The federal finance department just released its Tax Expenditures and Evaluations report for 2007. This annual report includes the estimates and projections of revenues that the federal government loses from different tax credits, deductions, exemptions and other tax expenditures.
The number of these loopholes has proliferated in recent years as the Conservatives have used boutiquey tax cuts for a wide range of policy areas, despite evidence that they are much less effective than direct spending programs.
Some of the most startling figures are the estimates of revenues lost from the partial inclusion of capital gains in income and the related employee stock option deduction. These measures allow those with capital gains or stock options to only include half the value of the gains in their taxable income.
According to this report, the federal government will lose over $11 billion in revenue this year from these measures alone: over $1 billion for the stock option deduction and over $5 billion on the personal and corporate side each for partial inclusion of capital gains income. This amount is almost 50% higher than the projections of revenue losses for this year from the 2006 Tax Expenditure Report.
Clearly, this is an increasingly popular — and expensive — tax loophole. It is also a tax loophole that overwhelmingly favours the rich. A CCPA report by Ellen Russell and Sheila Block estimated that two-thirds of the value of a capital gains tax cut would go to the top 5% of families.
Tax returns from CRA for 2005 also show that over 66% of the value of all taxable capital gains were claimed by just 5.9% of taxpayers (those making over $100,000 a year) and 4% of all taxfilers (including those who had no tax owing).
The stock option deduction is even more egregious: most of high paid corporate executive compensation is granted in the form of stock options. This is taxed at half the rate of normal wage income and is worth many millions in lower taxes for these top executives. This is a major factor in the fact that the super rich pay a lower rate of tax than most other Canadians.
An original implicit rationale for taxing capital gains at a lower rate that capital gains included some inflationary component. But this rationale was lost when the taxable proportion of capital gains was cut at the same time that the trend rate of inflation was cut. The more recent rationale is that it encourages savings and capital investment and, in the case of executives, a focus on stock performance. But these arguments carry little water. The world has been awash in an excess of speculative capital in the wrong hands in recent years, and the stock option deduction has been widely abused.
Capital gains should be taxed at the same rate as other forms of income, with some adjustment for inflation. This would raise about $8 billion or more in additional revenues each year, provide funding for more public programs and also encourage more productive long-term investments, instead of speculative short-term investments.
These types of revenue losses put the lie to Finance Minister Flaherty’s claim that he has no room to provide any significant spending or measures in next week’s budget.
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