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Economy Lab

Why politicians love boutique tax credits Add to ...

Frances Woolley is a professor of economics at Carleton University



There are economic statements that amount to full-fledged budgets. And then there are budgets, like this one, that barely amount to an economic statement.



Budget 2011 continues the trend towards an ever more personalized tax system with a new Volunteer Firefighters Tax Credit, a Family Caregiver Tax Credit, and a Children’s Art Tax credit. Coming soon: the Marginal Riding Tax Credit, available to all voters in must-win constituencies.

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The irritation such credits generate among economists is completely disproportionate to their fiscal impact. The Children’s Art Tax Credit, for example, is projected to cost $100-million in 2011-12, or a miniscule 0.035 per cent of the $278.7-billion the federal government is planning to spend that year. The importance of the credits is symbolic: they show that smart politics, bad economics outplays bad politics, smart economics every time.



These boutique credits are bad economics for any number of reasons. If the aim of the Children’s Art Tax Credit is to make activities affordable, it’s not enough money to make much difference: the maximum credit, 15 per cent of $500, is just $75. Charities like the Max Keeping Foundation are better at targeting support to families in need.



If the Credit aims to support families with children, it would be simpler to increase the child amount tax credit by $500. This would benefit almost all families, from those who are stretched to find $100 for art classes, to those who don’t think twice about paying $500 for violin lessons, and would not require the creation of millions of tax receipts. Plus, as Tim Cestnick points out in his tax matters column, all of these boutique credits only add to the complexity of the tax system.



But boutique credits are smart politics. First, they appeal to people’s sense that they deserve a break, validate their choices, and reaffirm their sense of self-worth. The Children’s Art Tax Credit goes to good parents, ones who enroll their children in Suzuki violin lessons, not bad parents who spend their money on beer and popcorn. Second, they give people a sense of control. Tax liabilities stop being something outside of an individual’s control. Instead, the plethora of credits available mean that taxes can be reduced through planning and wise choices.



Policies are smart politics for a reason: they appeal to voters. If economists want to have a positive influence on the policy debate, they have to understand voter psychology: why do voters like special tax credits so much? “Smart politics” isn’t a criticism. Sometimes it’s a way of saying “I don’t understand why people like this policy.” At other times, it’s a way of saying, “I understand why this policy appeals to people, but if they were well-informed, they would think otherwise.”



There’s no point in telling politicians that a particular policy is “smart politics, bad economics.” They’ll take it as a compliment, and keep on making the same kind of policy choices.



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