In condemnation of loopholes

This was my opening monologue guest-hosting The Arena on Jan. 12: Oh oh. The federal government is spending tens of billions more than they admit. Through tax loopholes.

When the Finance Department published its latest attempt to list them all and estimate their cost, the Globe and Mail headline “Flaherty’s tax credits cost Ottawa billions” prompted a colleague to grump “The left always talks as though the money belongs to the government … It’s our money. Tax cuts don’t ‘cost’ the government since it’s not their money to start with.”

Well, you should be grumpy. But not because he’s right. Because, for once, the Globe is.

As you may imagine, I’m all for tax cuts. I want the government to spend less and tax less. And when it must tax, to raise the money it needs to pay for its programs, rates should be as low as possible on as broad a base as possible so they have the least possible impact on our wallets and our behaviour.

Tax credits do the opposite. They grant special favours to some group the government likes, or to reward some behaviour the government likes. They are social engineering. And they force the rest of us to pay more.

If the government cuts everyone’s income tax by $75 we all pay less of our income and that’s good. But if it gives everyone who puts their kid in art class a $75 “tax credit”, that is, $75 back from the government, someone else has to come up with that $75 and that’s bad. After all, government spending hasn’t gone down. So everyone who doesn’t enroll their kid in art class has to pay a little bit more to cover the total $100 million cost of this particular goody for those who do.

Now tell me: What’s the difference between the government giving you a $75 “tax credit” and it giving you 75 bucks because you enrolled your child in something it considers artistic (which oddly includes chess… and if you don’t agree you still pay.) Right. None.

So why do it through the tax system? Simple: It lets you spend without admitting you’re spending.

If you’re wondering how much it lets them spend on the sly… Finance wonders too. Their report warns “Many of the tax expenditures … interact with each other such that the impact of several tax provisions at once cannot generally be calculated by adding up the estimates and projections for each provision.”

In short, the tax system is so complicated even the people who created it don’t know what it does. Which certainly suggests it’s not an effective policy instrument. But as I’ve noted before, the main appeal of the individual loopholes to most politicians isn’t what they do for culture, the economy or fairness. It’s what they do for their reelection prospects. (You can’t imagine how many press releases the government put out touting the “Volunteer Firefighters Tax Credit” alone, but unless you think they think people just love firefighters – down girls – the only explanation is they wanted every one of them to know, on election day, who’d given them money.)

Despite Finance’s warning that their monster is too complex even to measure, I did a quick and dirty total of the 128 personal income tax loopholes listed, leaving out those under $2.5 million that were too small for Finance to bother calculating, a few big ones I thought shouldn’t count like the basic personal exemption, and some that looked like legitimate attempts to avoid double-taxing. The remaining stuff like the $280 million Tuition Tax Credit, $2 billion Canada Employment Credit, $15 billion for Registered Pension Plans etc. produced a total north of $70 billion.

If all this were counted as the spending it really is – coming out of the general tax revenue pool to reward things and people the government likes – rather than entered as a frugal, small-government reduction in revenue, federal budgets would top $350 billion, a quarter over their on-paper $280 billion. And if it didn’t exist, personal income taxes could be $70 billion lower – hardly trivial given that they only net just under $120 billion now. (The 67 corporate ones worth about $26 billion – against just over $30 billion in net revenue – are even worse.)

Finance estimates the personal stuff isn’t even effective income redistribution because the government has managed to cram enough something-for-everyone into it. But in any event if you want to hand out money to relieve poverty, call it spending because that’s what it is.

Torquing the tax code for politically advantageous social engineering then disguising it as tax relief makes reducing the meddlesome intrusion of government into our lives and our crushing tax burden much harder. And it’s dishonest.

You should be mad.

UncategorizedJohn Robson