The sixth in a seven-part series, “Taxes for the Common Good.”
If you’re the parent of young children, like me, you’ll likely remember the introduction of the Children’s Fitness Tax Credit in 2006. There was a bit of a buzz on the school yard at pick-up time. Parents chatted about the unexpected win of having the government cover part of the expense of their kids’ sports.
Low-income parents had far less to say. Their reality is different. Their kids don’t have the option of playing hockey or taking swimming lessons. For them, these activities are just too expensive and a non-refundable tax credit doesn’t change this.
Tax expenditures and how they work
While we don’t often like to think of them this way, tax expenditures are a form of government spending. Instead of writing a cheque or providing a service, the government spends by choosing not to collect certain tax income. Tax expenditures can be tax exemptions, deductions, rebates, referral or credits.
There are over 200 income and GST-related tax expenditures at the federal level, a number that has steadily grown over the past decade. Many, like the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit are non-refundable. This means that tax filers receive the benefit of a deduction or credit only if its value is greater than taxes owed. If you pay no income tax – or only a small amount – you receive little or nothing by way of support.
Tax expenditures can be good if they free up money for those struggling to make ends meet. But when they subsidize non-essential activities (like letting corporations deduct expensive seats at professional sports events) they can also deprive the government of essential funds.
Public justice requires society to consider and prioritize the needs of the most vulnerable. Some tax expenditures honour this priority, but many do not. If tax expenditures are to benefit the common good, we need new strategies to ensure that the needs of low-income households are prioritized.
Boutique tax credits: ineffective and expensive
According to the Parliamentary Budget Office, federal tax expenditures represented over $100 billion in foregone tax revenues in 2009. That’s over one-quarter of total government spending.
Some tax expenditures achieve important public policy objectives. They help people save for retirement, support charitable activities, and offset the cost of medical expenses. Yet others are narrowly targeted, designed to appeal to particular population groups, regions or industries to gain their support at the ballot box.
The cost of these “boutique” tax credits is high. For example, in 2011, the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit cost $160 million and $32 million, respectively.
Many tax expenditures favour the wealthy
The non-refundable design of many tax expenditures disproportionately benefit middle- or upper-income brackets. In 2011, about two-thirds of those claiming the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit had incomes over $50,000 per year. Yet this group made up only 28% of all tax filers.
Low-income families who would benefit the most from fitness or arts programming simply cannot afford these “extras” when they struggle daily with the choice of paying the rent or feeding the kids.
Wealthier families, on the other hand, those whose activities the federal government is subsidizing, would enroll in these extra-curricular activities regardless of these tax breaks.
Finding a better balance
Taxation is a system of give and take.
Revenues collected pay for important public programs and infrastructure that benefit Canadians across the income spectrum. Similarly, lower revenues, whether through tax cuts or tax expenditures, limit program options.
While some tax expenditures serve the common good, many more contribute to the growing inequality in Canadian society. So while middle- and upper-income Canadians might enjoy a few extra dollars, this money doesn’t just fall from the sky. It gets taken out of programs and services that would assist those on the margins. In other words, it comes from those who had fewer options to begin with.
This isn’t right. We need to press our government to ensure that tax expenditures serve the greater good. And, we need to encourage those around us to think about the broader societal implications when they catch a small tax break.
Karri Munn-Venn is a policy analyst at Citizens for Public Justice, a national organization of members inspired by faith to act for justice in Canadian public policy. Taxes for the Common Good: A Public Justice Primer on Taxation is available free at www.cpj.ca/taxes-and-common-good. Follow Karri and her colleagues on Twitter @karri.munnvenn and @publicjustice.