Tax deduction card
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Tax deduction card is an operationalisation of tax exemptions or deductions. It avoids the typical problem that tax deductions can only be made from income tax, but not from e.g. value added tax. It uses a personal tax deduction card, that is used by the taxpayer when she is making purchases. If she has tax deductions available on her card, she can use them instead of paying the tax in a shop.
Scope
What is such a taxation system that treats different tax types in a neutral way with respect to social transfer of income?
Definition
Rationale
Tax deduction card is an operationalisation of tax exemptions or deductions. Usually, tax deductions are made from income tax so that the employee gets the benefit from the tax deduction. There are problems related to the current system. Tax deductions can only be made from the income tax but not from e.g. value added tax.
The purpose of tax deductions is societal, i.e. the society wants to support certain individuals due to their low income, difficult life situation, or other reasons. There is no particular reason (except tradition) to limit tax deductions to income tax only. Each individual should be exempted to a certain amount of tax, determined by the the societal reasons mentioned above. This deduction should be available to the individual when she is paying any kind of tax. To make this possible in practice, all taxpayers are given a tax deduction card. It is like a credit card containing information about the amount of tax deduction the person has available. When she buys services or goods, she can show the card when paying, and a part of the tax deduction is applied to the tax included in the service. The usage of exemption is recorded into the card account, so there is little less exemption to be used after the purchase.
The tax deduction card can also be used to implement a tax progression. Depending on the yearly income (or other criteria, determined by the country's policy), an individual may be eligible to 100% reduction of tax up to a certain amount of tax; after that, he/she is further eligible to 80% reduction of tax up to another amount of tax; then 60% reduction, and so on, until no tax deductions are available. Depending on the individual's total income, he/she will be able to utilise a smaller or larger part of the theoretical tax deduction. Of course, in a case where the individual cannot use all the deductions, he will make sure that all the best deductions (i.e. those that give 100% reduction of the tax) are maximally used before using the second best 80% reductions. These tax deductions can be loaded to the tax deduction card as the income of the individual increases. However, this can also be done in the traditional way of adjusting the withholding tax.
The tax deduction card approach is a generalisation of the current system with a progressive income tax and a proportional value added tax. The current tax percentages can be implemented, but it also possible to develop a tax system that is neutral to the type of income. This has often been seen as a major problem at least in the current Finnish tax system: income tax is generally clearly higher than the capital gains tax.
The tax deduction card can be used in principle with any tax type, e.g.
- Value added tax
- Gasoline and vehicle tax
- Alcohol and tobacco tax
- Other goods taxes
- Recycling fee
Note that income tax and capital gains tax are paid by the employer and the company, respectively. Therefore, there is no need or opportunity to use the tax deduction card, which is individual.
In addition to actual taxes, it is possible to use the tax deduction to tax-like costs of public services, such as child care services, doctor visit costs, or drug costs. Some part of the cost can be defined as tax-like costs to which deductions can be used, and the rest can be costs that must be paid by the customer irrespective of amounts of deduction available. This system would completely eliminate the current problem of overlapping deductions. In Finland, it is typical that many public services are priced based on the incomes of the customer. When many prices like this are applied at the same time, it is not uncommon that many prices go up at the same time with increasing income, and the money available for consumption actually decreases with increasing salary.
Result
Each individual is given an annual tax exemption of a fixed amount of money. This tax exemption can be used to pay any tax, by using a tax exemption card in a similar way as a bank card in shops or elsewhere where indirect taxed are collected. If the tax exemption is used, the customer has to pay only the tax-free price.