Time to tame the targeted tax tinkering

Posted on in Governance Policy Context

TheGlobeandMail.com – Globe Debate
Nov. 14 2014.   Jeffrey Simpson

Some day, someone in high office will undo the damage the Conservatives have done to the federal tax system.

That day did not come Wednesday, when Finance Minister Joe Oliver delivered the annual economic update. If anything, Mr. Oliver bragged about the government’s tax policies. He’s paid to do that, and he likely believes in the policies. But the Conservatives have offended at least three principles of sound tax policy.

First, they have pockmarked the system with little tax breaks directed at this or that group, rather than using those monies to lower taxes across the board.

Second, they have shifted taxes from consumption to income by dropping the Goods and Services Tax by two points.

Third, they have tried to achieve social objectives (such as child care) through the tax system, at great cost to the Treasury without measurable results.

These offences against sound policy flowed from political calculations that disdained sensible economics. If lower taxes are indeed a desirable policy, then ideally you want taxes dropped on incomes across the board, so that taxpayers earning the same amount will be treated similarly.

These policies don’t meet that test. They single out particular kinds of people and families, and offer tax credits depending on family structure and activities pursued. Quite often, the tax credits or benefits (a kind of subsidy) are so small that they do not influence behaviour, except at the margin. Or, they are available to families who don’t need the incentive.

Take for example, the original Universal Child Care Benefit, which was the Conservatives’ answer to child-care costs. It offered $100 a month for each child under 6. That worked out to about $3.30 a day, per child. Ask any parent what that buys. Now, the Conservatives propose to raise the UCCB to $160 a month, or a little over $5 a day, per child. And to offer a benefit of up to $720 for children between 6 and 17.

Of course, families love a cheque in the mail from Ottawa, which is the Conservatives’ political objective. Who wouldn’t? About 1.7 million families get the cheque. They will be reminded of which party got the government to send it to them. And they are supposed to be grateful.

The sums per family are risible when placed against the costs of raising a child. But because so many cheques are being sent, the cost of the program is not – $4.4-billion (!) by 2015-2016. Billions of dollars leave the federal treasury without achieving the intended social purpose.

Now, along comes the Family Tax Cut, otherwise known as income splitting. This new iteration of a campaign promise is less egregious than the one the Conservatives first advanced, but it’s still bad policy, greatly favouring single-earner families. Even with a limit of $2,000 as a tax benefit from shifting income from a high-income spouse to one earning less or nothing, the measure will cost $2.4-billion.

A few billions here, a few billions there, and you’re talking about real money. Then throw in the two GST points, the reduction of which was deplored by almost every economist in the country, and you’re talking about tens of billions of dollars over a decade.

Dubious as the tax changes might be, the opposition parties have been reluctant to propose doing away with them. On the contrary – when the New Democrats unveiled their plan to build daycare, they carefully left the Conservatives’ UCCB cheques untouched.

Neither they nor the Liberals will dare to suggest raising the GST back to 7 per cent, even with offsetting reductions on personal incomes, especially for low-income people. Nor will either party touch a national carbon tax such as the one successfully introduced in British Columbia (although stalled now by Premier Christy Clark’s government) that recycled all the carbon tax revenue into lower business and individual taxes.

Some day, and perhaps we are dreaming, a government with guts and common sense will wipe out these targeted tax cuts and use the money for broad-based tax measures that do not discriminate and pick favourites. It will encourage rational decisions, greatly simplify the tax code and put sound economics ahead of political calculations.

We should live so long.

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