Many of us know the catchy tune by the Canadian band The Barenaked Ladies, If I Had A Million Dollars, but how about multiplying it by 100,000 times? Each year, approximately $100-billion leaks out of the federal government's revenue-gathering system, more or less unseen by the public. As the song says, that amount of money would buy a lot of Kraft Dinner.
The $100-billion leakage – a policy choice to forgo federal government revenue equal to nearly 40 per cent of annual federal government spending – did not get created overnight. It has been built up step by step through what are technically called "tax expenditures" (TEs) that benefit individual taxpayers and businesses. In popular language, they are often called tax credits, or even tax loopholes. The system is administered by the Canada Revenue Agency, but it was developed and implemented by elected governments over many years. Provinces have their own systems of tax expenditures that build on the federal system and add to the revenue leakage.
The massive annual revenue leakage from TEs is over and above the money that has been returned to individual and business taxpayers by reducing tax rates and eliminating specific taxes.
If governments reduced the rate of leakage, they would give themselves more revenue and strengthen their fiscal position without having to raise tax rates, introduce new taxes or cut spending.
The total number of TEs has reached about 190, with seemingly more added in every budget. Some TEs make good policy sense –such as those that encourage Canadians to save for retirement or for their kids' postsecondary education. But for many individual tax expenditure items, which could total as much as $20-billion in annual revenue leakage, governments may be hard-pressed to demonstrate what priority public policy goal is being served or whether a specific measure is actually delivering the intended outcome.
Taking advantage of the myriad tax expenditures has become a major driver of rising compliance costs. It has been estimated that up to 70 per cent of individual Canadians now have someone else do their tax return, in what was supposed to be a self-administered system. For businesses, estimates suggest as much as 2 per cent of their spending is on tax compliance.
Given the massive scale and unintended consequences of TEs, there are good reasons to examine the overall benefits, relative to the revenues forgone. The Conference Board of Canada, which is launching a new research centre on tax and fiscal incentives, sees three central issues with the existing system of Canadian TEs.
1. Value for money
There has been remarkably little regular public analysis of whether specific tax expenditure items are actually achieving their intended policy purpose. If they do not, they represent a waste of scarce public resources. For example, do Tax Free Savings Accounts actually encourage more Canadians to save? Or are they merely a subsidy for wealthier Canadians, for savings that would have occurred anyway? A public review of the evidence would be helpful in answering that question.
2. Alternative uses
Similarly, there has been little public debate on whether the 190 or so TEs reflect the nation's highest public spending priorities. Additional annual spending of $100-billion – or even the lesser amount of $20-billion – would surely attract considerable attention, yet tax expenditures largely escape public review and discussion. There are obvious alternative uses for the forgone revenue, such as: cutting tax rates across the board; eliminating some taxes entirely; or increasing spending on specific highly valued public services.
3. Interaction among TEs
Finally, there has been little discernible analysis of whether different tax expenditures are working to reinforce and support one another, or are pulling in different directions – thereby dissipating their intended impact.
The tide may be changing. As part of its effort to restore fiscal balance in 2015-16, Quebec has begun a review of its system of fiscal incentives, particularly for business, to determine where value for money is not being achieved and where it can capture some additional revenue. If the Quebec exercise bears fruit, others may be interested in following suit.
So what would you do, if you had $100-billion? Time for a discussion, Canada.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.
Glen Hodgson