What’s the difference between a tax break and a tax loophole? Tax breaks are legitimate deductions that I make and loopholes are shady tax dodges that others use. Seriously, they’re all what economists call tax expenditures. The only difference between them is whether they progressive or regressive, and how much they improve equality.
Some tax expenditures benefit low and middle-income families such as deductions for union dues and post-secondary education. Others benefit wealthy Canadians such the mineral exploration deduction and the capital gains allowance.
Regardless, they are all uncollected taxes. And it’s a lot says David MacDonald, senior economist for the Canadian Centre for Policy Alternatives (Monitor, Jan/Feb, 2017). The government of Canada gives up almost as much in tax expenditures as it collects in taxes. In 2011, tax expenditures were $103 billion while collected taxes were $121 billion.
Tax expenditures serve a useful purpose if they improve equality. Equality is an indicator of how happy citizens are, be they rich or poor, as I argued in an earlier column (Conservatives can increase chances by decreasing happiness, Dec. 14, 2016).
The question is whether tax expenditures increase equality or reduce it. Are they progressive or regressive? MacDonald has analysed tax revenues and found that of 64 tax expenditures, only five are progressive and go to the lower half of income earners. The remaining 59 tax expenditures go to the top half. The tax benefit for low-income earners is a paltry $130 while for the richest it’s $15,000. Is it any wonder that “tax loopholes” seem shady? Low income earners see it for what it is –a benefit that only the rich receive.
With the feds in the fiscal hole, and with almost as many taxes uncollected as collected, I would have thought that Finance Minister Morneau would have use the last budget to reform taxes. But he didn’t according to Kevin Milligan, professor of economics at UBC.
“In the budget, the government did make some good moves with the tax measures it tackled, but it did not tackle enough. That is, Mr. Morneu may have grabbed some of the low-hanging fruit, but he left a lot of fruit further up the tree untouched, (Why Morneau got cold feet over eliminating Canada’s bloated tax-credit system, Globe and Mail, Mar. 24, 2016.)”
On the plus side, the feds are still committed to reviewing corporate tax shelters that allow income to be split with partners and lower taxes. And they simplified the Canada Caregiver Credit for those caring for an elderly or infirm family member.
It’s OK to eliminate tax breaks but not my tax break. Milligan elaborates:
“For every tax expenditure, there is a particular constituency that benefits, while costs are dispersed across all taxpayers. Firefighters like their volunteer-fighter tax credit; teachers like their teacher-school-supply credit and first-time home buyers like their home-buyer tax credit.”
The solution, adds Milligan, is to eliminate entire bundles of tax breaks. That way no particular group feels targeted by tax reform.
Tax reforms may be painful but they’re necessary to improve equality. We’ll all be happier for it.