Over the past several years, governments across Canada have shown a newfound fondness for implementing new or expanding tax credits, deductions and other special tax privileges (also known as carve-outs).
That is certainly true at the federal level where the Conservatives have added several new credits, including the Working Income Tax Credit, children’s art tax credit and volunteer firefighters tax credit.
Here in B.C., the Liberals followed suit with boutique tax credits in their 2012 budget, including children’s fitness and art credits that mirror those implemented by the federal Conservatives.
In addition, provinces (in particular Ontario and B.C.) have been in a battle for much of the past decade to offer the juiciest tax credits to specific industries, including the film industry. Now NDP leader Adrian Dix has promised to make the film tax credit even more lucrative should his party form the next government.
The problem with these special tax arrangements is that they benefit a small group of British Columbians at the expense of higher tax rates for everyone else. The higher tax rates create disincentives, or barriers, for productive activities such as investment, savings, hard work and entrepreneurship. Tax credits and deductions also needlessly complicate the tax system.
Perhaps most concerning, however, is that the tax carve-outs often produce little or no benefit. Many of them simply reward individuals and businesses for activities they were already doing anyway.
At the federal level alone, we now have a total of approximately 234 tax carve-outs (exemptions, deductions or credits) to select groups or specific activities segmented into three categories: personal income tax (128), corporate income tax (70) and goods and services tax (36).
In 2012, the total cost (in forgone revenue) of personal and corporate income tax carve-outs was $168.9 billion – more than the entire amount ($159 billion) collected in personal and corporate income taxes.
B.C. taxpayers already hand over $331 million to the film industry through the film and television tax credits.
The total cost of the personal and business income tax credits, deductions and other carve-outs in B.C. was $3.5 billion in 2012-13, approximately 38% of the $9.2 billion raised in personal and corporate income tax revenues.
Eliminating or significantly scaling back loopholes that provide little value could simplify the tax system and provide additional fiscal room to implement effective tax reform to boost prosperity for all British Columbians. Doing so would make our tax system more competitive with other provinces and help improve the economy through stronger incentives for work effort, savings, investment and entrepreneurship. •
