BOUTIQUE TAX CREDIT INCONSISTENT AND FINANCIALLY DISCRIMINATING (Part 1 of 2)
These thoughts are purely the blunt, no nonsense personal opinions of the author and are not intended to provide personal or financial advice.
Revisions were applied to this post on June 19, 2016.
(Preface: Every political party has introduced tax credits to give financial benefits to certain members of the population more than others. However, during the reign of the Conservative party under Prime Minister Stephen Harper, a plethora of tax credits were introduced. This led to coining of the phrase ‘boutique tax credits’. Much of the following information has been taken from the ‘Policy Forum: The Case Against Boutique Tax Credits and Similar Tax Expenditures by Neil Brooks’ (brooks). The Neil Brooks discussion provides an excellent overview of why boutique tax credits are so wrong and discriminatory. While many families, especially poor families do not benefit from boutique tax credits, ever singles also do not benefit from most of the tax credits. If there are any negatives to the study it is that financial discriminatory impact of tax credits and expenditures for ever singles and to some extent single parent with children family units is not fully recognized).
The author of this blog has long thought that boutique tax credits are financially discriminatory to singles. However, we cannot even begin to articulate what Neil Brooks has so eloquently stated in his article. The entire article is worth a read including the footnotes which provide excellent information on many commentaries and studies of this topic. For this post, we attempted to condense the PDF from 68 pages to 8 pages, for example, by eliminating the many footnotes – see condensed version at the end of this post. Blog author’s comments have been highlighted in blue).
This has been a very difficult post to write in terms of length as there is so many excellent points that have been made by Neil Brooks in his study, so be forewarned that the condensed version of the Brook;s article is eight pages long).
PROBLEMS WITH BOUTIQUE TAX CREDITS (AS IDENTIFIED BY BLOG AUTHOR)
SUMMARY OF TAX PROBLEMS:
Problem 1 – Conservative boutique tax credits purposely target traditional family values (single income families). Boutique Tax Credits initiated by the Progressive Conservative Party under Stephen Harper purposely target traditional family values. The party never gives a definition of traditional family values or who is included in the traditional family. They talk about the family unit as ‘essential to the well-being of individuals and society’. A reflection of their belief in the importance of the role of the traditional family in society, another objective was to privilege single-earner families through the tax system (page 76). (Blog author’s comments: Ever singles are generally not included in these boutique tax credits).
Problem 2 -tax expenditures introduced by the Conservatives of Boutique Tax Credits were targeted at relatively narrowly defined groups of potential Conservative voters (page 67). Finance Minister’s budget moved to put the finishing touches on building a new Conservative coalition through a series of tax cuts, rebates and other subsidies aimed at select segments of the voting population (page 73). By enacting these tax expenditures, as opposed to across-the-board tax cuts, the Conservatives were able, at a much lower cost, to favour middle-class families with children, middle-income and well-to-do seniors, and other much more narrowly targeted groups ( page 77). (This is what this blog author calls ‘selective’ democratic socialism).
Problem 3 – Tax Credits and Expenditures ignore traditional tax criteria that apply to technical tax provisions, namely, equity, neutrality, and simplicity (page 69).
Problem 4 – Conservatives were “pleasing their electoral base with . . . dollars in pockets for boutique programs rewarding wealth and socially conservative values (page 69). An example is pension splitting where wealthy married/coupled persons benefit the most, poor and married or coupled persons with equal incomes benefited to a lesser extent.(Blog author’s comment: Ever singles and divorced/separated persons are not able to use this tax credit).
Problem 5 – Tax Expenditures Can Serve as a Bribe to Potential Voters (page 77) By enacting these tax expenditures, as opposed to across-the-board tax cuts, the Conservatives were able, at a much lower cost, to favour middle-class families with children, middle-income and well-to-do seniors, and other much more narrowly targeted groups.
In 2011, the average taxpayer with an income between $100,000 and $150,000 paid $3,633 less in taxes. The average taxpayer with a very modest income of between $20,000 and $25,000 saw only $475 back in the same period. These numbers are before the impact of the new Family Tax Cut and the doubling of the Child Fitness Tax Credit – both of which are likely to accelerate the same trend. (/canada2020). (Blog author’s comment: Poor families and ever singles including seniors are least likely to benefit (senior-singles-pay-more).
Problem 6 – It is very difficult to get rid of tax expenditures or tax credits once they are implemented. Political parties are reluctant to eliminate them even if they are discriminatory for fear of losing votes. Also, tax expenditures are extremely hard to repeal, even the truly awful ones, since eliminating a tax expenditure will be framed as a tax increase (page 78). (Blog author’s comments: Will it ever be possible to eliminate the pension splitting from which wealthy families benefit the most? And, who is paying for this?) Neil Brooks calls pension splitting an “outrageous pension income splitting scheme that should be repealed and the revenue used to enrich, or reduce the clawback, of the old age security pensions” (page 122). Reducing clawback will not solve problem of inequality if clawback is not increased for singles and reduced for married or coupled persons through income-testing.
Problem 7 – Tax expenditures that are relief measures transfer income from one group of individuals to another. (Blog author’s comment: Instead of these relief measures targeting lower income individuals and families, many have benefited wealthy families the most. Ever singles benefit the least).
Problem 8 – Psychological impact of tax credits or expenditures (The Public Appears to Favour Policies Framed as Tax Breaks-page 83). people’s psychological biases predispose them to favour tax expenditures, certainly over direct spending programs……label—tax relief versus direct outlay—matters.” These studies are also consistent with other survey results in which respondents admit to have benefited from tax expenditures and yet deny ever having used a government social program.(Blog Author’s comments: The reverse effects of Tax Credits and Expenditures are often not discussed, that is, the anger and financial despair that some citizens feel towards those that are receiving more of the benefits without, for example, application of income-testing principles).
Problem 9 – Tax Expenditures Reduce the Political Pressure for Public Programs (page 84) One of the Conservatives’ major political goals has been to resist the public provision of social programs. Hence, another explanation for the popularity of tax expenditures under the Conservatives is that they were a step forward in implementing a broader political project, a private-sector welfare state.Tax credits for private caregiving work reduce the political pressure for publicly provided long-term care facilities.. …. Supplementing the wages of low-income workers with a tax credit reduces the pressure to offer public service jobs to the unemployed…..The tax subsidization of tuition fees, textbooks, and interest on student loans reduces the political pressure for more direct government support for universities.
Problem 10 – Tax Expenditures Make the Tax System Less Transparent (page 94) and Tax Expenditures Divert the Resources of the CRA and Create Administrative Problems That Damage Its Reputation (page 94)
- Complexity and number of tax credits make them very difficult to interpret and lawyers and accountants become intimately involved in their implementation. As a result attention is directed towards interpretation of these credits instead of tracking abuse of the tax system.
- Many are badly designed (page 96)
- Tax Expenditures Often Do Not Serve Important Objectives of Government Policy (page 97)
- Tax Expenditures Often Do Not Achieve Their Objectives Equitably (page 104)
- upside-down effect of tax deductions
- all tax credits should be refundable.
(Blog author’s comment: Past posts have talked about upside-down financial effects (housing), and tax credits should be refundable and income-tested. To have someone else confirm these facts is reassuring. It would be nice if political parties and governments also realized these facts.)
Problem 11 – Education – Conservatives completely exempted certain scholarships and fellowships from tax in their first budget in 2006. The exclusion of a $10,000 scholarship for a low-income student who has no other income provides that student with no implicit subsidy. However, the same exclusion will provide an implicit subsidy of $2,200 to a higher-income student in the 22 percent tax bracket. If the point of the exclusion was to benefit needy students, this upside-down effect is perverse (page 104)
Problem 12 – Low income individuals and families benefit the least. A credit that can be offset against a taxpayer’s tax liability is of no value to a low-income person who has no tax liability because his or her income is less than the amount of the basic personal tax credit, for example. Hence, all tax credits should be refundable (page 106)…..In terms of delivering subsidies equitably through the tax system, if the primary purpose of a tax credit is to incentivize or assist low- or middle-income individuals, entitlement to the credit should be income-tested so that it vanishes when a taxpayer’s income reaches a certain amount (page 108). Income-testing so that it vanishes when income reaches a certain amount should vanish quicker for for married or coupled persons than singles as it costs more for singles to live than married/coupled persons as a family unit.
Neil Brooks has also stated that analysis of financial formulas such as distributional tables should show beneficiaries by income class, gender, household type, age cohort, and geographical region. This is based on known facts that females and disadvantaged persons based on race likely benefit least from tax credits (page 111). (Blog author’s comments: Analysis of household types is important as ever singles and early divorced singles are likely to benefit the least from all tax credits).
Problem 13 – The proliferation of tax expenditures, such as the boutique tax credits, gives rise to significant rent-seeking social costs. (page 114) and encourages relevant interest groups to lobby for analogous tax expenditures. (page 114). (Blog author’s comments: Powerful lobby groups such as families and seniors often lead to tax credits and expenditures targeting these groups. Ever singles do not have this kind of financial and lobbying power. As a result they are likely to receive less of these benefits).
Problem 14 – Boutique tax credits are useless when they target everyone in a group, for example, seniors. Giving age credit to all seniors benefits wealthiest seniors more as poor seniors do not have enough income to apply tax credits (page 122).
Problem 15 – This problem as been added by the blog author, that is there is a compounding effect to tax credits when they are applied one on top of another for specific groups. An example is when child tax credits are given to married or coupled family unit, who then are also able to use pension splitting credits as seniors. As a result, married or coupled persons with children are able to gain more wealth than ever singles who are not able to use any of these credits.
Problem 16 – This problem has been added by the blog author, that is the so called ‘merry go round credits and expenditures which disappear and reappear. Some citizens can never get on the merry go round because their place in line keep getting pushed back or they are kicked out of the line or they excluded from the lines. For example, there are some parents who have never benefited from any the child tax credits because they had no children during implementation of some tax credits only to have these tax credits abolished when they do have children.
(Blog author’s comments: it would seem that a solution to the elimination of Tax Credits and Expenditures with fairness, equality, neutrality and simplicity for all, perhaps, should be to provide three government funded basic rights: healthcare, college/university education, and universal day care).
This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice.