Ottawa should end unfair and ineffective tax breaks

TheStar.com – Opinion/Editorials – While global conditions may mean a comprehensive review of Canada’s tax code will have to wait, the Trudeau government should not pretend there is nothing that can be done today.
March 10, 2017.   By STAR EDITORIAL BOARD

All signals out of Ottawa suggest that the upcoming federal budget will be a modest affair, constrained by slow growth, sagging commodity prices and uncertainty around the undefined policy of an unpredictable U.S. president. When Finance Minister Bill Morneau tables his second budget on March 22, it will likely put the government’s much-touted march toward middle-class fairness on hold until the economic outlook clears and brightens.

So it goes. No political agenda is immune from global pressures and shifts, of course.

Yet, as the Star has argued before, at least one major Liberal promise ought not to wait. It is, in fact, made more urgent by our current economic uncertainty and Justin Trudeau’s commitment to active government: namely, closing tax loopholes that both compound economic unfairness and compromise Ottawa’s fiscal position.

Every year, the federal government forgoes about $100 billion through so-called tax expenditures. These breaks, often offered as politically micro-targeted giveaways, have proliferated in recent decades. Yet, while their total cost is roughly equivalent to a quarter of all government spending, tax expenditures are not subjected to the same oversight or accountability as other outlays. And what little we do know about these measures suggests that many are both unfair and ineffective.

Morneau’s first promise upon taking office was to review tax expenditures with the goal of finding $3 billion in annual savings, a plausible, if modest aim, to be delivered in the 2017 budget. Now, however, Morneau says the review, like much else, will have to wait until Donald Trump’s promised tax reforms take shape.

The notion that Canada will be better placed to revise our own tax code once we understand the larger competitive dynamics may have merit. But there are some hugely costly loopholes currently on the books the wrong-headedness of which cannot possibly be altered by Trump’s policies.

Morneau might look at three in particular, as a means both of providing an immediate down payment on his promise of tax fairness and of laying the groundwork for future investments.

1. The tax break on executive stock options: Currently, compensation received in the form of stock options is taxed at a much lower rate than regular income. The tax break was conceived, in part, to help capital-starved start-ups attract top talent, but has been co-opted by executives at established companies as a way to dodge taxes. Ottawa loses about $1 billion every year through the loophole, more than 90 per cent of which goes to the top 1 per cent of earners.

In 2013, for instance, 75 of Canada’s 100 top-paid CEOs received part of their income as stock options. This allowed them to accrue combined savings of $495 million, or $6.6 million each. That’s half a billion dollars of forgone revenue to subsidize 75 very rich people.

Moreover, it’s not at all clear that incenting companies to compensate employees with stock options is really such a good idea. The evidence suggests it encourages CEOs to drive up expectations, and thus stock prices, not necessarily results.

Some start-up executives have expressed concern that closing the loophole might drive innovators out of the country, particularly if Trump follows through on his low-tax promises. Of course, those who benefit from the break have every reason to say that, whatever the merits. In any case, surely there is a way to help these small enterprises that doesn’t require an annual billion-dollar public gift that mostly benefits people who have nothing to do with start-ups.

2. The tax credit on corporate dividends: Even more costly, and nearly as skewed toward the rich, is the tax break on dividend income. Every year Ottawa loses about $4.1 billion through this loophole, 91 per cent of which goes to the top 10 per cent of earners and as much as 50 per cent to the top 1 per cent.

This is meant to spare corporate profits from so-called double taxation. Corporations already pay tax on their profits, the logic goes, so that money should not be taxed again when paid out to shareholders.

Some dispute that this is of double taxation given that corporations and shareholders are distinct economic units. But in any case the same principle doesn’t seem to apply to ordinary Canadians. As a recent report from the Canadian Centre for Policy Alternatives points out, “double taxation is actually quite common — for everyone.” When we buy goods or services, we use money that has been taxed as income, yet we are not spared from paying sales tax. When we buy gas, we are essentially triple-taxed.

Simply putting a cap on this currently unlimited credit would save Ottawa a huge amount of money and begin to address the unfairness of a credit that would seem to give a special break to those who need it least.

3. The Canada Education Savings Grant: Ottawa’s most significant post-secondary program is another tax expenditure we know to be largely ineffective. Last year, a government study, uncovered by CBC News, confirmed what critics had long maintained: the $900-million annual grant disproportionately benefits the well-off.

Surely the goal of the credit is to increase access to education, not simply to help those who can already pay for school do so more easily. Yet roughly half of the money goes to families with annual household incomes above $90,000 and a third of it goes to those making $125,000 or more.

For years, economists warned that the program wasn’t working. They pointed out that the grant is available only to those with registered education savings plans (RESPs) – that is, to those already able to save for school. As one might expect, high-income families are far more likely to be in such a position.

It’s a shame that Ottawa’s richest post-secondary grant does not appear to be significantly expanding access to education. Every year the program remains unchanged is another year in which hundreds of millions of public dollars are ineffectively allocated. The report makes clear Ottawa understands this. Trump’s presidency does nothing to alter the pressing need for a fix.

During Justin Trudeau’s recent cross-country tour, he admitted “there is more to do” on tax fairness. While global conditions may mean a comprehensive review of Canada’s tax code will have to wait, the government should not pretend there is nothing that can be done today.

https://www.thestar.com/opinion/editorials/2017/03/10/ottawa-should-end-unfair-and-ineffective-tax-breaks-editorial.html

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