Ottawa’s tax reforms don’t go far enough

Posted on July 22, 2017 in Governance Policy Context

TheStar.com – Opinion/Editorial – We hope the sensible package now before Canadians is not all the Trudeau Liberals have to offer on this issue, but is instead a down payment on the comprehensive reform we need and they promised.
July 21, 2017.   By STAR EDITORIAL BOARD

The tax reforms Bill Morneau proposed this week are a welcome, if modest, step toward realizing the finance minister’s oft-touted top goal of tax fairness. The government has set its sights on three iniquitous tax breaks that allow wealthy individuals to avoid paying their fair share. They should be scrapped.

But such loopholes, which have proliferated in recent decades, are everywhere in Canada’s sprawling tax code. We hope the sensible package now before Canadians is not all the Trudeau Liberals have to offer on this issue, but is instead a down payment on the comprehensive reform we need and they promised. There is still much work to be done.

The three measures now being floated all aim to limit the ability of high earners to use the small-business tax system to dodge paying their share on income. The most far-reaching of these would constrain the practice of so-called “income sprinkling,” which allows individuals to significantly reduce their tax burden by transferring large portions of their income, through a corporation, to family members. Taken together, the package could save Ottawa hundreds of millions of dollars annually.

This is a start, but it likely won’t get Morneau even a tenth of the way toward his stated aim of saving $3 billion annually through a review of so-called tax expenditures.

The promised review is crucial. Over the last century, Canada’s tax code has grown into an unwieldy mess. The code is now roughly 200 times longer than it was in its original form, a result not mainly of thoughtful economic design, but of the slow accretion of politically micro-targeted tax breaks. The Harper Tories were particularly fond of such boutique tax credits, which allowed them to appeal to certain politically important constituencies while essentially shrinking government.

Tax expenditures now account for upwards of $100 billion of forgone revenue annually, about a quarter of all government spending. Yet, unlike other government outlays, they are not subject to significant parliamentary scrutiny or even government study. No one seems to know exactly how much is lost through these loopholes, or whether they achieve their stated objectives. As Auditor General Michael Ferguson warned in 2015, even the finance department seems to be in the dark.

What we do know, however, suggests that these tax breaks, like the ones Morneau is now seeking to tackle, too often benefit most those who need help least, deepening rather than mitigating economic inequality. A recent study by the Canadian Centre for Policy Alternatives found that of the 64 tax breaks on which good data are available, all but five provide more benefit to the top half of earners than to the bottom.

Take pension income splitting, for example, which allows the higher-earning spouse to shift pension income to the lower earner. This costs Ottawa $965 million annually, 83 per cent of which goes to the richest 10 per cent. Or the tax break on dividends for shareholders of Canadian firms, which costs $4.1 billion a year, half of which goes to the top 1 per cent. At a minimum, both should be capped.

The obscene executive stock option loophole, which drains about $1 billion annually from the public purse, is even more regressive; 90 per cent of its benefits are enjoyed by the top 1 per cent. This tax break was conceived, in part, to help capital-starved start-ups attract top talent, but it has since been co-opted by executives at established companies as a way to dodge taxes. It is both unfair and ineffective.

Same goes for the $900-million Canada Education Savings Grant. As economists have long warned, Ottawa’s richest post-secondary program does not appear to significantly expand access to education, instead disproportionately helping the well-off pay for school they can already afford.

These are just a few of the much-criticized, highly questionable and largely unscrutinized tax expenditures that, for both fairness and revenue, might be capped or scrapped.

The Liberal government, which came to power promising to make life better “for the middle class and those who aspire to join it,” is highly attuned to the growing anxiety about economic justice. In the wake of the last U.S. presidential election, Trudeau said that Donald Trump was elected in part because too many Americans felt they were not sharing in their country’s economic success. He has made much of his commitment to cracking down on the sort of tax cheating exposed by the Panama Papers.

Yet more than a year and a half into the Trudeau government’s mandate, its record on tax fairness has been mixed. The last federal budget included only very marginal tax reforms, and the tax-expenditure review has apparently been put on hold until the Trump administration clarifies its own tax policy.

It’s not uncommon for governments to promise to constrain tax expenditures, and then to back off. That’s because every loophole, once established, has its passionate defenders. It takes political courage to follow through.

But at a time of slow growth, ballooning debt and sagging commodity prices, of rising anxieties about economic justice and inequality, the Trudeau government has little choice. In a number of senses, it can’t afford to keep transferring billions of dollars to the wealthiest few, especially when there’s no evidence that any larger policy objective is being met.

The government should do as it promised and conduct its review. And it should ensure that tax expenditures are submitted to the same level of scrutiny as any other government spending.

It’s been more than 50 years since the Carter Commission, the last time Ottawa took a comprehensive look at our tax system. Since that time, Canada’s tax code has expanded exponentially in an often thoughtless, piecemeal fashion. We’ve lost track of whether our tax system is doing the job it is intended to do. In taking another look, we will no doubt find significant savings to be had and injustices to redress.

https://www.thestar.com/opinion/editorials/2017/07/21/ottawas-tax-reforms-dont-go-far-enough-editorial.html

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