Tax Exemptions for Investment Income: Boon or Bane?

Mowat Research #143, February 2017; ISBN 978-1-77259-040-1

58 Pages Posted: 13 Feb 2017  

Peter S. Spiro

University of Toronto - Mowat Centre for Policy Innovation, School of Public Policy and Governance

Date Written: February 2017

Abstract

The Canadian tax system is riddled with tax exemptions and preferences for many types of income and taxpayer characteristics. Eliminating unneeded tax expenditures would increase economic efficiency. It would allow a tax system that is fairer across income groups and also fairer in its treatment of different types of income recipients at the same income level.

The bulk of investment income is received by higher-income Canadians, and therefore these preferences favour them. That exacerbates income inequality, which has been a growing policy concern in recent years.

The most heavily subsidized saving vehicles are for retirement. They are much more generous in Canada than in other OECD countries. The subsidies for this type of saving are almost twice as large in Canada as in the United States. The benefits are quite unevenly distributed among Canadians (even among people at the same income level), and the economic benefits are lacking. The best guess is that they actually reduce the national savings rate.

Adding up all the preferences for investment income, one finds that the federal government loses about $75 billion of tax revenue per year. That is more than half of all the personal income tax it currently collects. The vast majority of investment income in Canada is either not taxed at all or taxed at lower rates than regular income. Eliminating or reducing these expenditures would permit substantial reductions in general income tax rates without a loss of revenue.

Keywords: tax expenditure, capital gains tax, dividend tax credit, registered retirement savings plan, income distribution, Canada

JEL Classification: H20, H21, H24

Suggested Citation

Spiro, Peter S., Tax Exemptions for Investment Income: Boon or Bane? (February 2017). Mowat Research #143, February 2017; ISBN 978-1-77259-040-1 . Available at SSRN: https://ssrn.com/abstract=2915264

Peter Spiro (Contact Author)

University of Toronto - Mowat Centre for Policy Innovation, School of Public Policy and Governance ( email )

720 Spadina Avenue, Suite 218
Toronto, Ontario M5S 2T9
Canada

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