A winning proposal for tax reform

Posted on January 19, 2015 in Governance Policy Context

NationalPost.com – Full Comment/Editorials
January 19, 2015.   National Post Editorial Board

Ahead of the 2006 election, the federal Conservatives announced that, if elected, they would implement or expand a variety of tax credits. Among the proposals the Tories made in that campaign: An Apprenticeship Job Creation Tax Credit, worth up to $2,000 for a business that took on an apprentice; a child fitness tax credit of up to $500 per child enrolled in sports or fitness programs; and a $500 tax credit for post-secondary students to defer the costs of textbooks.

There were more, but you get the idea. And there was more where those came from. In the years since, the Tories have sprinkled new or enhanced credits everywhere there were a few votes to be won: a tradesperson’s tools deduction, a volunteer firefighter’s tax credit, even a bump to the meal tax deduction limit for long-haul truckers.

It’s not hard to grasp why the Tories have fallen into this pattern: Tax credits are an easy way for a government (or a party desiring to form a government) to offer up a few trinkets and baubles to every conceivable group, no matter how big (parents) or small (peckish truckers). But they’re generally terrible economic policy. Whatever political utility they may have, tax credits needlessly complicate our tax code, distort economic decisions and cost the federal government billions.

How many billions? A recent report by the Fraser Institute put the total cost of all federal “tax expenditures,” as they’re called in official parlance, at $155-billion. Some of these are defensible: for example, RRSPs and Tax Free Savings Accounts, though counted as tax expenditures, do not introduce new distortions into the tax system, but rather remove them, preventing the double-taxation of savings that would otherwise occur. But the report identified no fewer than 68 tax credits that served mostly political ends and complicate the tax code for no identifiable benefit to society. Total cost: $23-billion.

An extra $23-billion in federal revenue would have balanced the books two years ago. Or, as the Institute recommends, it could be used to dramatically lower tax rates on the middle class, dropping both the current 22% and 26% brackets down to the 15% base rate, at no net cost to the treasury. That would leave 98% of Canadians paying the lowest rate, while the remaining 2% paid the 29% top rate. (The report includes a further option of raising the threshold at which the top rate would apply to $250,000, though this would mean some net loss of revenue.)

A purist might prefer the focus were on cutting the top marginal rate. But the approach taken in the Fraser report has the singular advantage of being politically saleable. Indeed, surely every party should be able to sign onto a proposal that would make for a simpler tax form, a more efficient economy, and lower tax rates for millions of Canadians. That is, if political parties saw tax policy in those terms, rather than as a vehicle for distributing goodies to carefully selected demographic groups. But hope springs and all that.

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