A recent report from Ontario’s Institute for Competitiveness and Prosperity makes sensible recommendations for changes in taxation policy. The focus? The ineffectiveness of a whole range of politically loved, and economically loathed, tax credits.
The institute focuses on its home province, but its research has national implications. That’s particularly true of this latest report’s criticism of federal tax policy, notably a series of tax credits introduced since 2006 – the year that the Conservatives formed a minority government.
These tax breaks include the Home Renovation Credit, the Public Transit Credit, and the Children’s Arts Credit. The report makes a convincing case that, if any form of government support is needed in these areas, direct grants would work better. They’d also be less likely to disproportionately favour more affluent households.
The exception that proves the rule, in the institute’s view, is the research and development credit, which – the institute believes – more than earns its keep by encouraging productivity growth.
Few of the report’s recommendations are likely to be popular, and one will be especially difficult to sell: the phasing out of a tax deduction that gives favourable treatment to small rather than large businesses. The argument is made that Canada has a particularly urgent need to development strong exporting companies, which are typically bigger enterprises. But small business groups are apt to be well organized in promoting their interests.
But these tax programs were created to charm voters, not auditors-general. “These credits mostly likely exist for political reasons,” say the authors, “rather than their economic merits.” No kidding. It’s what makes these cases of misspending so easy to start, and so hard to unwind.