In an era of fiscal austerity, it makes sense to scrutinize Ottawa’s tax expenditures (tax credits and deductions) with as much rigour as one uses to scrutinize direct government spending. Tax expenditures related to personal income tax total $100-billion per year.
This report briefly surveys the tax policies of the Harper government and takes a closer look at the targeting and effectiveness of two ‘boutique’ tax breaks: the Public Transit Tax Credit and the Children’s Fitness Tax Credit. Both are non-refundable tax credits. Non-refundable tax credits provide a greater benefit to higher income tax filers.
While only 25 per cent of individual tax filers report annual income above $50,000, this income group represents a disproportionate percentage of claimants for these two boutique tax breaks. For the Children’s Fitness Tax Credit, 65 per cent of claimants have income above $50,000. For the Public Transit Tax Credit, 39 per cent have income above $50,000. These tax breaks are thus skewed toward middle- and upper-income earners. While the existence of such tax credits may create a political benefit for the federal government, this alone does not represent an appropriate use of taxpayers’ resources.
The tax breaks also fail to meet their stated policy objectives. The Children’s Fitness Tax Credit was shown to have limited effectiveness in encouraging greater physical activity by children, particularly those from low-income families. The Public Transit Tax Credit has been criticized for failing to reduce greenhouse gas emissions, which is its objective.
Eliminating these two poorly targeted and ineffective boutique tax breaks could save the federal government $164-million annually. This money could then be put toward deficit reduction, more-efficient forms of tax relief or policies that better target lower income Canadians. Far greater changes would be possible with the elimination of a broader selection of tax expenditures.
In his 2010 budget, Finance Minister Jim Flaherty vowed to “increase restraint on government spending … [and] aggressively review all departmental spending to ensure value for money and tangible results. With the goal of eliminating the deficit over five years, he promised to reduce planned government spending by $17.6-billion.
However, direct government spending is only one aspect of overall government outlays. Equally significant is the role of tax expenditures – benefits or credits provided to particular classes or groups of taxpayers for a variety of purposes. Tax expenditures represent potential revenue not collected by government. Tax expenditures vary widely in size: from $7-billion for Registered Retirement Savings Plans to $5-million for the Infirm Dependent Credit. For 2010, the Department of Finance lists over $100-billion in personal income tax expenditures.
Despite the significance of tax expenditures as a share of total government spending, there appears to be little interest within government to review tax expenditures. The 2010 budget made no promise to scrutinize tax credits in the same manner as direct government spending is scrutinized.
Tax expenditures should be considered on an equal footing with direct government spending. A tax expenditure that fails to meet its stated objective should be eliminated. Consider a tax credit intended to encourage some beneficial activity, such as planting trees. If evidence shows this credit is irrelevant to a taxpayer’s decision to plant trees, it should be abandoned and the tax reduction rolled back.
Further, it seems reasonable that tax expenditures should be targeted toward those families most in need. Evidence that certain tax breaks disproportionately benefit middle- or upper-income brackets violates the concept of effective targeting and raises the possibility that such tax breaks exist for purely political reasons.
Finally, the elimination of all or most tax expenditures would simplify the tax code and provide an opportunity for a substantial reduction in basic rates. This would greatly enhance the efficiency of our tax system.
This backgrounder investigates the Harper government’s boutique taxes and the extent to which these tax innovations meet their stated objectives.
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