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Opinion: ‘Boutique’ tax credit promises miss target

Charlene O’Connor thinks Canada has a taxation problem.
18801313_web1_Opinion

Charlene O’Connor thinks Canada has a taxation problem.

The Scarborough office manager and mother of 12-year-old twins is taking courses to become a tax preparer in time for next spring’s filing season. And she is concerned and annoyed – both at what she sees before her in the federal election campaign, and at what she is learning in her tax class.

Her frustration speaks to the electoral game around the tax system, where every campaign leads to layers and layers of new tax goodies that benefit a small group of key voters. They have piled on for years, with each successive government reluctant to streamline the system because of the political blowback that comes with cancelling a tax break.

Now, she sees one boutique tax credit after another being offered up as a way to make everyday life easier for families.

She senses intuitively what many a tax connoisseur knows: Our tax system in increasingly complicated, with no clear, overriding goal in sight. And as political leaders arm-wrestle to prove who is the most generous to voters, the federal tax base is eroding without a discussion about what it is they are trying to achieve.

To wit, both the Liberals and the Conservatives have offered up $6-billion, across-the-board income-tax cuts for all and decorated their offerings with an array of tax credits and finely tuned boutique tax cuts.

Tax cuts in a time of populism are aimed at helping the regular person as political parties compete to see which of them can design the most grassroots-friendly tax system while accusing the other guy of simply benefiting the elites. Under no circumstances must the rich be seen to be getting richer.

The result is a patchwork of measures that is confusing, expensive and, at times, counterproductive, but is also – the parties hope – appealing to a wide and varied collection of motivated voters.

The election-oriented tax contest of 2019 is dramatically different than the contest of just four years ago. Back then, the Liberals surged to victory in part because of their promise to cut income taxes for the middle class, ratchet up rates for the rich and close billions of dollars’ worth of loopholes that they argued were distorting the fairness of the tax system.

It was done with the goal of redistributing income from the rich to the rest, to foster “inclusive growth” – a phrase that has now all but disappeared from the Canadian political lexicon despite its ambition and appeal just four years ago. Now, it’s all in the name of “affordability” – that amorphous word that is so central to every party’s campaign in 2019.

The more O’Connor sees of the 2019 campaign, the more she yearns for 2015.

As she sees the return of boutique measures in this campaign and the race for each party to out-cut the other, she worries about taxpayers who don’t happen to be in the party’s voting base, or who are too poorly paid to really benefit, or who just can’t figure out the ins and outs of an increasingly complicated tax system.

Canadians, by global standards, are not really carrying a heavy burden when it comes to tax.

Figures from the Organization for Economic Co-operation and Development show single individuals in Canada pay a middling amount of income tax. And Canadian families are among the lowest taxed in the developed world, especially once family benefits are thrown into the mix.

As for Conservatives versus Liberals, the tax burden for single individuals was almost exactly the same at the beginning of the Stephen Harper era as at the end his time in office and has declined a bit under Trudeau, according to the OECD.

In election polling on what issues matter to voters, taxation is usually in the middle, after cost of living, the climate and the economy in general. In a recent Ipsos poll on what issues determine Canadians’ vote choice, taxes ranked fifth.

There are certainly many people who wish they paid lower taxes, but not to the point where they are taking their frustrations out at the ballot box.

And that’s probably a relief for anyone in government. Ottawa is more addicted than ever to their money, turning to personal income tax for almost half of its revenues.

That proportion has been relatively steady under Trudeau and Harper before him. The Finance Department’s most up-to-date fiscal tables show that when Harper took office, 46.4 per cent of the government’s revenues came from personal income tax. When he left office a decade later, that had risen to 49.5 per cent. In 2018, under Trudeau, it was 49.3 per cent.

But it’s up substantially – about 10 percentage points – from the early 1980s, and in record-high territory.

So, what’s going on here, and why the mad rush by political leaders to one-up each other on the tax front?

Populism through tax policy, some economists say.

“It’s populist-type tax cuts, particularly aimed at the base,” said Jack Mintz, a tax policy expert from the University of Calgary. “But is it good policy?”

Taxes can be used smartly to improve an economy’s efficiency and competitiveness, Mintz says. And they can be used to make a society fairer, through redistributing income. Or they can be used to achieve some kind of greater policy goal.

But today’s array of tax offerings seems more aimed at immediate gratification than either fairness or productivity, he said.

“We’re seeing it from all parties,” says economist Glen Hodgson, a senior fellow at the C.D. Howe Institute.

Every party wants to be seen as socking it to the rich – taxing Big Tech, imposing a luxury tax here, a wealth tax there – while putting more money in the pockets of regular folks.

For both economists, the concern is that the tax base is being eroded, the government coffers drained of revenues and there’s not much thought being expressed about what Canada should be aiming for as a country.

“It becomes a permanent shrinkage of the fiscal base. Meanwhile we’re still running deficits. Effectively, we’re borrowing to give people money,” said Andrew Jackson, a labour economist with the Broadbent Institute.

Tax cuts, however small, address the issue of affordability in that they do indeed mean extra money in your pocket. But it’s not very much money – about $300 per person on average for the big, across-the-board income tax cuts proposed by the Liberals and Conservatives. On the other hand, the cost to the treasury is significant and ongoing, hampering the ability to reduce debt or spend on social programs, which can in turn affect affordability.

The Canadian Taxpayers Federation, which exists to lobby for lower taxes, is by definition generally supportive of the competing broad-based tax cuts being put in the window by the Liberals and the Conservatives. But even it is a bit skeptical at the political competition to use “affordability” as a reason to slice and dice the tax system into boutique measures.

“It’s not an easy issue, and it’s not just a lower-income issue,” said CTF federal director Aaron Wudrick.

If Wudrick had his druthers, the tax system would be simpler and more transparent, so voters could know exactly what they’re paying and why.

O’Connor also worries about simplicity. “There are just so many subtleties” in what the parties have on offer, she said. “The government has to make sure people are paying their fair share and the rich aren’t getting away with things.”

But she also believes the competition between micro-targeted tax credits we’re now seeing promises to make a complicated system yet more complicated, without necessarily making life much easier for Canadians.

In other words, she’s all for populism – but only to a point.

Heather Scoffield is a national affairs writer.