Fiscal favours are eroding our tax system
TheStar.com – opinion/editorialopinion
Published On Wed Mar 23 2011. Lisa Philipps
With Tuesday’s budget, the federal government continued its love affair with tax expenditures, those special breaks that target tax relief to select causes or groups.
Like many Liberal budgets before them, every one of the Conservative budgets since 2006 has announced an array of new subsidies to be delivered through the tax system. Though their individual price tags may seem modest, they add up to a major drain on revenues. This budget alone would reduce federal revenues by almost $300 million per year once the new personal tax credits are fully phased in.
It is not easy to justify giving fiscal favours to some groups over others. Doing so erodes one of the most fundamental principles of our tax system: that people in similar circumstances should bear similar tax burdens. Known to policy wonks as “horizontal equity,” it is a key to ensuring that the system is not only fair but is seen as fair by those who must comply with it.
At first glance, this newest slate of tax goodies looks benign. Who could argue with a little tax relief for volunteer firefighters or children’s art? In isolation this makes sense. But zoom out a little, and it’s not clear why we should tax one group of volunteers more heavily than another. Fighting fires is a hugely important contribution but is it more deserving of tax relief than volunteering to provide disaster relief, to build houses for homeless families or to teach new Canadians to read?
One could hardly blame these other groups from seeking parity. In fact, the new children’s art credit is the outcome of lobbying efforts by parents who felt left out of the children’s fitness credit announced a few budgets back. Given how one favour leads to the next, it’s not surprising that our tax system looks like Swiss cheese.
Many of the tax expenditures in this budget seem like they are meant to help those in great need. They will go to people like university and college students, families with disabled dependants and people with medical expenses over $10,000. Once again, appearances can be misleading. All of these new credits are “non-refundable,” meaning they benefit only those with enough income to pay taxes. This leaves out a surprisingly large chunk of the population.
The latest data available from the Canada Revenue Agency show that in 2009, almost 34 per cent of individuals who filed returns had no tax payable (28 per cent of men; 39 per cent of women). That means the new credits are of no help whatsoever to a full third of tax filers, most of them at the bottom of the earnings scale.
In reality, these concessions are targeted to middle and upper earners. Perhaps we do want to help these folks with their tuition, care giving or medical expenses, but it makes little sense to exclude the neediest citizens from these programs. Yet this is so often the effect of delivering subsidies through the tax system.
Who will evaluate the impact of these new tax expenditures to see if they are encouraging more Canadians to pursue post-secondary education or volunteer firefighting, or have other salutary effects that help to justify their costs? Most likely no one, ever. Once enacted into law, these special rules will sit in the tax code indefinitely with no need to be examined or reapproved the way a direct spending program would be.
It is easy to add tax expenditures and almost impossible to remove them. This is why many tax policy experts call for “sunsetting” these rules, which gives them a limited lifespan subject to evaluation and reapproval. The two-year home renovation tax credit announced in the 2008 budget was a rare example of a government heeding this advice.
It’s time for Canadian politicians and voters alike to grow up about tax expenditures. Little breaks may seem nice if you happen to be part of a favoured group, but ultimately they destroy simplicity and fairness for all of us. Incidentally, they also make it hard for governments to reduce the general rates that apply to all taxpayers or to fund programs for the most needy.
In the next federal election campaign, instead of focusing on who will get the latest batch of tax goodies, we should be asking legislators what they will do to halt the uncontrolled growth of tax expenditures.
Lisa Philipps is a professor of tax law and policy at Osgoode Hall Law School of York University, and co-editor with Neil Brooks and Jinyan Li of Tax Expenditures: State of the Art.
< http://www.thestar.com/opinion/editorialopinion/article/959666–fiscal-favours-are-eroding-our-tax-system >