Tax breaks the same as spending

Posted on January 17, 2012 in Governance Policy Context

Source: — Authors: – news
Posted: Saturday, January 14, 2012.   By John Robson, Parliamentary Bureau

Give the finance department credit for its annual attempt to list Canada’s tax loopholes and estimate their cost. But then recoil in horror at the resulting tens of billions of dollars in disguised spending. Yes, spending. That’s what tax breaks really are.

Many people object to this description, and headlines such as the Globe and Mail’s “Flaherty’s tax credits cost Ottawa billions”, claiming a tax cut is just the state giving us our own money back. But that’s not what so-called “tax credits” are.

I’m all for real tax cuts. I want governments to spend less and tax less. And when they must tax, to raise the money they need to pay for their programs, rates should be as low as possible on as broad a base as possible, to minimize the impact on our wallets and on our choices. We shouldn’t be shopping, working or living in one place rather than another because of different tax rates for different behaviours.

That’s exactly what tax breaks make us do. And it’s why they’re not tax cuts but politically manipulative social engineering. They grant special favours to some group the government likes, or reward some behaviour the government likes, and force the rest of us to pay more.

If the government cuts everyone’s taxes by $75 we all hand over less of our income. But if it gives everyone who puts their kid in art class a $75 “tax credit”, that is $75 back from the treasury (they do: see the full list at, someone else has to come up with that $75. Since government spending hasn’t gone down, everyone who doesn’t enrol their kid in art class has to pay a little bit more to cover the total $100 million cost of this particular goody for those who do.

Now, what’s the real difference between the government giving you a $75 “tax credit” and paying you $75 because you enrolled your child in something it considers artistic (which oddly includes chess)? None.

So why do it through the tax system? Simple: It lets you spend without admitting you’re spending.

If you’re wondering how much it lets them spend on the sly, the finance department wonders too. Their report warns: “Many of the tax expenditures … interact with each other such that the impact of several tax provisions at once cannot generally be calculated by adding up the estimates and projections for each provision.”

In short, the tax system is so complicated even the people who created it don’t know what it does, which certainly suggests it’s not an effective policy instrument. (Mind you, the main appeal of loopholes to politicians isn’t what they do for culture, the economy or fairness but for re-election prospects.) But despite the department warning the monster is too complex even to measure, I did a rough sum of the 128 personal income tax loopholes listed.

I left out those under $2.5 million that the finance department doesn’t bother calculating, and a few big ones I thought shouldn’t count, such as the basic personal exemption, fiscal transfers and attempts to avoid double-taxing. And still got over $70 billion. It’s just an estimate, but roughly the right size. And huge given that federal personal income tax nets just under $120 billion after this $70 billion in targeted givebacks. Loopholes amount to nearly 60% of net revenue.

If all this were counted as the spending it really is, instead of dishonestly entered as a frugal, small-government reduction in revenue, federal budgets would top $350 billion, a quarter over their on-paper $280 billion. And if it didn’t exist, personal income tax rates could be slashed by a third. (The 67 corporate ones worth about $26 billion, against just over $30 billion in net revenue, are even worse.)

Finance estimates the personal exemptions don’t even redistribute income much, because they’re so broadly available. But in any case if you’re giving out money to relieve poverty you should call it spending because that’s what it is.

Riddling the tax code with politically advantageous loopholes then disguising it as tax relief makes reducing the crushing burden of government much harder, including its meddlesome intrusion into our lives. And it’s dishonest.

Now there’s something to object to.

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