strategist-one complex-of Ross Pero and the less complex, but as affective, strategy of Warren Buffett.