End boutique credits, lower tax rates and strengthen economic growth says MLI’s Jason Clemens
OTTAWA, March 20, 2012 – Thanks to years of tinkering by successive governments of all political stripes, Canada’s current tax system is littered with tax credits, deductions, and other special treatments that cost the treasury billions but often produce little or no benefit to the country says MLI Director of Research Jason Clemens. This results in higher tax rates, weakened economic incentives and a needlessly complicated tax code that is costly to obey and to police.
In a new briefing paper released in advance of the federal budget, Clemens calculates there are currently 100-plus special treatments offered for personal income taxes alone. Some of these specific tax credits include children’s art classes, school text books, children’s fitness programs, tools for tradespeople and apprentice mechanics, professional and union dues, political contributions, volunteer firefighters, artists, musicians, caregivers, child-care, first-time home buyers, small business, Northern residents, students, miners, and farming and fishing properties. To understand the enormity of these special treatments for personal income taxes, Clemens calculated that in 2011 their total cost (in tax revenue forgone) was $130.2 billion. That is more than the entire amount ($120 billion) collected in personal income taxes.
Most of these special arrangements simply lower the tax burden for certain individuals and businesses without improving incentives overall for workers, savers and investors. Clemens therefore recommends that the federal government eliminate or reduce many of these special treatments in order to fund reductions in personal income tax rates for everyone. This reform would spur economic growth by strengthening the incentives for work effort, savings, investment, and entrepreneurship.
“Nearly all economists agree that the best tax system is the one that imposes the lowest possible costs while providing sufficient revenues to finance government programs and services,” says Clemens. “This means the broadest tax base coupled with the lowest rate possible. Every time government tinkers with the tax base through tax credits and other protections, higher tax rates are required to raise the same amount of revenue.”
In assessing tax complexity, Clemens finds that there is a large number of tax credits and exemptions that benefit a small group of Canadians at the expense of higher tax rates overall. More importantly, many of these carve-outs simply reward individuals and businesses for activities they were already doing anyway, which implies that little net benefit is being created despite substantial costs.
The complexity of these special treatments extends well beyond their direct costs. Clemens cites recent research estimating the cost to individuals to comply with and administer the tax code of between $19 and $31 billion annually. Simplifying the tax code can reduce both direct and indirect costs.
“Tax reform should be a top priority in the coming budget,” says Clemens. “The Canadian government has an opportunity to introduce broad tax reform aimed at reducing the compliance and administrative costs of the tax code as well as reducing the number of tax credits. The proceeds from such a bold reform could be used to reduce marginal personal income taxes, and in doing so, improve the Canadian economy.”
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The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government. www.macdonaldlaurier.ca