Automated Tax System

Summary:

An automated individual and corporate taxation system requiring no active input from citizens/organisations to conduct their yearly taxes.  Everyone receives a receipt in the mail for taxes paid and a detailed description of the deductions/credits used.  The tax system automatically adjusts taxation from year to year, keeping tax data for up to 5-10 years, in order to minimize the tax paid for an individual (for instance if it was possible to shift credits to lower taxes paid, then you will receive that benefit the next year).

Long Description:

The vast majority of labourers in the work force operate on a salary/wage income earned by working a job at some business.  This is a very simple process and one should expect the tax system to be simple.  In fact, it is usually so simple (using the example of a Canadian T-4 style employee), a computer should just be able to do it automatically.

The essential component to an automated tax system is the ability to instantly collect information from employees/employers.  In the past, the lack of computer systems prevented easy automation of these systems.  A technologically savvy government can provide software to businesses to participate in (or else they must do it the "old way").

For Canada, this is a matter of automating the collection of donation receipts, income slips (such as T-1, T-4).  Most people are simply copying the numbers from those slips into a computer tax program or the paper tax form and then sending it to Revenue Canada.  For these people, this is nearly an entirely redundant step.  Some people have more complicated tax returns because of dividend income, donations, tuition fees and other special tax credits or deductions.  Their concern is maximizing the use of tax credits and deductions based on their expected marginal tax rate from year to year.

Definition of T-1, T-4: These are the names for tax forms in Canada.  A T-4 slip, for example, indicates the income you earned from a particular job, the amount of Canadian Pension Plan contributions you've made, the amount of Employment Insurance contributions you've made and even income (and tax paid) on stock plans at the company.

In both cases, an automated tax system can function well.  For simpler tax returns, it is just a matter of processing the taxes through a computer without requiring user input.  For complicated tax returns where tax credits can be shifted from year to year, the simplest solution is to retain all tax information for up to 5 years, so that each year you can attempt to minimize tax paid across a sliding five year window.  This means that if you "should have" shifted tax credits to the next year, the automated tax system does that automatically, allowing you to pay the least taxes without expending any effort.

For both Canada and United States, the primary obstacle to implementing an automated tax system, from a technical perspective, is to be able to provide the software to businesses so that they can easily collect data and send it to the government.  In Canada, businesses already compile this information and merely would send it to the government and not need to send it to employees.  In the United States, itemized deductions requiring receipts cause the greatest issue, and the best solution is a tax reform.  The easiest solution would be to eliminate of every single tax deduction/credit that requires receipts and instead lower the tax rate of the lowest bracket to maintain revenue neutrality.

Given the proliferation of computer systems at even the smallest business, this can have a fairly high penetration rate in the business world.  The old system would still have to be maintained for anyone not sufficiently computerised.

An automated tax system requires a few changes to the tax code:

• Tax credits/deductions that require proof need to be eliminated.  Shifting these into tax rate reductions on the lowest tax bracket is the simplest solution.
• Overly complicated tax shifting adds burden to the automated tax software and are typically only available to high income individuals.  It's likely simpler to just lower the tax rate in general for everyone.
• Tax credits for special cases can still be maintained if they're mostly associated with public services.  These include tax credits for tuition (post secondary education or skill labour training) or age-based credits.

At the end of a fiscal year, you are sent your tax bill.  It clearly indicates how it was calculated, how much was paid and your contribution rooms for various registered government plans.  These would include your registered retirement savings plan (RRSP, 401k), or your education savings plan (RESP) and for Canadians, your tax-free shelter room (TFSA).

Rationale:

Currently, the more financial resources you control, the better accountant you can hire and subsequently pay less taxes than someone who has a worse accountant, or no accountant.  This creates a divide most typically seen in the corporate world where small businesses do not have the capability of using so-called "tax loopholes" in comparison to very large companies.  The United States is the primary example of this problem where a company such as GE can pay a negative tax rate on twelve billion dollars in profit while a small hardware store in a small town pays nearly 40% tax rate on profits.  That is not an equitable situation and damaging to market competitiveness.

For individuals, the difference is less marked but if we consider that in Canada, on average a person takes 1-2 hours of time to do their income taxes (for most T-4 employees the time is fairly low), but upwards to days of time for those who are self-employed or own a business, it is a lot of lost labour hours.  In the United States, filing income taxes takes considerably longer and thus impacts productivity even more (especially for itemized deductions in America where one must retain receipts, a concept which does not exist in Canada).  An automated tax system saves many hours of work and most importantly, ensures everyone receives tax credits/deductions as they were intended to be used rather than by crafty manipulation of the system.

Recently, the Canadian Association of Accountants had levied a complaint that the Canadian tax system is convoluted and is taking time away from accountants who would rather be growing businesses.  This system should reduce the amount of accountant time spent toward tax issues.

Tools:

The most helpful tool in this case is software.  If the government maintains free tax software for everyone it makes the system cost less and easier to maintain.

This requires a tax infrastructure to handle the storage of filed tax returns (for the purpose of properly calculating tax levels for each individual/business across a five year period, giving back money as needed when tax credits/deductions could be used more wisely in later years).  It also requires an infrastructure for receiving tax data through a fiscal year (for Canada these are receipts such as T-4 slips and for the United States, the equivalent would be sent to the tax servers).

What I'd like to talk about later:
Corporate Tax Revisions and Business/R&D Grants
Healthcare - Preventative Care
Nursing Home Funding
Minimum Income
Carbon and Toxins Tax
Incubator Program