parliamentary budget office and the tax free...

Parliamentary Budget Office and

The Tax Free Savings Account

Mostafa Askari University of Regina, March 18, 2015

Why do we have a PBO?

• 2006 Federal Accountability Act

Origin

• To promote transparency and credibility to the government’s fiscal forecasting and budgeting

Purpose

• Level the playing field for Parliament

• Foster trust in government

Ultimate goals

“We also know that the government has been wildly inaccurate in its forecasts and spending projections over the past five or six years. In recent budgets the Liberals have lowballed surplus numbers by an average of $6.5 billion per year. In the U.S. they do not have this kind of debate. There is a congressional budget office. People there, like here, may disagree on fiscal policy, but they should not have to guess if the numbers they are using are accurate.” “We believe that an independent, non-partisan parliamentary budget office should produce forecasts of revenues and spending which are universally available and accepted by all parties and experts of all stripes. Such a body would ensure that the government is genuinely accountable for taxpayers’ dollars and that we maintain fiscal discipline at the federal level.”

Stephen Harper, October 6, 2004

Two branches of the PBO’s mandate

Reporting on the state of the nation’s finances, the

government’s estimates and trends in the Canadian

economy

Estimating the financial cost of any proposal for matters over which Parliament has

jurisdiction

The PBO in practice

• Opposition Senators and Members of Parliament will frequently request analysis of contentious matters, and the resulting public reports are used to hold the government to account

• However, all parliamentarians have an interest in the PBO’s findings

Used for Political Purposes

• Budget of $2.8 million

• 17 employees

Small

• More than 200 publications since the beginning of its activities in 2008

• All PBO publications and data are available to the public

Prolific and open operating model

What features define the PBO?

• The PBO provides advice independent of government

Independent

• Expert staff and independent peer review for major files

Authoritative

• Conduct analysis independent of requestor’s political affiliation

Non-partisan

Reporting on the state of the nation’s finances, the government’s estimates and

trends in the Canadian economy

Annual Economic and Fiscal Outlook, and occasional

updates

Annual Labour Market

Assessment

Quarterly review of

federal program spending

Analysis of the main and

supplementary estimates

Estimating the financial cost of any proposal for matters over which Parliament has

jurisdiction

Estimating the financial

cost to remediate Canada’s

contaminated sites

($3.9 billion)

Cost of absenteeism in the public

service ($871 million)

Budget analysis of acquiring

Arctic/ Offshore

Patrol Vessels

Fiscal cost of the mission in

Iraq, Operation

Impact ($129 to $166 million)

Challenges

•Organizational structure •Appointment process •Budget

Weak statutory protection

• Weak legislation

• No remedies for lack of compliance

Access to information

• Political and bureaucratic resistance

• Fear of PBO’s presence in media

Open and transparent publishing

Tax Free Savings Account

Summary

Key benefit: Exempts investment income earned on TFSA assets from income tax and income-tested transfer calculations

TFSA facts: • Implemented in 2009 • Contribution room increases

annually (by $5,500 in 2015) • Eligibility starts at age 18

Age limit: 38

Age limit: 68

0

50

100

150

200

250

300

350

400

2010 2020 2030 2040 2050 2060 2070 2080

x1000 Illustration: growth in personal TFSA limits

Medium term Long term Scenarios Fiscal Distribution Fiscal Distribution Fiscal Distribution

-0.2 -0.4 -0.5 -0.7 -0.9

-1.1 -1.3

-1.5 -1.7

-1.9

-0.2 -0.2

-0.3

-0.4

-0.5

-0.6

-0.7

-0.8

-1.0

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

$ b

illio

ns

Provincial

Federal

• Though the TFSA is a federal initiative, income earned in accounts is also exempt from provincial income tax

• The provinces bear about 1/3rd of the fiscal impact


-0.2 -0.4

-0.6 -0.7

-1.0 -1.2

-1.5 -1.7

-1.9 -2.2

-0.1 -0.2

-0.2

-0.3

-0.4

-0.4

-0.5

-0.6

-0.6

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

$ b

illio

ns

Transfer Tax

• Most benefits are tax savings, but 20-25% of benefits are generated through increased transfers on income-tested programs (e.g. OAS/GIS clawbacks)


0.11

0.18

0.23

0.19

0.13 0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.00 0.05 0.10 0.15 0.20

Tran

sfe

r G

ain

s

Tax Gains

Low

Mid-Low

Mid

Mid-High

High

TFSA gains as % of after-tax income, by income group in 2015

• Transfer benefits rebalance distributional outcomes in 2015


-0.1

-0.2 -0.3

-0.3 -0.4 -0.4 -0.4

0.0

-0.1

-0.1

-0.2 -0.2 -0.2 -0.2

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

2010 2020 2030 2040 2050 2060 2070 2080

% o

f G

DP

Provincial

Federal

• The TFSA will grow ten-fold as a share of GDP (2015 to 2080)

• The rate of growth will slow each year as fewer people gain from increasing contribution room


Low income

Mid-low income

Mid

Mid-high income

High income

0

0.4

0.8

1.2

1.6

2

2010 2020 2030 2040 2050 2060 2070 2080

Gai

ns

as %

of

afte

r-ta

x in

com

e

TFSA gains by income group

• The lowest 20 percentile gains relatively little from continued TFSA expansion

• Median- to high-income households gain the most over the long term


0.49

1.31

1.75

1.71

1.36 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.0 0.5 1.0 1.5 2.0

Tran

sfer

Gai

ns

Tax Gains

Low

Mid-Low

Mid

Mid-High

High

2060

2015

TFSA gains by income group

• Transfer gains play a sizable role in rebalancing tax gain regressiveness, in the medium and long term


Low

Mid-Low

Mid

Mid-High

High

0

0.5

1

1.5

2

2.5

2010 2020 2030 2040 2050 2060 2070 2080

TFSA

gai

ns

as %

of

afte

r-ta

x in

com

e

TFSA gains by net worth

• Unlike many tax programs, wealth not income, is the key determinant of TFSA benefit potential

• Only the wealthiest 20 percent of households materially gain from TFSA expansion beyond 2050


45 and under – solid lines 46 and over – dashed lines

TFSA gains as % of after-tax income, by income and age group, 2060

Low

Mid-Low

Mid

Mid-High

High 0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.0 0.5 1.0 1.5 2.0

Tran

sfe

r G

ain

s

Tax Gains

• Age is also influential

• Older households generally have higher wealth and choose higher risk/return assets

• TFSA limits also increase with a person’s age, further benefitting older households

Medium term Long term Doubled limit Fiscal Distribution Fiscal Distribution Fiscal Distribution

-50 -170

-250 -350

-450 -80

-130

-180

-230

-800

-600

-400

-200

0

2016 2017 2018 2019 2020

$ m

illio

ns

Provincial

Federal

Medium term

• Like the first iteration of the TFSA, the near-term fiscal impacts of doubling contribution limits are relatively small

• Total TFSA fiscal costs would be about 20% higher by 2020


-1.0

-0.8

-0.6

-0.4

-0.2

0.0

2010 2020 2030 2040 2050 2060 2070 2080

% o

f G

DP

Baseline

Long term

• Over the longer term, doubling the limit would increase the TFSA fiscal costs by about 1/3rd


Low

Mid-Low

Mid

Mid-High

High

High - status quo

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2010 2020 2030 2040 2050 2060 2070 2080

Pe

r ce

nt

of

afte

r-ta

x in

com

e

Long term distribution of gains by household net worth

• Primarily the wealthiest 20 per cent of households would gain from a higher contribution limit

Medium term Long term $100k limit Fiscal Distribution Fiscal Distribution Fiscal Distribution

• As an illustration, if instead TFSA contributions were immediately and permanently increased to $100k

• The fiscal profile of the program materially changes in the medium and long term

$100,000 limit scenario

Baseline

0

0.1

0.2

0.3

0.4

0.5

0.6

2010 2020 2030 2040 2050 2060

% o

f G

DP

Long term fiscal impact under an alternative scenario

Medium term Long term $100k limit Fiscal Distribution Fiscal Distribution Fiscal Distribution

• Yet the distributional profile of the TFSA would effectively be unchanged

0.38

1.07

1.40

1.42

1.31 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.0 0.5 1.0 1.5 2.0

Tran

sfer

Gai

ns

Tax Gains

Low Mid-Low

Mid

Mid-High

High

Long term distributional impact under an alternative scenario

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