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tax and spend

A sign outside the Canada Revenue Agency is seen Monday May 10, 2021 in Ottawa. THE CANADIAN PRESS/Adrian WyldAdrian Wyld/The Canadian Press

The federal Liberals are watering down a campaign pledge to squeeze billions of dollars each year from tax dodgers, a promise that was the biggest source of new revenues in the party’s election platform.

The Liberals campaigned on a pledge to bring in $11.9-billion from stepped-up tax enforcement through to fiscal 2025-26. All three major parties included a similar policy in their platforms, although the Liberal version was the most expansive by far. And those pledges were part of a years-long pattern of governments looking to stricter tax enforcement as a politically painless way to boost revenues.

Last week’s budget had a much more cautious view of the dollars waiting to be squeezed from wayward taxpayers, with just $1.3-billion in net revenue projected through to fiscal 2026, as the chart below shows. In large part, that’s because the government proposes to spend less pursuing those tax dollars, with the budget forecasting just $915-million over the next four years, compared with the $2.5-billion outlay in the Liberal platform.

But Ottawa’s forecasted payback from that investment – a rare instance in which the I-word accurately describes government spending – is much smaller as well. Both the reduced budget, and the shrinking expected benefits, seem to be an implicit acknowledgment of the limits on how much revenue can be squeezed from a crackdown on tax avoidance and evasion.

“It could be a case where they have reached a point of diminishing returns,” Parliamentary Budget Officer Yves Giroux said in an interview, adding that it’s possible the department is simply underpromising to avoid missing a target.

But Mr. Giroux said there are other possibilities. The amount of money to be reaped could depend on what sort of enforcement activity is being funded.

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The kind of taxpayer to be targeted for stepped-up tax enforcement is also a variable, affecting both the amount of revenue, and when it arrives. Mr. Giroux notes that audits of smaller businesses generate revenue relatively quickly. But those amounts are likely to be significantly smaller than the fruits of auditing larger companies.

Indeed, a 2019 CRA study found that the 2014 tax gap for small and medium-sized companies was $2.7-billion to $3.5-billion. (The agency defines the tax gap as the difference between tax that would have been paid if all legal obligations were met, and the amount actually paid.)

The 2014 tax gap for large businesses was twice as big, with an estimated range of $6.7-billion to $7.9-billion.

The budget gives some broad hints as to what the government intends. The document says the extra funds will be used for “the CRA to expand audits of larger entities and non-residents engaged in aggressive tax planning; increase both the investigation and prosecution of those engaged in criminal tax evasion; and to expand its educational outreach.”

In a statement, the Finance Department said the increased amounts for tax enforcement in the budget represent what that department and the CRA believe can be currently absorbed, given previous similar expenditures. The statement did not directly respond to the question of why fewer new dollars are to be spent on enforcement than was promised during the campaign. But it did say the government is willing to take further action on enforcement.

In the budget, the government goes on to claim that similar efforts since 2016 have “yielded a return of five dollars to each dollar invested.”

That claim is built on a shaky foundation, most particularly since the CRA acknowledged in a January, 2020, report that it does not monitor or report on how good a job it does collecting cash.

More broadly, the assertion that the government gets $5 for every $1 spent on tax enforcement is contradicted by the budget numbers.

Robin Boadway, professor emeritus of economics at Queen’s University, said there is little evidence to support the idea of an outsized payback from increased enforcement. “These are really quite remarkable rates of return,” he said, adding that if such estimates were accurate, it would raise the question of why past governments did not try to collect those funds.

As this second chart shows, the budget is considerably less optimistic, with a return of just 52 cents on the dollar in fiscal 2022-23, rising to $3.38 in fiscal 2025-26.

The Liberal platform from last summer, meanwhile, was much more aggressive in its assumptions. The platform forecast a payback of $5.67 in fiscal 2023, more than 10 times higher than the budget projection. By fiscal 2026, that gap had narrowed somewhat, when the platform’s estimate of a return on a tax enforcement dollar was only half again as high as the budget figure.

Even with a rising payoff over time, the budget’s actual forecasts are well below the $5 figure cited in the budget. As this third chart shows, that gap is even bigger if only original tax debts are counted, and the added costs of penalties and interest are excluded. (That tighter metric is a more precise measure of the tax revenues recovered through enforcement efforts.)

The government does not publish such a figure. And the PBO did not break apart its estimates in that way either when it released its costing of the Liberal election promise of increased funding for the CRA. But a PBO study from October, 2020, said that the agency’s analysis of CRA data indicated that collectible cash equaled 68.5 per cent of the gross fiscal impact for income tax and GST/HST audit programs. (That same study noted that the fiscal impact does not account for the cost of objections, appeals or writeoffs, all factors that would tend to whittle away at the benefits gained from spending money on increased enforcement.)

Essentially, the PBO study says that about two-thirds of the estimated benefit of increased enforcement is attributable to the original tax debt owed, with the remaining one-third resulting from added penalties and interest. If those added costs are excluded, the multiplier effect of added enforcement spending shrinks even further.

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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