The Conservative Party’s 2011 election platform titled “Stephen Harper’s Low-Tax Plan” promised a bountiful menu of tax goodies. The government has delivered appetizers such as the Children’s Art Tax Credit and the Family Caregiver Tax Credit as well as an amuse-bouche in the form of a Search and Rescue Volunteers Tax Credit.
Diners are now contemplating the two main taxation dishes pledged in the Tories’ 2011 platform. Already the pot on the front burner is boiling over, with the federal chefs wavering over whether the kitchen should serve up the promised but scorched income-splitting dish in next year’s budget.
Even the chef of finance has smelled something foul emanating from this pot. Income splitting would consume nearly $3-billion of federal tax revenues annually with a disproportionate share going to the richest families. Moreover, true foodies are not convinced of the authenticity of this dish, as it addresses an illusory equity issue while distorting marital choices and women’s home-versus-work choices.
Relatively neglected by culinary critics is the pot simmering on the back burner, which contains the other featured tax item from the Tories’ electoral cuisine – doubling the contribution limits to Tax-Free Savings Accounts.
Yet, this super-size-me TFSA dish would suffer from the same deficiencies as the income-splitting course: tantalizing to many but served only to the elite few, and its nutritional values highly disputed. Moreover, the ultimate total bill for this menu choice would dwarf that of income splitting.
Benefits from expanding the TFSA platter would go disproportionately to the highest earners and wealth holders. Current provisions for Registered Pension Plans (RPPs), Registered Retirement Savings Plans (RRSPs), and TFSAs already provide almost everyone with ample fare to sate appetites for tax-sheltered savings.
For example, a $50,000 earner can contribute 18 per cent of that ($9,000) in RPPs and RRSPs combined plus another $5,500 in a TFSA. That total of $14,500 is more than one-third of the worker’s roughly $42,000 net-of-tax income. Very few individuals save at such a high rate, and none need do so to secure a comfortable retirement.
One can repeat the math for an individual earning $100,000 and come to a similar conclusion: current tax provisions are more than adequate for all but the most ardent saver. However, for individuals earning above $200,000, the $24,000 limit on RPP/RRSP contributions along with the TFSA are more binding on savings rates.
The current system thus constrains only the top 2 per cent of income earners, and they are the ones who would reap most of the gains from doubling TFSA limits. Though not disclosed on the menu, the enlarged TFSA dish parallels the income-splitting one in being a course fit mainly for those with rich palates.
While the original TFSA recipe served the needs of many moderate and middle-income savers, the super-sized portion would benefit few other than the already well-fed. Some in special circumstances – such as retirees obliged to withdraw tax-sheltered funds exceeding their current needs – would also benefit but with no stimulus to new saving.
Also like income splitting, the claimed policy goals of enlarging the TFSA are unlikely to be fulfilled. The asserted purpose is to facilitate increased personal savings for retirement and other needs. Yet extensive empirical research on the savings effects of tax provisions like RPPs, RRSPs, and TFSAs uncovers no strong or unequivocal results.
Many individuals are “target savers,” who can attain their chosen retirement wealth level with lower annual savings when the tax on their investments is lightened. For high wealth holders, raising the TFSA limit will be a pure tax windfall with shifts of previously accumulated taxable assets into the tax-free account and no new saving.
While the initial revenue cost of doubling TFSA limits would be modest, the long-run budgetary impact could be enormous – much larger than the cost of income splitting. UBC economist Kevin Milligan has estimated the annual revenue loss to the federal treasury under a mature scheme at potentially more than $10-billion.
Moreover, unlike with income splitting, the provinces would be compelled to partake in an expanded TFSA meal since they use the federal income tax base. Total provincial revenue losses would be about 60 per cent of the federal figure.
Prospective diners at this venue should be forewarned of the peculiar house rules. No reservations taken, and many will line up at the door. But few patrons will actually be served, and their bills will be paid entirely by the masses who are turned away.
Rhys Kesselman is Canada Research Chair in Public Finance with the School of Public Policy, Simon Fraser University. The original TFSA was based in part on his research.