Communism Promotes Protectionism

The taxation of capital and investment income creates all kinds of distortions in the markets. For example, shares are only taxed upon their sale, so investors will hold on to shares that have gained value just to delay their tax bill by another year. The reverse also occurs, selling off stocks that have lost value in order to get an immediate tax credit. Taxation is thus a contributing factor to the instability of the stock market.

For this reason and many others, I propose to eliminate corporate taxes and taxes on all investment income. This could be done implicitly, by removing contribution limits on RRSPs, while keeping the tax system otherwise intact. Or it could be done explicitly, making RRSP accounts only useful to even out spending over one's life time. In the following example, I will calculate the an individual's worth and tax contribution over a 10 year investment period separating labor from spending. I will assume that taxation is flat at 50%. Government bonds' real yield is 2% a year and average individual investments' real yield is 4% a year.

With investment taxation explicitly removed, labor is taxed as soon as it is earned. This gives:
Individual after 10 years = (Labor * (1 - 0.5)) * 1.04^10
Government after 10 years = (Labor * 0.5) * 1.02^10

With investment taxation eliminated by removing the cap on RRSP, labor is taxed only when it is spent. This gives:
Individual after 10 years = (Labor * 1.04^10) * (1 - 0.5)
Government after 10 years = (Labor * 1.04^10) * 0.5

Both approaches give the same amount of money to the individual, but the second approach gives a bit more money to the government, at no cost to the individual.

Investments by individuals are unlikely to be truly global. They have more knowledge of the value of local capital (shares of local companies), like shares of Bombardier Transport. When the local government needs to buy new subway railcars, they should rationally prefer the local supplier, since the government owns about half of the capital of that company through the RRSP of its citizens. Only the explicit elimination of investment income tax solves this problem.

Unfortunately, the taxation of labor combined with the loss of man hours resulting from the reallocation of human capital (that is recycling the workers at Bombardier Transport into some other field of work) also lead to the state effectively owning local capital. Education is a form of capital from which the state collects investment income tax as a subset of the tax on labor. One's time is quite easy to re-allocate anywhere in the economy, but one's education may not be easily used in another industry. To decouple the state from all forms of local capital, we would have to find a way to not tax the education part of worked time and to only tax the "universally re-allocatable talent" of workers. I don't really know where to start to achieve this distinction.

In practice, highly educated workers in rich countries (those that own the most human capital) are not very vulnerable to foreign competition. Lowly educated workers are very vulnerable, but the cost of reallocating their labor is small. Finally, workers in the middle (ex: technicians) have the most human capital to lose from foreign competition. Minimizing the regulatory overhead in reallocating mid range educated workers is the way to go.

Another solution would be to impose a head tax, effectively detaching the interests of the state from all forms of local capital, including human capital. Not so popular, though.