This column part of The Globe's Wealth Paradox series – a 10-day in-depth examination of our growing income inequality and the best ideas available for improving upward mobility for all.
Canada’s tax system is a mish-mash of deductions, exemptions, credits, transfers, and rates with no unifying objective or premise which disproportionately benefits the wealthy. A simple way to tax the rich and restore fairness in our tax system is to reduce the numerous and sometimes overlapping tax expenditures that do not have clear public policy benefits and which benefit high income individuals at the expense of low income households. Doing so would free up much needed funds for targeted tax and income relief to those households that need it the most.
According to the Conference Board of Canada, there are now nearly 200 tax expenditures related to personal income at the federal level alone. These federal tax breaks result in an estimated $100-billion of foregone tax revenue annually. It might surprise most Canadians to learn that these tax breaks amount to nearly 80 per cent of total personal income taxes collected. Without these tax breaks and assuming no behavioural changes, we could collect $225-billion.
Tax expenditures are also known as tax breaks and include both tax credits and deductions. In essence, tax expenditures represent revenues that the government has elected not to collect from tax payers for one reason or another. The problem with many of these tax expenditures is that they fail to produce any discernible societal benefit, they disproportionately benefit high income tax payers, they distort the fairness of our tax system, and add layers of unnecessary complexity.
Some of these tax expenditures may be popular with tax payers, but their popularity is misplaced. For example, research has found that the Child Fitness Tax Credit and the Public Transit Amount, directed $107-million (70 per cent of the value of these tax credits) in tax relief to the top 25 per cent of tax filers. Because these tax credits are non-refundable not all households that claim them actually derive any benefit at all, demonstrating the complexity these credits add to our tax system.
Other tax expenditures are not well known at all. For example, there’s a deduction and a tax credit for investors who purchase qualifying flow-through shares (FTS), common shares in oil and gas companies that pass on tax deductions to the investor. While industry lobby groups claim this tax treatment greatly benefits exploration in Canada, in reality FTS mean that tax payers are shouldering the burden associated with high-risk investments by high-income individuals. In fact, investments in FTSs are predominately done for tax planning reasons and are actively marketed to investors who are looking for last-minute tax deductions and credits. An unintended cost of the FTS regime is that it is likely shifting investment dollars away from other, less risky, and unsubsidized investments.
Another example is the special deduction on stock options. It has been estimated that limiting this deduction would increase taxes paid by wealthy Canadians by approximately $300-million a year.
Lindsay Tedds is an Associate Professor in the School of Public Administration at the University of Victoria. You can follow her on twitter @LindsayTedds.