Our muddled tax system

Due to an error on Canada Revenue Agency’s part, taxpayers will have five extra days to file their taxes this year — meaning they will have five extra nights of frantically pulling their hair out trying to get their returns in order.

The rigmarole of visiting accountants, updating tax software, searching for receipts and trying to keep up-todate on all the latest tax deductions and credits has become a painful yearly ritual for most Canadians. No one wants to pay more money than they have to, or overlook something that could get them accused of tax evasion. Yet most of this pain and suffering that individuals and businesses go through at tax time is entirely unnecessary. It is a consequence of the increasing complexity of our tax system; a complexity that is itself not only unnecessary but counterproductive.

Just how much more complex has it become in recent years? A new re- search paper from the Fraser Institute has succeeded in quantifying it, using a number of different measures. Between 1990 and 2014, for example, the text area of the Income Tax Act (how much space it would take up if the pages were laid side-by-side) increased 62 per cent. The number of tax expenditures — including all credits, deductions, exclusions and exemptions — likewise increased by 22 per cent between 2000 and 2014; while the size of the federal government’s tax guide expanded by 25 per cent. Over the past 20 years, the dollar value of personal and corporate tax expenditures increased by 98 per cent and 104 per cent respectively, in real terms.

All this added complexity costs Canadians more than just a few late nights organizing their returns. According to other Fraser studies, the cost of complying with federal tax laws cost Canadians between $5.84 billion and $6.96 billion in 2012. Add in the costs to governments of collecting the taxes, and the system cost the economy upwards of $31.4 billion in 2011 — about one-and-a- half percentage points of GDP.

If that weren’t bad enough, a report released Tuesday by Auditor General Michael Ferguson chastises the Finance department for failing to properly account for the cost to the treasury, this time in foregone revenues, of these tax expenditures, or to provide Parliament with the information necessary to properly scrutinize them.

According to the auditor general, the billions of dollars in targeted tax breaks provided by the federal government should be accounted for in the same way as program spending. Indeed, when governments give some taxpayers a break that others have to pay for, they are really just another spending program.

For example, it costs $3 billion annually to dole out tax credits for first-time home buyers, seniors, students and companies exploring for natural resources. At the most basic level, there is the question of efficacy: do such credits even benefit their intended recipients? As the auditor general notes, “regular evaluations of all tax-based expenditures are important, since circumstances leading to their implementation can change.” Yet Parliament typically lacks even this information: “The Department of Finance Canada does not systematically evaluate all existing tax-based expenditures.”

Moreover, even if they do “work” as intended, there is the efficiency cost to consider: the distortion of economic choices involved when some activities are favoured over others. Decisions between rival investments come to be made not on the basis of real economic costs, but the string of tax goodies attached to each. On top of which is the unseemly social engineering of governments dangling tax credits in front of taxpayers in return for whatever behaviour they think best.

And the situation is only going to get worse: the 2015 budget introduced a number of new targeted tax breaks, including an expanded child fitness tax credit. These will make it that much more complicated and costly to file returns in the years ahead, that much harder for Parliament to evaluate its costs and benefits, and so on.

We’ve been here before, of course. The same accumulation of unwarranted deductions and credits led to the great tax reforms of the 1980s, which substantially broadened the tax base and sharply cut tax rates. Perhaps the time is approaching when the cycle will repeat itself.

Most of the pain and suffering that Canadians go through at tax time is entirely unnecessary