Characterizing personal expenses deducted from taxable income as "tax expense" is like characterizing "phantom" income as lost wages.

Tom: Tax expenditures come in all shapes and sizes and were inserted in the tax code for any number of reasons. One kind are expenses needed to earn income, without which income would not be earned, or at the level earned. Many others are not like that at all.

A tax expenditure is an item that causes a reduction of tax otherwise payable.

Donno: the U.S. is not chasing people overseas to close tax loopholes; they are trying to collect tax period, because unlike most countries, they tax citizens on their world-wide income, regardless of place of residence. Ambassador David Jacobson of the United States, in a speech in Ottawa yesterday, as much as admitted the policy was poorly designed when it came to the estimated million Canadians with U.S. citizenship who have made no demands on the services of the United States, have no connection with that country, own no property there, do no business there, and yet are required to pay U.S. taxes, or to fill out U.S. tax forms every year that will record that nothing is owed to the U.S. government, a more bureacuratic answer to a non-problem is hard to imagine. But there you have it, and the ambassador said his government would try to fix it. We shall see.

Rob K: I was not suggesting that all tax expenditures are wrong. I was only suggesting that they fly under the radar and periodically need re-assessment. They distort behavior in the sense that some taxpayers do things to chase the tax expenditure; in other cases because they reward taxpayers for doing what they were already doing, as with the Transit Pass Tax Credit.

Joanne: Most economists would agree that a shift in taxes towards consumption and away from taxes on incomes reward investment and savings and deter consumption, which is a good thing. Of course, there needs to be offsets for low-income people who spend more of their incomes on consumption on basic necessities.

Aron: the value of taxes forgone through tax expenditures is roughly 60 per cent of the total tax revenue of the federal government, so eliminating all of them would wipe out the deficit and turn us into surplus. But you would never want to do that. You could and should, however, examine many of them, except that individuals, groups, companies and regions have come to expect their tax expenditures as just, fitting, appropriate and sacrosanct.

An interesting tax exemption is the accelerated capital cost allowance -- that governments usually bring out to spur capital spending in economic downturns. Given that most of those expenditures would have been made anyways (from a going concern basis), the economic efficacy of accellerated capital cost allowances seems dubious. (mind you I'm not an MP in a riding that needs to spur job growth)

Thanks for taking my question. I would have thought the political benefit of "tax cut" would be wider than a focused exemption.

Rob K: Look, one of the many challenges with subsidies is the one you just mentioned. It's called the "free rider syndrome." That means you intended to do something, but along comes a government subsidy for doing what you were intending to do, so you get a free ride. It's almost impossible to measure precisely the "free rider" sydrome, but it exists. Take, for example, the wildly popular program to give people a tax break to renovate their home or cottage, up to $10,000. Builders, renovators and owners loved it, and money flew out Ottawa's door. What could not be calculated was: how many people would have done the renovation in, say, the next five years without the tax credit? Presumably at least some, and they got a "free ride" on the government program.

Amit: It's the other way around. Why did the Harper government go against the advice of almost every economist in the country and cut the GST instead of rates? Because the GST was visible, and tax rates are not. It was a decision 100 per cent political; 0 per cent economic. And it blew a $12-billion hole in government revenues. We wouldn't be having any debate at all about cutting government spending in Ottawa by 5 or 10 per cent -- and our fiscal situation would be very, very strong -- if the GST had been left alone.

Further to the moderator's question at 2:10, when do tax exemptions make the most sense as government policy?

Nat: When the genuinely stimulate productive activity that would not otherwise have occurred.

The tax code still has the capital gains deduction whereby someone selling a "small business corporation" can exempt $750,000 of capital gain. What do you suppose is the policy rationale for keeping this?

Mr. Simpson: I'd be very interested to find out the tax expenditure on physician and dentist incorporation, given income splitting and the much lower tax rate that corporations pay. Most people seem unaware that the majority of physicians are now incorporated, pay themselves, their spouses, and any adult children incomes or dividends from the corporation to avoid paying the hefty 46.41% marginal tax rate that's at the top of the Ontario brackets.