Harper's tax boutique: Tax expenditures in a time of deficit
By Ben Sand and Peter Shawn Taylor
Governments spend your money in a wide variety of ways. Making purchases, paying wages and sending out cheques are certainly the most popular methods. And when Finance Minister Jim Flaherty unveils his 2011 budget on March 22, we can expect considerable attention paid to this sort of spending.
But a government can spend in other, less obvious, ways as well. For example, it may choose not to collect tax money that it is owed. Tax deductions and credits of this sort are called 'tax expenditures.' And if Ottawa is serious about getting its financial house in order, it needs to rein in spending in all its forms – including spending through the tax system.
This year the federal government will give away over $100 billion worth of tax expenditures on personal taxes alone. The biggest single item is the deduction on registered retirement savings plans, allowing Canadians to save $7 billion in taxes annually. While few may quibble with the value of RRSPs, many of the Harper government's recent tax expenditure innovations deserve closer scrutiny.
Beginning with his first budget in 2006, Mr. Harper has been an enthusiastic creator of what are called 'boutique tax cuts.' Unlike tax cuts that treat all Canadians equally -- such as reductions in rates or increases in the basic personal exemption amount -- boutique tax cuts only benefit select groups of people. The Child Fitness Tax Credit, Public Transit Credit, Tradespersons' Tool Deduction and the University Textbook Amount, to name just a few of Harper's boutique tax cuts, each offer tax reduction to a small slice of the population.
A close look reveals the inherent flaws, and substantial scope for savings, with these selective tax cuts.
The Children's Fitness Tax Credit, for example, allows parents to claim up to $500 for their child's participation in such things as hockey, dance or kung fu. Now everyone enjoys saving money, but if encouraging children to play sports is deserving of a tax expenditure, then it should target lower-income families who might struggle to pay these fees. This is not the case, however. Two-thirds of all claims and 70 percent of the dollar value of this tax cut go to tax filers with incomes above $50,000. This is a tax expenditure directed mainly at the middle class.
And according to a University of Alberta survey of 1,000 parents, the fitness credit is also irrelevant to decisions to enroll children in youth sport. Well-off families enroll their children regardless, and low-income families are not able to access the credit because they can't afford to pay the fees in the first place. The Children's Fitness Tax Credit thus fails in its stated objective of encouraging more children to play organized sports.
Despite its ineffectiveness, however, the children's fitness credit figures prominently in federal ads boasting of Ottawa's tax cuts for families. This is because the purpose of Harper's boutique tax cuts is political, rather than practical. By offering targeted tax expenditures to select groups of Canadians – transit riders, families with children, workers with tools etc ? the Conservatives hope to win their favour come election time.
All of which suggests that if we are looking for places to reduce wasteful government spending, boutique tax cuts are a good place to start.
Figuring out the gain to government coffers from eliminating politically-motivated tax expenditures is complicated by the progressivity of the tax system and interplay between different credits and benefits. Our calculations show that removing this particular boutique tax cut would provide Ottawa with $67 million in savings. Cutting the Public Transit Credit would add another $100 million. A comprehensive review of all federal tax expenditures holds the promise of even more substantial savings.
Of course eliminating a boutique tax cut is not the same thing as raising taxes. It simply gets rid of ineffective and wasteful government tax expenditures.
In the U.S., President Barack Obama's recent bipartisan National Commission on Fiscal Responsibility and Reform placed a strong emphasis on reducing tax expenditures as the key to solving the massive U.S. deficit. In Canada, the gains from eliminating boutique tax cuts could also go towards the deficit, or be used to fund real and effective tax relief for all taxpayers. Regardless, the result would be a simpler and more efficient tax system.
It's time to give tax expenditures as much scrutiny as the rest of government spending.
Peter Shawn Taylor and Ben Sand are authors of "Harper's Tax Boutique: Rethinking tax expenditures in a time of deficit" published March 17th 2011 by the Frontier Centre for Public Policy. See www.fcpp.org.