Frances Woolley is an associate dean and professor of economics at Carleton University
$14.7-billion. That's how much TFSAs would eventually cost the federal government each year in foregone tax revenues, if existing contribution limits were doubled. Why would the Harper government even contemplate this kind of sacrifice – and, moreover, saddle future provincial governments with an additional $7.6-billion revenue hit?
There are good reasons to increase the amount of retirement savings room available to Canadians. Low rates of return on investments, together with increased life expectancies, mean that people have to set aside more to generate sufficient income for their retirement. Many economists believe that exempting investment income from taxation stimulates savings, investment and economic growth, and is fair – people are only taxed on what they earn, not what they save.
But increasing TFSA contribution limits is a bad way of giving people more retirement savings room. Canada is entering difficult demographic times. The baby boomers are starting to get old. In the coming decades, the cost of providing them with health care, old age security, and other benefits will be formidable. But with a shrunken labour force, where will the tax revenues to pay for all this come from?
RRSPs were made for times like these. Because they allow people to defer taxes, they help governments cope with the fiscal challenges of population aging. All the tax revenue foregone when people claimed RRSP deductions throughout the 1980s, 1990s, 2000s will come back to governments now, and in the coming decades, as older Canadians gradually draw down – and pay tax on – their registered retirement savings.
RRSPs leave a legacy of tax revenue to future governments. Increasing TFSA contribution limits does just the opposite – it creates an investment vehicle that is ripe for abuse, whether by generating super-normal returns, or by sheltering income in a TFSA while claiming government benefits. At the same time, it deprives future governments of the opportunity to tax investment income.
I was an early advocate of TFSAs, and still believe they play a crucial role in Canada's retirement system. As Finn Poschmann and Rhys Kesselman put it, "For many low- and moderate-income workers, saving in Registered Retirement Savings Plans (RRSPs) makes little sense, as their tax rates and benefit clawbacks in retirement will be higher than those they face while working." TFSAs give students and others in low-income situations a simple way to get a tax break on their savings.
Yet a $5,500 annual TFSA contribution limit is enough to meet the needs of low-income Canadians. Very few of them have savings levels even approaching this amount. Why double the TFSA contribution limit to $11,000?
It's not about buying votes. The people who would be most likely to take advantage of any increase in the TFSA contribution limit are wealthy older Canadians, who need some place to put their RRIF withdrawals. The bulk this constituency would likely vote Conservative anyway.
It's not about tax reform; a vision of what a good tax system should be. If this government seriously wanted to tax consumption more and tax savings less, it would not have cut the GST.
There's a saying in policy circles: "the costs are the benefits." For some, the revenue foregone by expanding TFSAs is a cost. For others, it's a benefit. Prime Minister Stephen Harper is on the record as believing in small government. One sure-fire way to shrink governments is to deprive them of revenue. Doubling the TFSA limit will do that. Not now, and not in a year from now. But in 10, 20, or 30 years' time, the doubling of the TFSA limit will gradually erode the ability of Canadian governments to raise revenue, redistribute income, and pay for public services.
And some people might figure that's a good thing.