A taxsystem is fundamental for a government to incorporate into society in order toredistribute wealth and act as an important drive in economic development.However, the problem lies in that present taxes in our society are becomingincreasingly biased. According to Piketty’s book ‘Capital’ it is feared thatwithout enough government intervention the 21st century will allowfor ‘patrimonial capitalism’ to return. The 20th century encompassedbankruptcies, inflation and higher tax rates which led to income and wealth taxhaving to be distributed equally. However, entering the 21st centuryand leaving behind the years of economical crisis, income and wealth tax isagain giving way to income inequality. 1Thereis an inevitable growing gap between the rich and the poor, and in order tocreate a balanced and ethical market based economy this gap must be narrowed.
2 Asgovernments and populations continue to grow so does the tax burden, for thoseof a low income gap a higher tax is sufferable, and can lead to anti taxmovements of not paying taxes. However, tax is required in order to uphold acountry’s economy. The problem however, lies in that there is no regard fordifferentiated incomes, political alignments differ between individuals andthere is no assurance that the government spends the tax money efficiently. As aforementioned governmentintervention is vital to stop this growing gap, governments should resort toprogressive tax systems, where the middle class is differentiated from that ofthe upper class, and where tax is relative to an individual’s income. However,when incorporating this kind of tax system governments need to consider howthey will simultaneously come up with certain revenue to cover demographic challenges,and only taxing those of a certain social class. Essentially by only taxingthose at the top of the income scale not enough revenue is generated.
Scandinaviancountries such as Denmark have found a way to incorporate a progressive tax,which will be conveyed throughout the essay. This essay will explore taxdevelopment and the extent to which income inequality is dispersed throughoutCanada. It will be conveyed in terms of income and wealth tax and how these twotax factors have changed in the 21st century and are creating awealth gap in Canada.
The aim is to distinguish the factors, which Canada mustincorporate in order to successfully reduce this wealth gap and control therising income inequality. The following research question will be the focalpoint; if Canada were to incorporate structural progressivity into its taxsystem and society, would this more likely create a balanced and future prooftax system for the country? Income tax is defined as the tax anindividual or entities pay relative to their income or profit. This tax canvary depending on a country’s tax system. As a result it contributes toredistributing wealth into society and being used by the government fordemographic challenges. Wealth tax, on the other hand, is the tax on a person’stotal value; this means an individual’s personal assets. Do we need to amend current tax systems to makethem more ’21st century-proof ‘? Income tax is defined as the tax anindividual or entities pay relative to their income or profit. This tax canvary depending on a country’s tax system. As a result it contributes toredistributing wealth into society and being used by the government fordemographic challenges, and social assistance.
Wealth tax, on the other hand,is the tax on a person’s total value; this means an individual’s personalassets. A tax system is one of the corefundamentals in a country’s economy. It is vital to society in order to supportgovernment and public spending, raising revenue for the government and forimplementing policies. However, the idea of a tax system being beneficialtowards a population has changed. The world is changing, governments andpopulations are growing, domestic economies and world trade has significantlygrown, and because of this tax systems are constantly modified. Tax however, isno longer identified as a beneficiary in creating welfare, its seen more as a burden. Tax systems need to be amended andupdated, in order to comply with the rapid developments in the 21stcentury economy.
As these developments occur, global inequality can arise, morethan ever before. To prevent these factors from occurring governments shouldturn to implementing neutrality, stability and simplicity in their systems inorder to pursue these developments. Simplicity should be acquired in a taxsystem since all the policies and tax legislations need to be straightforwardand understandable to those paying taxes. If there is lack in simplicity andclarity, a system can be too complex which will lead to rule breaking; mistakesand can misrepresent an entire economy. In addition it can distort agovernments image since it can lead to a non-productive administration. Ifindividuals are confused by their taxing systems then they may be morenegligent towards paying.
Stability is fundamental in a tax system, sincesociety depends on a stable foundation. A population is more attracted to asystem they can trust and is seen effective. If a tax system encounters toomuch turmoil and is being portrayed as one not aiding projects, which cansocially benefit society, then it has failed to comply. In addition, taxpayersneed the assurance of stability in order to plan their investments accordingly,long-term planning and for on-going agreements. Furthermore, the objective of taxneutrality is so a government does not favour any kind of individual, economicentity, or activity over another. Neutrality in a tax system does not entirely support income inequalityas it leans towards a government being unbiased and not favouring an individual’seconomic behaviour. In contrast progressivity is the principle ofdifferentiating income classes.
3 Although these tax principles arethe way to a good tax policy, and help create a more reliable tax system, theycan also be undesirable. Capitalists, big corporations as well as small wealthybusinesses, prefer an imperfect system, one where they can ‘cheat’ the system,and pay less tax, for example; Canadian business owners using privatecorporations in order to pay a less tax. Tax systems are mostly set up in orderto control and monitor economic activity, hence they are not desired by therich and corporations. By modifying these systems and making them ‘stable’ and’simple’, those in the high-income gap are less likely to find a way out ofpaying more taxes, since the system is more fraudulent proof. Rise of Income Inequality in Canada Governments such as the Canadian,led by Prime Minister Justin Trudeau, needs to acquire appropriate leadership andacknowledgment towards solving the growing issue of income inequality in Canada.According to the Organization for Economic Co-operation and Development4(OECD)5, Canadais categorized amongst 34 industrialized countries to be experiencing incomeinequality. It has continually increased, ranking Canada no.
21. Canada is anation, which struggles with an unbalanced structure in terms of the income andwealth taxation. According to The Conference Board of Canada, thecountry’s income inequality rose in the early 2000s withthe 1 percent of high-income earners taking a third of the nations income. Thiseconomic inequality is due to market forces creating less job opportunities forthe low skilled workers since the world has experienced great technical changeas therefore in need of more qualified and high skilled workers. Institutionalforces have also acted as a conduit to this problem, due to the population’spolitical alignment, national policies supporting the high income earners morethan those in the lower income bracket, and in addition, the decrease inminimum wage rates.6 Canada is in dire need of proper leadership in order to regulate thisunequal income by fully supporting the middle class and incorporating a systemwhere minimal taxes are payed, and in order to do so structural progressivitymust be endorsed. 7 A progressive tax has the objectiveof taking proportionately more tax from those in the higher income levelbracket than those of the ‘middle class’.
Furthermore, when doing so it willcreate a system in order to redistribute this wealth into welfare benefits forthose in lower income level bracket. When adding or adjusting the tax system toone with progressivity, it will mostly target those of major wealth, which isundesirable to those in that category. In addition, policy makers must also takeinto account how they will generate enough revenue, by adding this tax systemdue to that the majority of Canada’s population is middle class. If Canadachooses to apply a progressive tax system it would acquire many beneficialaspects. It will narrow the recent growing wealth gap between the rich and thepoor, effectively aid in boosting economical development, due introducing amore balanced and morally appropriate market-based economy.8 Denmark can be regarded a successfulexample of adjusting a country to a progressive tax system. The Danish societyand government form part of an egalitarian system meaning the Danish welfaresystem aims on its citizens have equal access to the services, which areessentially paid through taxes. Those of a high-income level have acceptedtheir responsibility towards the country and societal needs and hence agreed topay a high tax amount relative to their income.
The middle class also pays taxbut it is proportionate to their income. Even though Denmark arguably has anexcessive tax on high earners, its system of redistributing wealth is exceptional.The government manages to balance the economy and society by taking these taxfunds to cover its expenses by investing in welfare benefits for all. Theseinclude; public institutions, free healthcare, hospitals, child benefits, statepension and the police, which many countries do not offer. Policy makers usethis to incentivize those of a higher income level to pay a large amount oftax.
Progressivity in Denmark has itsdownfalls for those with a high income yet it has managed to take theseundesirable amends and created a plethora of perks for its citizens. It is safeto say that this nation has managed to create a balanced system politicallyeconomically and socially; hence this system has shown its eligibility for thefuture. The undesired structural progressivity Progressive tax systems arechallenging to advocate for. It is undesired by capitalists, high-incomeearners, and large corporations because it targets them, and taxes more oftheir money. Furthermore, progressivity is a principle that needs to be amendedinto a tax system, especially in the 21st century, where the economyis growing rapidly and social gaps are widening.
Governments must securethemselves from global oligarchy, which results in the wealthy taking politicaland economical power, and their public image. These adjustments will createturmoil and will clash with heads of government and companies. Trudeau isalready facing huge backlash due to closing loopholes which allowed the wealthyto pay less tax by using private corporations and stand by the middle classpaying minimal taxes.
The prime minister of Canada will jeopardize his image tothe 10% of wealthy Canadians, and his public image will alter. Individuals andmultinationals for altering the norm will blame Trudeau, but at this ratemodern society must comply in order to prevent inequality. Opinion A tax system can improve with theright leadership and an appropriate strategy, which is ultimately approved byall stakeholders. It is difficult for a government to implement a tax system,which satisfies all due factors such as; political alignment.
For a countrylike Canada, with a very large population and many different social classes,Trudeau will face hardship when wanting to alter the system, which has been inplace for so long. Those of the upper class will not want to consent; hence hewill face a lot of critique. However, with the right leadership Trudeau couldimprove the tax system to a more equal one.
He could integrate values likethose of Scandinavian countries, using a more egalitarian approach. It is alengthy process and it takes a long time for a country to trust change, but Ido believe improvements can be made for the sake of equal payment of taxes. As aforementioned, stakeholders suchas the individuals, companies, and the general public play an important role inthe change of a tax system since they are at the receiving end, as do governmentssince they are incorporating the change and having to deal with the outcome. Inaddition, when changing or implementing any new system, it is important thatthose involved adjust their behaviour.
Governments should adapt theirbehaviour in order to identify with all of the general public, finding a goodbalance with both the upper and the lower class. It may be that in times ofinequality the ‘underdog’ is favoured, thus the government should also behaveappropriately towards the upper class. As for individuals and companies of ahigher income level, understanding that those of a lower income level do nothave the means to pay as much tax as them, is important. This categoryespecially, is the one which is most targeted when making a more equal taxsystem since they will end up paying more tax. The Danish are aware that iftheir income level rises they will be paying more taxes, since they are earningmore than others. However it is a general understanding, that their tax moneywill serve them greater utility since it is invested in the system for socialbenefits. In comparison most wealthy Canadians, try and find all possible waysto pay less tax.
In terms of behaviour, Canadians of the upper class need toadjust and accept the situation. A point to reflect on is, Denmark invests allof the money earned off tax, into social benefits for its population, hence inmy opinion, when changing towards structural progressivity, Canada or any taxsystem should look into what kind of incentives to offer its population. Toconclude the above points, a progressive tax system can massively encourage andimprove economic growth and a balanced welfare system if a country makes theappropriate steps.
Research This essay focuses primarily on howto make a tax system more future proof for a country, since changes in incomeand wealth tax has allowed income inequality to arise. This has been explored byresearching and reflecting Canada and Denmark’s tax system. A point which mustbe touched upon, is that Denmark has a population of approximately 5 million people,which beneficial to the government is easy to manage, also it has a fruitfuleconomy to its advantage. Canada on the other hand has a larger population tomanage, but the key to solving its tax inequality is to differentiate itspopulation’s income. If the economic situation in Canadawere to change, would individuals of a lower income gap be more willing to paytaxes? And if Canada were to lower the tax rate for the aforementioned categoryand increase it for the higher income gap, what incentive could they offer inorder to have all the above individuals comply with this system?A plausiblereason behind the income inequality can be due to political alignments.
Not allindividuals agree on where tax money should be spent, hence it is important theCanadian government implements social benefits with tax money, which positivelyaffect the majority. 9 Hypothesis1: By incorporating structural progressivity in their tax system, canessentially lower income inequality in Canada.