March 17, 2011
Harper’s Tax Boutique
Rethinking Tax Expenditures in a Time of Deficit
Ben Sand and Peter Shawn Taylor
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.
View entire article in PDF (13 Pages)
Peter Shawn Taylor,
is currently Editor at Large of Maclean’s magazine. He earned a Master’s degree in Economics from the University of Alberta in 1989; and was senior analyst for the Alberta Liberal Caucus in the early 1990s under Liberal Leader Laurence Decore. Since then he has worked extensively in journalism. He has been a staff member of Alberta Report, Canadian Business and the National Post, where he was a founding member of the editorial board in 1998, as well as Maclean’s. In addition, he has written widely for publications including Reader’s Digest, Saturday Night, Equinox, MoneySense, Canadian Geographic, Prospect, Globe and Mail, Vancouver Sun and National Post Business. He has given presentations and is a frequent media commentator on public policy issues including daycare, family taxation and poverty.