The "tax expenditure" conundrum

Amid all the Panama Papers angst about how much money offshore tax havens are draining from Treasuries around the world. this column by Thomas Walkom in today's Toronto Star provides useful perspective. As Walkom points out, the amount of revenue that Ottawa loses to Panama, the BVI and the rest is certainly dwarfed by the amount that it willingly foregoes in the form of targeted tax breaks domestically -- so-called "tax expenditures".

I don't recall hearing the term "tax expenditures" during my education.  The first time I heard it may well have been in 1981 when, as Walkom recounts, Pierre Trudeau -- father of Canada's current PM -- tried to clean up the income tax code, only to retreat in the face of a huge outcry from the public.  One right-wing commentator sourly noted that "tax expenditures" were just another way of saying "letting some favoured taxpayers keep more of their own money".

In the intervening decades, the number of tax breaks -- or loopholes, as Walkom prefers to call them -- has increased dramatically. The Harper Tories were particularly keen on targeting giveaways very precisely at their electoral base: that's how we got the bizarre children's textbook credit and exercise credit that Walkom mentions (and which have been swept away in the recent Liberal budget). Going over my tax return with an accountant just this week, I was reminded how many of these I benefit from, many simply because I am a senior.  I get an income tax deduction for my property taxes; I can split my pension income with my spouse in order to reduce the tax burden (a right no longer available to younger Canadians); dividends and capital gains are treated more favourably than employment income, and so on and on.

The Liberal government may have declared its intention to review and reform the tax system, but it would be imprudent to expect that Justin Trudeau will have a whole lot more luck with this than his father did. Notionally, abolishing all tax expenditures would allow the Government both to increase its revenues and to provide a significant reduction in overall rates of corporate and personal income tax.  However, the outcry would be just as great as it was back in 1981: taxpayers about to lose loopholes they have grown used to would very easily calculate how much they stand to lose, whereas the broad mass of taxpayers would find it difficult to calculate how much they might stand to gain from a couple of percentage point reduction in the overall tax rate.  It's not hard to guess who would make the most noise.

Besides, it's difficult to gauge how committed an avowedly activist government like Trudeau's would really be to simplifying the tax system.  Tax expenditures arise in part from public demand, but are in much greater measure the result of governments' conviction that they know best when it comes to deciding who gets what. The simplification of the child tax credit system referred to above is a good start, but it's very unlikely that this government or any other will have the intestinal fortitude to push through a true reform of Canada's tax system.