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"It wasn't always this way."

Truer words... In the introductory tax law course at UofT my old professor used to introduce the course by comparing the Income Tax Act, 1917, with the Income Tax Act, 1985 (as amended). First, he'd drop the 1917 Act on the Table. Being, essentially, a 12 page pamphlet, it would drift lazilly to the table. Then, he'd drop the bound copy of the 1985 Act (complete with the accompanying regulations, remission orders, and a couple of tax treaties). Being, essentially, a 3000 page collection of run-on sentences, it crashed to the table with a resounding thud.

I think your first and last explanation probably account for the bulk of the heft of the tax system. The Income Tax Act is certainly inelegantly written and, unfortunately, is often written by people who don't fully understand the activities they're trying to tax. So part of the proble, is how the tax act is drafted. Moreover, some complexity is inevitable in a fair and efficient tax system. The reality is that, while you can have a "simple" tax system, it will probably produce tax results that most Canadians will think of as being seriously unfair or seriously inefficient, or both. I mean, you could come up with a pretty simple tax system ("How much income did you earn last year?" Give us X%), but that's a tax system that couldn't deal with things like child care expenses, medical expenses, savings, the double taxation of corporate income, the reorganization of businesses, yada, yada, yada (one could go on, literally for 3000 pages - parliament sure does). But once you decide that you want to allow people to claim child care expenses, or allow businesses to reorganize without triggering taxes (two, seemingly, desirable attributes of a fair an efficient tax system) you start having to take on added complexity.

But you missed another explanation for the complexity of the tax system. People don't like paying taxes, and so are willing to spend a lot of time and a lot of money (thankfully) to take advantage of the provisions of the tax act to reduce their tax obligations. Some of that, of course, is what parliament intended, but some of it is clearly unintended tax avoidance. As a result, the Act keeps getting amended to include explicit or implicit anti-avoidance rules; to more narrowly identify who qualifies for specific exemptions, credits, deductions, etc; to reverse unfavourable (from the fisc's perspective) judicial interpretations; and on and on. And then, once you've included those anti-avoidance provisions, you find out you need exeptions to the exceptions because the anti-avoidance rules are overly broad. So you end up in a nasty little arm's race between the government and taxpayers, with one side devoting considerable resources to reduce their tax burden, while the other devotes considerable resources to preventing them from doing so. And while it's a race the government will never win, that doesn't stop it from trying, in the process creating a rat's nest of legislation and rules.

Bob, great comment. By the way point 6 was prompted by your earlier remarks about charities and fundraising.

One thing you don't say in your post is that the government is tremendously disadvantaged in the avoidance/anti-avoidance race by the fact that the avoiders can afford to buy the best and the brightest litigators. A government tax lawyer would be making what - 20%? 30%? 40%? -- of what their private sector counterpart earns?

Frances and Bob,

You make very valid points why the income tax system is so complex. Tax avoidance tricks are byzantine rules that not everybody takes the efforts to execute to reduce theirs Income Taxes even though they con't like to pay tax. I don't believe a simple statistic specyfying what is the real income tax paid after all possible deduction on revenue is publish. A simplification could be based with that statistic in mind function of theri revenue. It would increase income tax of the most entrepeneurial avoider and decrease all the others.

I think you're giving the government (this one in particular) way too much credit in point one. I'm too lazy to look it up, but I'm sure I've read that the public transit credit has gone overwhelmingly to people who were going to take public transit anyway, reducing carbon emissions by some piddly amount at horrendous expense. Bad public finance.

Jim, thank you for giving me an opportunity to rant.

A properly designed public transit amount would increase the incentive to take public transit on the margin. In Ottawa if you're a marginal or moderate user (say you take the bus 10 or 20 times per month) it's cheaper to buy tickets than buy a bus pass. But tickets are not eligible for the public transit credit. How difficult would it be to add a receipt for income taxes to a sheet of bus tickets? This annoys me every time I go to the local convenience store and spend $40 or $60 on sheets of bus tickets for my kids.

Along the lines of what has already been identified, but just to reiterate that the tax system has increasingly become politicized of late by that guy that has that Masters in Economics (Calgary). And he has been aided/pushed by those other social scientists (the Poly Sci guys) in the PMO.

So, whereas in the past, in the midst of an election campaign, Mulroney would be announcing regional mega-projects (say Van Isle gas pipeline)- this approach has since fallen out of favour. The new political strategists, aided with extensive voter demographics and polling (and a basic understanding of marketing segmentation)- used the tax system to target key demographics - essential to them in winning more seats through their swing votes (suburban soccer parents - children's fitness tax credit; urban blue collar workers - tool tax credit for apprentices etc.) This allows a small positive political announcement a day during the campaign - with differing photo backdrops across the country. Good visuals and politics. Bad policy (hello GST cuts).

It's a pander - just becoming more specific due to a higher degree of voter segmentation (and hence more tax complexity).

JVFM - as a hockey mom, the thought that my vote can be bought so cheaply is profoundly depressing. Hockey parents can usually claim the full fitness amount, saving the princely sum of $75 in taxes (15% of $500). Suburban soccer moms get more like $30 (15% of $200 - fields are cheaper than ice).

I just don't understand why a rational voter would switch allegiance for such a small sum of money. There's an obvious response - voters aren't rational. But what are people thinking when they say "oh, I'll vote for this party, they introduced a tax break that saved me $75"? Seriously, what are people thinking?

Frances: It shows they "care", and share your values? Yes, it is depressing, isn't it.

They're targeting the fence sitting swing voters - ones that also respond well to blue sweater vests- probably not you or anyone who frequents this site. One vote moved from "their" side of the fence to "yours" is a net gain of 2 - which can make a difference is some key ridings. First past the post voting systems have these perversions - all the more acute in minority situations.

Frances: One thing you don't say in your post is that the government is tremendously disadvantaged in the avoidance/anti-avoidance race by the fact that the avoiders can afford to buy the best and the brightest litigators. A government tax lawyer would be making what - 20%? 30%? 40%? -- of what their private sector counterpart earns?

Well, certainly the consensus view of most private sector tax practitioners would be that the private sector gets the cream of the crop, while the government gets the rest. Then again, that's a partisan perspective isn't it! :)

There's probably some truth to it (particularly at the very elite level of Bay Street law and accounting firms). The advantage isn't on the litigation side - working for the Department of Justice is considered to be a pretty sweet gig, and while they're salaries don't match those on bay street, they're not as far off as you suggest (maybe 50-70%), and once you factor in taxes, other benefits (a nice cushy defined benefits pension plan), and a better work life balance, they do alright for themselves. The real advantage the private sector has is that the tax planning side of the business is more likely to appeal to the really clever tax professionals, as it gives you more opportunities for creativity, versus the government side which, of necessity, is largely reactive. I mean, the government isn't going to pay someone to sit in an office all day and dream-up ways of clever ways to beat the system - the private sector will.


Well, think of why a tax on revenue wouldn't be a great idea. Consider two companies, company A with revenue of $1,000,000, company B with revenues of $500,000. With a revenue tax, of, say,10 percent company A would pay twice the tax of company B.

Pretty simple. But, what if company A has expenses of $900,000 and company B only had expenses of $100,000. Company A would have a before-tax profit of $100,000 and Company B would have a before-tax profit of $400,000. So, under a revenue tax, despite earning only a 1/4 of the profit of company B, company A would pay twice as much tax. I can't speak for you, but that would strike as an odd result, and an unfair one.

Moreover, in that example company A would pay, in essence, a 100 percent tax rate, since it would have income (I.e., profit) of $100,000 and would have to pay taxes of $100,000 (I.e., 10 percent of $1,000,000). On the other hand, company B would only pay a 12.5 percent of its profits in tax. Sort of odd that the more profitable company should pay significantly less tax?

And it could get even worse, what if a recession hits and company A's revenue falls to $910,000? If it decides not to lay-off any employees, it'll have a pre-tax profit of $10,000. Unfortunately, it'll have to pay $91,000 in taxes. How long do you think it'll stay in business? These sorts of profit insensitive taxes are the worst form of taxation, because the have to be paid even when the company has no income (this is why Canada and the provinces are gradually phasing out taxes on capital, which have the same sort of features).

And the reality is, while people like to rant about sketchy deduction, most of the deductions (at least in dollar terms) claimed by businesses are pretty hard to argue with, things like: wages, rent, interest, capital cost allowances (I.e., depreciation), etc. Frankly, if you didn't allow those sorts of deductions, you'd end up with a pretty dysfunctional tax system, like the one described above

Susan Delacourt (columnist with Toronto Star) co-wrote a paper (pdf) on this in Policy Options FROM SALES TO MARKETING: THE EVOLUTION OF THE PARTY PITCH

A decade later, following a process set in motion with the evolution of the Reform Party into the Canadian Alliance, the federal Conservatives set about making the newly united party more market-sensitive as well. We’ve had some glimpses over the years of the intensity of this effort under Stephen Harper’s leadership and of the party’s acknowledged commitment to the market research game. There’s Paul Wells’ 2006 book, Right Side Up, which showed us how Conservative strategist Patrick Muttart used research to segment the voter base into prototypical characters — “Mike and Theresa,” suburban citizens who might be open to voting Conservative if the right product was on offer, and “Zoe,” the urban, single woman who would probably never vote for the Tories. Tom Flanagan’s book Harper’s Team also shed some light on such handiwork in the realm of political market research.

One of the more revealing insights into the Conservatives’ market research came in a 2007 CBC-TV documentary by reporter Keith Boag, which walked through the Conservatives’ impressive Constituency Information Management System (CIMS) and illustrated the vast array of data that the ruling party was accumulating about voters so as to shape its message and policies — everything from religion to consumer preferences.
They [another paper's authors] analyzed the dynamics of the Conservatives’ ascent to power and determined that the party “successfully managed to influence a shift in voter preference by designing and marketing a product offering that struck a balance between the interests of specific segments of the voting public…and the interests of internal party supporters.”

Its a direct manifestation of special interests at work--and the capture of government thereof. Every exception in the code corresponds to some special interest that lobbied--okay maybe a few exceptions appear in the code because the staffers who draft the bill have their own ideas about exceptions.

Lets pull an example from the recent news: Perhaps you've heard about the financial reform bill being debated by the US congress. Consider the following article.

Massachusetts Sen. Scott Brown raised concerns about the legislation's impact on his state's mutual-fund industry, specifically Liberty Mutual, MassMutual, Fidelity Investments and State Street Corp. Sen. Olympia Snowe of Maine raised concerns about provisions that could hamper lending for the lobster industry. ... Ms. Snowe launched into a detailed explanation of how the proposed Consumer Financial Protection Agency, a regulatory body that would write and enforce rules governing consumer finance, could harm Maine's lobstermen and innkeepers. Many depend on customized financing for the seasonal businesses, which take the form of home-equity lines of credit that allow for low payments in the off-season.

Ms. Snowe worried such loans could be deemed "unfair and deceptive" by regulators, because of their unique structure. Mr. Geithner, scribbling on note cards as the senator spoke, has asked the Treasury Department to find a way to resolve the issue
"This bill would count them like banks and prohibit them from doing things they have done for 100-plus years," Mr. Brown said that he told Mr. Geithner. Mr. Geithner objected, according to Mr. Brown, saying the bill didn't apply to these companies. "I know, but where does it say that in the bill?" Mr. Brown said he responded. "Where is the exclusion?" Since that discussion, Mr. Brown said, those drafting the overhaul legislation have been looking to amend the bill to explicitly exclude the mutual-fund industry.

Uh-huh. Now what about the rest of us?

Another possibility:
The taxes get more complex because politicians have an incentive to give special discounts to marginal supporters and have an incentive to tax those who are farthest from marginal supporters.

Special interests certainly lobby for special treatment on the corporate side. And there are some personal tax provisions that reflect the power of lobbying or interest groups within the party, for example, pension splitting (result of intense lobbying) or the universal child care amount (internal party politics).

But there's some complexity that just can't be explained in terms of special interests. For example, the federal government considers the universal child care benefit (UCCB) to be part of net income. The Ontario government doesn't. So to calculate your eligibility for, say, the Ontario sales or rental tax credit, you have to take your federal net income and subtract (UCCB-UCCB repayment) to get your Ontario net income.

There are rational, special interest/vote buying type explanations for this. Are low-income parents of children under 7 a key Liberal voting constituency? Or is there someone inside the Ontario government who is really fed up that the Conservative government replaced the Liberal national child care plan with the UCCB and still holding out against it?

But it also occurs to me that perhaps this is just institutional inertia or incompetence.

Sorry for taking another Ontario example, but it's the provincial tax system I know best.

I would like to propose a simpler political economy reason for the growing complexity: tax cuts.

1. When taxes rose regularly (i.e. post-war Canada until Chrétien-Martin), the provinces were more than happy to ride Ottawa's coattails. Every increase in federal taxes meant a corresponding increase in provincial taxes, but the feds bore all (or most) of the political pain. Once federal taxes started to come down, the provinces decoupled quickly. No provincial Premier was going to stomach lower revenue when the Feds were getting all the credit.

2. Consider some hull of optimal political benefit vs. revenue. The increasing political segmentation that polling and computers have enabled has added many more dimensions to this analysis. Tax cuts have increased the pressure to fine tune the political pain/revenue trade-off across the population segments. We used to use raw class proxies - e.g. rental property tax rates 4 times the rate home-owners pay - but now we have a stupid sports rebate aimed at 905.

Michael, I'm not sure the tax cut phenomenon explains the decoupling of the federal and provincial tax systems. In part, the timing isn't right (the provinces started cutting income taxes before the feds did, and the feds started allowing the provinces to decouple their tax system before the feds really started reducing tax rates). In 1997 (long before the feds started cutting taxes) it was the Harris government in Ontario that threatened to pull out of Ontario's federal/provincial tax collection agreement unless the feds allowed Ontario to impose a tax on imcome rather than a tax on tax (as had been the practice before). Tax cuts were a factor there, but it was the ability to tailor their own tax cuts that was driving the Ontario government, not fear of federal tax cuts (since Ontario was a good 4 years ahead of the feds on that front). If anything, what was driving the push for a separate tax system was that tax-cutting governments in Ontario and Alberta didn't like the the fact that, because the federal rate structure wasn't being adjusted for inflation over the 1990's), any tax system which used that structure would have steadily increasing tax rates as people got pushed into higher tax brackets (this factor was a secret, but very significant, explanation for the Liberal government's success over the last 1990s in balancing their budge).

The better explanation is probably that the provinces wanted the policy flexibility that was denied them by prior tax collection agreements. It surely isn't too surprising that in a federation with 10 very different provinces, we might provinces with different priorities and interests in terms of how they want to design their income tax systems. The better question is, why didn;t they do this earlier, and why I don't have a solid answer, I might suggest that before the widespread use of computers and networks, such a system was to complex for the CRA to administer. As computing and networking costs dropped over the course of the 80's and 90's, the previous administrative objections to having different provincial rate structures gradually vanished. Nowadays, if you're using a computer to prepare (or file) your return, the marginal cost of having a different provincial rate structure is probably nil.

In any event, the existence of parallel tax systems doesn't really increase the complexity of the tax system. There's a different rate structure, but that's a purely mathmatical calculation (even if you file by hand) and an extra page on a return, and there are different credits, but those were always there. The real complexity in the tax system come from determining what is "income", and in that respect the feds and the provinces still use the same tax base.

There is a real social cost to this. I am that rare freak who sees GST on something and sees roads, schools, and national defense. I see income taxes and think EI, theatre, and universities.

I hate filling in my taxes. I have a PhD in physics for God's sakes and I just can't figure out how to calculate my RRSP limit. And I read a rule, and I think I understand it. But then I fill in the answers to Quick tax and Quick tax arrives at a different answer than I did about what I can claim.

The complications might make things seem fair but in fact they make taxes *seem* less fair. A colleague in a lab I worked in once was Serbian and he told me how taxes were calculated there: the local thug tells you how much you owe. Being able to read the rules and calculate our own taxes should make us realize the taxes are fair, or at least understand what they are trying to do. But the rules are so complicated that they seem arbitrary. And if they seem arbitrary and hard to a physicist who reads econ blogs for fun, well... there's a problem.

Interesting discussion. Coming back to vote buying, I think the political impact of tax credits is magnified by the general public's ignorance of taxation. Many people believe that a $500 tax credit is worth $500 to them. (I realise that anyone with sense would figure out that this was wrong once they saw their tax bill, but this group basically gives a box of receipts to H&R Block, and then looks at the bottom line when they get the results). An even larger group, probably a majority, believe that a $500 credit is wroth $500 x {marginal tax rate}. Few people understand that credits are almost universally applied at the low marginal rate.

Anyway, I wouldn't be surprised if a good chunk of the answer was complexity saving money. None of my coworkers realised that worker contributions to our medical benefits could be claimed. Even payroll was stumped when I asked them to separate the disability insurance from the health portion. Our benefits are expensive enough that a good number of people would be over the 3% cutoff, and this is worth a lot more money than not checking off the GST credit box.

I've said it before, though. Everyone who calls for tax simplicity really wants to do away with other people's credits. Touch one that they take advantage of and you'll lose their vote forever.

Neil, you give the government too much credit - they don't know enought about how the system works to figure out how complexity could increase their revenue. And, truth be told, for every example where complexity increases their revenue, I could probably give an equal example where complexity costs them revenue.

Just one quick nit, a $500 credit is worth $500 dollars (assuming you have to pay tax or that its a refundable tax credit). But I know what you're saying, the government only gives you a 15% credit on what you spend (i.e., 15% of $500), but they never call it a $75 tax credit (which is what it is), they call it a tax credit on up to $500 worth of expenditures.

Once again I'm blown away by the intelligence and thoughtfulness of the comments on this blog!

Chris - you're a PhD in physics and you're stumped. The sister mentioned in my post (point 9) is a law prof married to a tax lawyer and she's stumped. I teach tax policy and I get confused (if I don't claim CTB for my 16-year old because my household income is too high, does this mean he's eligible for the Ontario Sales tax credit?).

Yes, complicated rules can seem arbitrary.

Neil, I agree with you and not Bob on this one.

So what would the political optics be of going to a very simple taxation system (say, a progressive tax calculation, period) and then giving people cheques instead of tax deductions for everything the government wants to encourage?

I know, this has nothing to do with economics. It's about messaging and honesty in politics, not really the subjects of Worthwhile Canadian Initiative. But comparing the spin of a "tax cut" to a "government handout" whose effect is precisely the same tells you a bit about our leaders.

(As a side benefit, most people wouldn't have to file tax forms. There would be enough information from employers and investment owners for the government to calculate amounts owing.)


My comment was only for personal income tax. So I agree with you that it would be a major distorsions if we eliminate all deduction for entreprise. It would act more or less like a sales tax, like in your example.

As another matter of complexities, it seems we want to solve every inequities or social imbalance between individuals and family with the income tax instead of creating good redistribution policy.

We always imply that our tax system is progressive maybe after taking account of all the possible deduction, it is less so. Some rich segment who exploits all these possibilities doesn't pay their fair share of income tax and it is not something we want to make public. Just maybe, I don't know if it is possible I am not that rich and I won't tell my secret if I am !

John, in the UK, donations to charity work more or less as you describe. Every time you give to a charity, the government automatically matches your gift by, say, 20, 30%, I don't remember the exact number.

I would be really interested in knowing whether that system results in more or less donations to charity/revenue for charitable organizations than the Canadian system of credits.

One advantage of the UK system is that the government matches everyone's donations, e.g. donations of low income people, not just the donations of people who pay income taxes.

Ah, the crisis theory of policy change! In a world of diffuse costs, concentrated benefits and sunk costs everywhere, it makes good sense.

So what is the fundamental problem? Are increasingly bewilderingly complex tax forms best viewed as a time inconsistency problem? Everybody understands the benefits of simplicity but when the time comes, the benefits of caving into the political temptation of more generous exceptions outweigh costs born by large numbers of inconvenienced but otherwise politically inactive taxpayers.

The complexity has to make it easier for clever people to fudge a little around the edges. I would imagine that the monitoring and enforcement costs for small sins are too great. Frances, is increased complexity an invitation to more cheating? That question must be difficult to empirically tease out.

Complexity does indeed make it harder to distinguish between cheating and genuine mistakes ("I didn't know I couldn't claim the fitness tax credit for my 16 year old"). So that makes enforcement more of a problem.

Also complexity means people use accountants, and there are accountants out there who might have little hesitation about writing off, say, my dog's dental work as a business expense ("home security system"). Professionals know how to avoid taxes - precisely how much they can get away with.

Empirically it would be possible to get independent information from a Statistics Canada survey on the total amount spent on, say, bus passes or children's sports or child care, and compare reported expenditures with amounts claimed for tax purposes. I suspect for child care reported expenditures are much greater than amounts claimed for tax purposes (evasion on the supply side, the relatively low maximum amount that can be claimed), but for the others I don't know which way it would go. Probably a lot of people who have bus passes don't pay income taxes, so have no reason to report their expenditures.

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