On Sunday, the Conservative Party announced an expansion of its suite of boutique tax credits. Previous analysis of boutique tax credits has been offered by Frances Woolley on Economy Lab here, and by Ben Sand and Peter Shawn Taylor here. I offer a slightly more academic discussion here.









The dislike of these credits among public finance economists is near-universal.

There are several reasons for this:

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Adds complexity to the tax system: Boutique tax credits benefit those who can afford accountants to arrange their financial affairs, and lard our economy with extra burdens of filling in forms and shuffling paper.

Costly to administer: The Department of Finance had to strike a committee to determine how much sweat you needed to excrete in order to qualify for the Children’s Fitness Tax Credit.

Low incomes miss out: Those Canadians struggling most with their budgets don’t benefit, since non-refundable credits only help those who pay tax. This is not a trivial concern – more than eight million Canadians filed non-taxable returns in 2009.

Incrementality: Much of the value of these credits goes to those already doing the activity; little increase in actual use. This means the incremental activity is achieved at great cost.

Ineffective: See here for an analysis of the ineffectiveness of the Children’s Fitness Tax Credit.

Creates entrenched interests of beneficiaries that will lobby for further credits and complain about job losses if credits diminished.

















In addition to the above more general concerns, the design of the new proposed Adult Fitness Tax Credit raises further specific questions. The goal of the credit is presumably to increase the health of Canadians. But it does this by subsidizing one particular channel to achieve that goal. Some people like running, going to their condo gym, or gardening to keep fit. Why should we subsidize one channel but not the others?









We also now have some evidence on the existing Children Fitness Tax Credit by a research team from Queen's and the University of Alberta. They found it to be ineffective.









Moreover, because it is too hard to administer daily passes for transit or gym usage, the credits favour monthly passes over day-use passes. This distorts people's decisions. Two Berkeley economists Della Vigna and Malmendier have found that people typically spend $600 too much by buying monthly over day-use passes, owing to over-optimism about future usage of the gym

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Improving the health of Canadians is a worthy goal for society to pursue. However, the pursuit of this goal through yet another gimmicky tax credit is unlikely the best way to achieve this goal.









What should be done instead? I know more about the tax system than public health, but I suspect programs aimed at education and targeted to at-risk communities would prove more effective. The Conservative press release mentions several interesting initiatives ranging from education tool-kits to targeted obesity programs. It is too bad that these initiatives are swamped -- by dollars and by campaign attention – by the new tax credits.

Kevin Milligan is Associate Professor of Economics at the University of British Columbia

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