The cheers from economists were audible when Marc Garneau recently announced that he believes Canada should "get rid of special tax preferences and make our tax system more efficient." The complexity and distortions of the tax code reduce productivity and Canadian economists have long called for an overhaul of the system. However, without details, this economist worries this is not a serious proposal.
Each year, the federal finance department issues a report of each of these tax preferences, known as tax expenditures, which are tied to income tax, corporate income tax, and GST or HST. The 2011 report includes everything from the Children's Arts Tax Credit to the Mineral Exploration Tax Credit for Flow-Through Share Investors.
Mr. Garneau has not indicated which of these tax expenditures he would remove. Getting rid of them all is a non-starter, as it includes untouchables such as Registered Retirement Savings Plans and the GST or HST exemption for basic groceries. If or when Mr. Garneau releases the details of his plan, he will be forced to pick and choose which tax exemptions to keep and which to abandon.
Picking and choosing which tax expenditures to keep and which to abandon is politically difficult, if not impossible. Getting rid of the Children's Fitness Tax Credit or the First-Time Home Buyers' Tax Credit? Get ready to be branded anti-family. Eliminating the Canadian Film or Video Production Tax Credit or Logging Tax Credit? Prepare from backlash from those industries. Think it's time for the Atlantic Investment Tax Credit to go? Now you have outraged an entire region of the country.
Mr. Garneau is correct in suggesting the Canadian tax code desperately needs clean-up. Doing so, however, is easier said than done, which explains why no government has attempted it in recent memory. I will believe this plan is more than wishful thinking when Mr. Garneau indicates which tax expenditures he would eliminate.