Budget may aim to close tax loopholes, which isn’t as easy as it seems

Stephen Gordon on fixing outdated tax credits

(Sean Kilpatrick/CP)

(Sean Kilpatrick/CP)

Finance Minister Jim Flaherty has dropped hints to the effect that the March 21 budget will include efforts to revisit the system of tax expenditures: the deductions, exemptions and credits for various activities, firms and people. Eliminating tax loopholes always sounds like a good idea, but it’s not always obvious what the distinction is between a loophole and an integral part of a well-designed tax system.

The largest single item in the 2012 edition of the Department of Finance’s report on tax expenditures is the basic personal amount deduction: more than $30 billion in foregone tax revenues. There is no way the government will remove this tax deduction, nor should it: public finance theory recommends a deduction covering the minimal income required to sustain a basic existence. Other big-ticket items include the system of RRSPs ($15 billion) and exemption of groceries from the GST ($3.9 billion). You can see why the business of eliminating loopholes is not simply a matter of wiping the slate clean. There are a lot of babies in that bathwater.

This is not to say the current system is perfect; far from it. The most pressing problem is transparency. After a tax expenditure has been implemented, it pretty much disappears from view—they don’t show up in the budget items, and they are not subject to any formal process of review. Some of those measures are probably designed to solve problems that no longer exist.

Many tax expenditures are spending in all but name: the working-income tax benefit is best thought of as a transfer to low-income households, but up until last year it was classified as a tax expenditure. There are many, many other tax expenditures indistinguishable from regular spending measures—think of the children’s art tax credit and other boutique tax credits that have become a trademark of Conservative budgets. But since these programs are classified as tax expenditures, they can be marketed as “tax relief” and not “increased spending.”

Perhaps the best way to proceed is to pick up on a suggestion of John Lester in a paper published by the University of Calgary’s School of Public Policy: integrate tax expenditures into departmental budgets and treat them in the same way they treat regular expenditures. For example, the various business tax credits would be included in the budget of Industry Canada and the tax expenditures for video and film production would be part of Heritage Canada’s budget. It would then be up to the various departments to decide if the expenditures were in fact the most efficient way of achieving their policy goals.

Stephen Gordon is professor of economics at the University of Laval in Quebec City, and a regular contributor to the Econowatch blog at Macleans.ca


Budget may aim to close tax loopholes, which isn’t as easy as it seems

  1. As Andrew Coyne pointed out, Flaherty now proposes to undo all the damage he did over his past 7 budgets.

    The fact is the Harper-Flaherty Conservatives brought in tens of billions in boutique tax cuts aimed at weaseling votes instead providing benefits to the economy. Now that it’s tax season, this is painfully obvious as the Harper Government leeches millions of taxpayer dollars to promote itself with “Economic Action Plan” ads touting these useless tax cuts.

    Another way Harper plays politics with the economy is by “starving the beast.” According to his 2009 budget, he is cutting taxes by $44.4B/yr. As Mr. Gordon pointed out before, the strategy is a 4 step program: 1) recklessly cut taxes; 2) manufacture a budget crisis; 3) justify deep cuts to spending; 4) go to step 1.

    When the Liberals were in power, they did what they thought was best for the economy based on the evidence and it got solid results. All Harper has done is squander the advantages he inherited from the Chretien-Martin Liberals.

    • I agree for the most part with you except for your last assertion. The Liberals are just as corrupt and scandalous as the conservatives, this is what happens with too much time misleading the public. The Liberal governments at least were not as ideologically driven as the Conservatives are, the Liberals were more bent on preserving power in a nonrepresentational system and playing around with undemocratic constitutional reform. Government should be focusing on sustainable prosperity and equal prosperity if we want to continue to call ourselves a Federal Nation, or else we should let the country dissolve and have provinces fight it out for another inevitable Federal system (which is obviously devastating for many reasons).
      Thankfully we are not a 2 party system like the crippled US, and have an effective democratic administrative alternative that focus on Federal Unity… the only party that believes Canada is a Country, not a mix match of self-invested provinces (or states, which seems to be the direction the Cons and Libs have wanted to frame the dialogue).

    • If you believe that reducing the amount of the economy that is taxed and then spent according to how whomever is in Ottawa thinks it should be is good for the economy then “starving the beast” is more like playing economy with politics. The Cons had no wish to blow up the deficit as much as the stimulus spending did, and now having had their hand forced in that they do seem to be hoping to get long term reductions in response to short term spending. That’s a pretty reasonable strategy.

      The GST cut was not top shelf economics and the child tax credit is costly but they were done in a much rosier scenario – and for the credit as an alternative to a government daycare program that had a good chance of being more expensive if it was delivered at all.

      It’s ironic how much heat Harper has taken for being “anti democratic” when in promising and delivering a reduced GST and a child care policy which were both promised and never delivered by the Liberals he’s probably done more to improve Canadian’s respect for federal governments than anyone since Mulroney and, I’d guess, Trudeau.

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