Larry Brown discusses the TFSA and tax cut mania

NUPGE's national secretary-treasurer looks at the long-term impact on government revenues and public services of the Harper government's new Tax-Free Savings Accounts (TFSAs). 'How are you going to buy your own health care with $400?' he asks.

By Larry Brown
National Secretary-Treasurer
National Union of Public and General Employees (NUPGE)

Ottawa (30 Nov. 2009) - Everyone knows the Conservative government doesn’t like taxes.  Prime Minister Harper has even been quoted as saying, “I don't believe that any taxes are good taxes.”

Yet while almost every Canadian grumbles about taxes, most people know that if they don’t pay taxes they are going to have to give up things like public health care, toll-free roads, safe food and education – all of these and thousands more vital services come from our taxes.

Tax cuts are a way for conservative governments to ‘Govern from the grave.’ A government that wants to weaken the public sector can cut taxes and then saddle the next government with inadequate income to provide any improvement in public services.

Most people now understand that for all the tax cuts they have supposedly seen – the never-ending parade of tax cuts over the last couple of decades – they have not really benefited personally at all. Almost every personal tax cut favours the already wealthy. If personal tax cuts were so great we’d all be rich. They don’t work that way, though.

$5,000 tax break doesn't help the poor

Yet in the 2008 budget, the federal government introduced a new wrinkle in its attack on taxes. It’s called the Tax-Free Savings Account (TFSA). It allows Canadians to put money into an account and not pay income tax on the interest earned. 

Of course, this is targeted only at those that already have a decent income. If you are earning minimum wage you aren’t going to have an extra $5,000 a year to invest. A whole lot of low income Canadians are going to see no benefit from this tax shelter. But, for those who do have some spare cash, the TFSA is apparently very popular.  It’s also very insidious. 

This little measure will cost the federal treasury tons of money, money that could be used for education and health care and a cleaner environment, and it will do so with very little benefit to the taxpayer. Over the medium to long term this little tax shelter is going to rip holes in Canada’s tax revenue, so there will be way less money to provide the services that Canadians want and need. 

The Toronto Globe and Mail recently had a helpful article about TFSAs and how wonderful they are. According to this article, about 3.6 million Canadians have set up a TFSA, and although the amount in each one only averages $3,400, the total socked away is already an astounding $12.4 billion.

But follow it through – with a savings account of $3,400, these days you might get 4% in interest, $136 per year. At a maximum the individual taxpayer will save a whole $40 in taxes by putting that money in a TFSA.

$144 million and growing annually

But that tiny benefit per saver will cost the government enormously – about $144 million already – in the first year of the program. For the individual who has enough money to put savings aside, that tiny tax break is virtually irrelevant. But given that an estimated 3.6 million people have taken up this program, when these individual decisions are aggregated, the lost tax revenue to the government is already huge.

While $144 million won’t break the bank now, wait a few years. This TFSA is a Trojan horse of a tax break; the real danger is initially hidden. Under this TFSA, those who can afford it can put away their $3,400 (up to $5,000) each year.

The estimates are that within 10 years the amount earning tax free interest will amount to $160 billion. Even if interest rates and rates of return on investments stay very low, that will result in foregone revenue for the federal government of a pretty noticeable $2 billion per year. By then the higher income individuals who have been able to put aside savings each year will be getting in the range of $400 per year in tax cuts, while the government will be trying to deliver public services with $2 billion less in annual revenue. 

Over the next nine years, even if the rates of return stay low, the federal government will take in something like $11 billion less in taxes than they would have without this tax shelter for those able to put away savings into a TFSA. 

$3 billion a year in 15 years

In fifteen years, the loss per year will be a minimum of $3 billion per year, even if the economy doesn’t improve in all that time.

This whole idea really is nonsense from a social policy perspective. Most tax cuts have at least a modicum of rationale. Tax cuts to business are supposed to create investment or jobs, even though that seldom works. But what change in behavior will this tax shelter for savings create? 

Will anyone develop new savings to cash in on the less than spectacular tax savings that will result? Or will people with a good income simply re-label their existing savings so they qualify for the tax shelter? That’s not even a real question. 

So we’re looking at a tax shelter that will cost billions, reward those with already higher incomes, and do nothing whatever to change anything for the better.

When we pay taxes, we all pay according to our income and we all get collective benefits, we get a common good, we get a reasonable quality of life.

$400 vs. the cost of health care

In 10 years, if people continue to contribute to the TFSA at the same rate, their tax break will add up to a collasal $400.

How is anyone going to pay for health care with $400?  That wouldn’t even cover a half hour stay in a hospital. Yet, we are staring at a huge and ever increasing tax cut – at a time when every reasonable Canadian knows that it costs money to deliver quality public services, and that the way we pay for those services, is through our taxes.  

For all Canadians without a high enough income to allow them to set aside savings, this tax shelter for the higher income earners is a double whammy – they get neither a tax cut nor workable public services.

We are already being told that we need to cut public services because we have a deficit. In truth, though, what we need is a sober and rational look at our tax system, not a knee jerk series of public service cuts based on a self-induced loss of revenue caused by an infatuation with tax cuts at any cost. 

The Tax Free Savings Account should be more honestly labelled as the Why Don’t You Pay For Your Own Health Care Account.

NUPGE

The National Union of Public and General Employees (NUPGE) is one of Canada's largest labour organizations with over 340,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good. NUPGE