Well, there seems to be a fair amount of fuss over the proposed doubling of the contribution limit to Tax Free Savings Accounts(TFSAs). Kevin Milligan says the case for raising the annual TFSA limit is shaky as the benefit will be mostly to high wealth households rather than those at the middle or bottom of the wealth distribution. There have been reports by the Broadbent Institute (the Kesselman study) as well as the Parliamentary Budget Office that also raise concerns about how over time the implementation of the expanded limit will increase the size of the tax exempt base and erode future government revenues. Indeed, my WCI colleague Frances sees this as part of a long term agenda to constrain the size of government.
A major theme running under most of these arguments goes something like this - Registered Retirement Savings Plans (RRSPs) at least leave "a legacy of tax revenue to future governments" whereas TFSAs may generate "supernormal" returns that will escape taxation and on top of it will accrue primarily to the well-off.
However, when I think of RRSPs and TFSAs, I see them both as essentially the same. They are both "tax expenditures" that are designed to encourage saving by promising some type of tax incentive. The broader debate should really be about how we want to encourage more saving and then about "tax expenditures" in general rather than how much we should allow as limits to either RRSP or TFSA contributions.
However, if we are going to argue about RRSPs and TFSAs, to my mind what differs is the timing of the break. For an RRSP, you are getting the tax incentive upfront and deferring the taxes until you withdraw the money. For a TFSA, you are making the contribution with after tax dollars and allowing the contribution to accumulate tax free - the tax benefit comes down the road as the money grows.
I suppose there is a clever mathematical way using inter-temporal budget constraints to show how under certain assumptions the two savings vehicles are probably equivalent both as savings vehicles as well in terms of their effects on tax revenues. I think a key variable is rate of time preference. Given a desire or need to save, if you are willing to postpone current consumption - a TFSA may be a better vehicle to build savings. On the other hand, if you need to consume more currently and still want to contribute to savings, the RRSP may be the better vehicle.
Young households with children who face more cash constraints might find the RRSP more attractive while older households would probably find the TFSA more attractive. All other things given, both vehicles are of greater advantage to higher rather than low income earners because higher incomes are more likely to be able to save - period. If you are going to make the argument that TFSAs are somehow favouring the wealthy or higher income earners, you need to acknowledge that the same argument applies to RRSPs.
As for estimates of foregone revenue ranging from 15 to 9 billion dollars a year some 40 or 50 years down the road, well those also need to be considered as a proportion of GDP yet to come rather than as absolute numbers. What is the current value of forgone tax revenue to GDP from RRSPs and TFSAs and how might this compare to the estimates of foregone revenue to GDP 40 or 50 years years from now? And regarding those "supernormal" returns - what if the investment in the TFSA yields a "supernormal" loss? There can be risks to the investments also.