Proposal Tax Policy For A New Er Promoting Economic Growth And Fairness

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In Kevin Milligan’s proposal Tax Policy for a New Era: Promoting Economic Growth and Fairness, a dual income tax system has been introduced that would boost economic growth and increase tax fairness. The new system contains a single, low rate on all capital income, coupled with a higher top tax bracket on wages. This essay, however, will focus on analyzing Miligan 's arguments in reforming the tax system. In this report, Milligan mentions two trends that raise concerns for current Canadian tax system. The first one is the increasing income concentration. More and more money was earned by relatively small portion of people. This has triggered some equity issues because the proportional tax that high earners pay does not higher that those…show more content…
To reform the system, there are three steps. First, the tax base should be cleaned: focusing on taxing labor compensation stocks and cutting unnecessary tax costs such as tax credits. Compensation can be divided into several options including employee stocks and wages etc. Now if stock options are tax exempted, people are likely to choose stocks instead of salaries. Therefore tightening employee stocks tax can prevent tax avoidance and lead to efficiency. Besides, cutting tax credits can save huge amount of revenue for government. However, he mentions that high salary earners tend to have high responsiveness in terms of rising tax. Now if they cannot find a way to avoid taxation of their compensation, it is more likely for them to ask for higher compensation (in this case, more stocks) from their companies. Once companies agree to increase the amount of their stocks, this tax on stocks is ineffective because income of high earners will remain unchanged. Another critic here is that politically speaking, tax credits can be considered as strong instruments to attract voters’ support. Simply reducing tax credits could collect extra revenue, however parties may not want to sacrifice their vote-getting techniques. Therefore the dual tax system may not gain support from politicians. Second, in terms of simplifying the capital gain tax, Milligan suggests a flat-rate tax should be established and with a range between dividend and capital income
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