Should direct taxation be abolished in Canada?

Question

Also, What might people think if the Canadian government says the taxation be abolished?What is the benefit(s) ?

Answer 1

Perhaps reduced, but not abolished. Abolishing direct taxes causes indirect taxes to be a more significant portion of a low-income earner's net income than a high earner's.

A lot of the following is from the Tutor2U site:

That said, increased indirect taxation allows a government to reduce the overall tax burden on income and capital. Both income tax and corporation tax rates can be lowered.

Supply-side economists believe that indirect taxes are preferable to direct taxes because they create less of a disincentive to work since employees retain more of what they earn. The argument runs that workers will respond to lower marginal tax rates by expanding the hours they work and raising productivity.

If this is true, then the long-run output potential of the economy should rise through an expansion of aggregate supply would expand, generating a downward pressure on the general price level.

One group where increased indirect taxation and reduced direct taxation might improve incentives are households who affected by the poverty and unemployment traps. People in low paid jobs and the currently unemployed may have little incentive to take paid work or work extra hours if the net financial benefit of doing so is very small. Lower starting rates of income tax may provide a better incentive for low-paid workers to enter the active labour market.

Direct taxes may create disincentives to postpone consumption through saving and also for firms to invest in new capital inputs.

Indirect taxes on the other hand would appear to encourage saving - one of the ways to avoid high levels of excise duties is to reduce consumption.

Taxes on spending are cheaper to administer than direct taxes because they are only collected from businesses.

An important argument against indirect taxes is that they tend to be regressive. Since each individual pays the same rate on their purchases, the poor pay a larger proportion of their incomes in indirect taxes (in comparison with direct taxes which tend to be progressive and are seen as more equitable – the proportion of income paid in taxes rises as income rises when a tax is progressive). An example of this in the UK is the high level of duty on tobacco products. Evidence from the Office of National Statistics shows that the duty on tobacco takes up a much larger percentage of the disposable incomes of lower income groups.

It depends on your goals for society - saving the rich money or costing the poor more. There is a very fine balance to maintain with taxes.

Hope this helps.