Amid a rising tide of tax credits, we need to simplify the tax code

The proliferation of niche tax credits is insane. But it doesn’t have to be this way, and here’s proof

 
Cars in a traffic jam
The way Canada taxes company cars is considered a model for the world because of its simplicity and neutrality. The same can’t be said of the rest of the tax code. (Image Source/Getty)

Hey, Sierra Club, got some news for you! Grab a pen, David Suzuki Foundation, you’ll want to get this down too. Same goes for all those other groups that like to get excited about climate change—and angry at Ottawa.

It turns out the Harper government is a world leader when it comes to green taxes. Yes, according to the OECD, Canada has the toughest, most environmentally friendly tax regime among all wealthy countries when it comes to cars, carbon and commuting—far surpassing those green darlings in Sweden and the rest of Europe. Surely everyone can learn something from this.

In September, the OECD released a report on the taxation of employer-provided vehicles and their environmental impact. Taxing non-cash benefits such as a company car more lightly than the equivalent cash income skews compensation choices, as employees will always prefer a cheaper car to paying more income tax. Plus, subsidizing car travel inevitably leads to more driving, which creates “high environmental and other social costs,” the OECD warns. “These include increased contributions to climate change, local air pollution, congestion and road accidents.”

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According to the OECD, most countries substantially under-tax company cars. In Germany, the implicit subsidy is $3,500 per car per year. Swedish drivers get more than $2,000 from the taxman. Across the 27 wealthy countries studied by the OECD, the average credit is $2,300. And in Canada? It’s a mere $57.

Canada tops the OECD leader­board because our tax code treats company cars logically and neutrally—recognizing that the taxable advantage of a work vehicle comprises both the fixed benefit of having access to a car plus a variable benefit that depends on how much you use it.

As a result, company cars make up just 8% of all vehicles in Canada. Our tax system is “green” in that it’s indifferent between wage compensation and free cars. By comparison, nearly half of all cars on Swedish roads are employer provided. In France and Britain, it’s one-third.

The smaller point here is that environmental groups should be singing Ottawa’s praises for its refusal to subsidize car travel, as is the case across most of Europe. While we’re waiting for that (it could be a while), we might also consider the bigger message: Good things happen when taxes are neutral, efficient and apolitical.

Unfortunately, with an election due next year and the budget nearly balanced, the Harper government seems intent on ignoring the successful lessons of its own car tax in favour of unleashing a host of new boutique tax credits and other pointless complications. In an effort to win over the middle class and micro-voting blocs, Ottawa has created numerous special tax goodies covering everything from the recently enlarged children’s fitness credit to the obscure volunteer firefighters credit. All of this makes our tax system more opaque and prone to unusual outcomes.

Consider the Conservative government’s promise to introduce limited income splitting for the current tax year, a move clearly focused on winning votes from single-income families with children. As announced at the end of October, the scheme will see taxpayers rotate in and out of income splitting over the course of their lifetimes. Newly-weds would file separately, parents with young children would file jointly, and once those kids grew up, they’d file separately again until finally, upon retirement, they’d be back to filing jointly, thanks to pension splitting. It’s a mess of economic distortions and red tape.

Deliberately creating tax nooks and crannies in hopes of engineering political advantage violates the basic premise of proper tax policy, which is to raise the funds necessary for government operation in the least disruptive manner possible. Canada’s tax on company cars is a small regulation that delivers a big lesson: A coherent tax system that places neutrality and efficiency first can lead to desirable social and environmental outcomes far better than a tax code full of politically meddlesome, needlessly complex credits, gifts and bribes.

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