Tax Credits Unfair And Ineffective: Why politicians like them, and you shouldn’t

Peter McCaffrey, Taxation

When elected officials propose ideas, they usually sound great on the surface. Their policies have solid aims and their intentions are good. But policies should always be evaluated by their results, not only their intentions.

Whether an idea will work isn’t enough. Whether a policy is the best way to achieve a desired outcome is just as important.

The disconnect between ideas and results is demonstrated by the provincial adoption of tax credits.

In the recent Alberta election, the Liberal Party, the NDP and even the ostensibly libertarian Wildrose Party announced plans to re-introduce a Film Tax Credit to Alberta as part of their election platforms.

Tax credits are designed to reduce the financial burden on a particular industry to create jobs and improve living standards for all. They do so by encouraging outside investment into a local economy and provide incentives to existing business to expand.

The theory is sound, but is a tax credit the best way to achieve these aims?

Should we have to bribe particular industries in to moving to and setting up shop in a specific place? Surely we should be looking for a more sustainable solution by focussing on creating a place that people want to move to and where they want to set up business.

In contrast to Alberta, the Saskatchewan Government announced last April that the Saskatchewan Film Employment Tax Credit, first introduced in 1998 and expanded in 2006, would be discontinued.

The removal of the tax credit dominated much of the news coverage of the budget announcement, even overshadowing a balanced budget that included major school projects and significant highway spending.

Opposition members jumped at the opportunity to attack the government for "abandoning" the film industry and for the "cultural loss."

The film industry cried doom and gloom, claiming that the plan would kill the entire film industry in Saskatchewan, while news editors indulged them, producing menacing sounding headlines such as  "Death blow to Saskatchewan film industry" and "Saskatchewan Film Gets Gouged."

Supporters are now even planning to go door-to-door in Saskatoon and Regina to collect signatures for a petition to reverse the decision.

Films were made in Saskatchewan before the introduction of the tax credit, so it’s hard not to think that the concern might be a little overblown.

Commentators like Simon Enoch from the Canadian Centre for Policy Alternatives complained that the government was cutting a tax credit for something that he likes – the arts – but keeping tax credits for things he doesn't like as much – like the resources industry. 

Enoch’s attitude illustrates the inherently arbitrary nature of tax credits. They often rest on the whim of politicians who also each have their own individual preferences. Politicians are also often less interested in fair and efficient tax systems and more in pleasing people to support their re-election efforts.

A predictable tax system that doesn't continually change to favour the preferred industries of whatever government is currently in charge would be much more attractive to business as it allows them to plan and invest for the long term.

It also begs the question as to why a government should reduce the cost of doing business for one relatively small and very specialized economic group.

Why not offer equally generous tax credits to all sorts of other industries like the music industry, or the tech industry?

And while we're at it, why not give a tax credit to a variety of corner shops, restaurants and other local businesses? They create jobs too.

In fact, couldn't we cut out the middle man, remove governmental ability to hand out arbitrary favours to their favoured industries and simplify the tax code at the same time, by just giving a tax credit to everything?

If we want every industry to grow and create jobs, why can't everyone receive a tax credit?

We could even just call it a tax cut.