Who Benefits from the TFSA?
A shorter version of this analysis was published today in the Globe and Mail’s online business feature Economy Lab.
Stephen Harper has unveiled yet another plank in a platform that seems remarkably out of touch with the concerns of an electorate walking on post-recession eggshells. His latest proposal would double the contribution limit to the Tax Free Savings Account (TSFA) to $10,000 a year.
The rich in Canada thank you, Mr. Harper. For everyone else, itâ€™s virtually meaningless.
The TFSA is pitched as something thatâ€™s good for everyone.
In 2008, before the recession hit, the average after-tax income of individuals in Canada was $31,400. Median after-tax income (50 per cent of Canadians made less) was $25,400. Thatâ€™s the most recent data available. The full impact of the recession on incomes had not yet registered.
Why double the contribution limit when the majority of Canadians are nowhere near able to contribute to the max now?
What’s the take up?
Introduced in January, 2009 — at the height of the recession and at a time when every other government across the globe was trying to stimulate spending, not saving — TFSAs permit Canadians to tuck away up to $5,000 in savings a year and never pay tax on whatever that money earns.
But, in the wake of a global economic meltdown that wiped out almost half a million full-time jobs in Canada, a lot of people are having trouble finding any money to save at all. In fact, they were having trouble saving before recession hit.
A small minority of Canadians have stuffed $19-billion in assets into these accounts in less than two years. A lot of those people have their money in low-yielding savings accounts. But a privileged few who have maxed out their RRSP and RESP room can use this account as mad money, investing in high-risk, high-return ventures and doubling or tripling their savings in a few short years. Tax free.
What’s the cost?
Even before it is expanded, Budget 2008 estimated the TFSA would drain $920-million from the public purse in its first five years. Turns out Canadians who could take advantage of the program socked away more than expected. But weâ€™ll never know the true cost of this move as it is neither a tax expenditure or a spending program.Â There isÂ no way of tracking who gets the most of it, who’s maxing out the limits or how much the government is losing on the venture.
Budget 2008â€™s initial estimates predicted the TFSA would eventually blow a $3-billion hole into annual federal revenues — just as Canadian politicians agonize about the rising costs of healthcare that seem so unaffordable.
You could relieve an awful lot of day-to-day stress for $3-billion. You could improve services, repair infrastructure or tackle poverty in a meaningful way.
Doubling the TFSA contribution limit means billions more will be forfeited, as UBC’s Kevin Milligan has argued here. He estimates the total price tag of the TFSA under the new proposal will be a loss of $6.7 billion to the public treasury.
And thatâ€™s just one proposal in Mr. Harperâ€™s Economic Action Plan, Part Two. Budget 2011 and the first 13 days of the election campaign have proposed dozens more that widen income disparities and trim revenues.
The standard push-back on the suggestion that the tax cut agenda is a wrong-headed use of public resources is the observation that itâ€™s our money in the first place, not the governmentâ€™s.
That is absolutely right.
Itâ€™s not the governmentâ€™s money, itâ€™s our money. And how we use our money to create a prosperous and civilized society is critical.
Letâ€™s be clear. This measure will make the rich and powerful more rich and powerful. The rest of us will be left begging for funding for basic services.
Canadaâ€™s banks will be, um, laughing all the way to the bank. Introduction and expansion of the TFSA means they can have their cake and eat it too.
The TFSA helps banks build up deposits.Â More deposits, more lending, more profits.Â Public policy helps fatten the banks and shields them from risk too.Â CMHCâ€™s mortgage insurance protects the banks against mortgage holders who default.Â The homeowner may go bankrupt, but the investor doesn’t lose a penny on his gamble. Taxpayers also helped outÂ during the credit freeze, buying $69 billion in mortgages from the banks to keep the money flowing. It’s unlikely we were sold the most reliable mortgages.
Weâ€™re making money on the deal now but should interest rates soar and defaults start to climb, the Canadian taxpayer would take the loss, not the banks who made some questionable lending decisions.Â (In fact the reason Canada’s mortgage portfolio is riskier now than a decade ago is the direct result of public policy.Â The Harper Government approved the introduction of government-insured zero down, 40 year mortgages in 2006â€¦.the very move that brought the house of cards down south of the border.Â By 2007 about two-thirds of all new mortgages being issued were highly-leveraged. We werenâ€™t smarter in Canada. We just came late to the party.)
TFSAs:Â They’re not here for you
The TFSA is sold as an Everyman’s policy: anyone can save more and win big, tax-free.Â But it’s really a win-win for the banks and people with lotsÂ of cash, while those struggling to stay afloat are ignored.
Some say that the TFSA is a good program for the poor who can afford to save but who would lose government income support by so doing; or whose taxable incomes on the other side of retirement will remain in the bottom tax bracket.
Both of these statements are true. But helping the poor is not why the TFSA was introduced by Mr. Harper’s government. It’s about helping the rich.
A Bush League Idea
By the way, you may be surprised to learn that a similar initiative was proposed three times by President George W. Bush and thrice rejected by the U.S. Congress.Â Thatâ€™s because it was shown it would strip the treasury of $300 to $500 billion in ten years, primarily favour the rich and make little difference to savings pattern.Â It made no sense in the U.S.Â Why does it make sense here?
What Should We Do?
The TFSA should not be expanded. It should be capped.
That would allow poor and middle class Canadians to continue to benefit.Â The rich could benefit too, just not in a super-sized way.
Lifetime contributions should be limited to $50,000 — 10 years of contribution. Growth of assets in the account should be limited to $150,000 tax free. Poor people donâ€™t gamble with their savings. It would take a long time to triple that maximum contribution when itâ€™s growing at two or three per cent a year.
Letâ€™s use public policy to serve the interests of the public. Not the affluent. They donâ€™t need the help.