Against Expanding Tax-Free Savings Accounts: Part One

There are 2 new studies on the consequences of doubling the Tax Free Savings Account

The first is from the Broadbent Institute. Double Trouble: The Case Against Expanding the Tax Free Savings Account. Here is the Executive summary.

Click to access tfsa_report-en.pdf

The Conservative Party of Canada’s proposal to double contribution limits for
Tax-Free Savings Accounts (TFSA) has received inadequate critical scrutiny to
date. This gap may stem from the notion that little revenues will be lost and the
perception that most taxpayers would benefit. Both beliefs are erroneous.
This study finds that no case—on either economic or equity grounds—can be
found for unconditional doubling of TFSA contribution limits. Over the long
run, doubling TFSA limits would cost governments additional billions in annual
tax revenues, put most of the lost taxes into the pockets of the already well-to-
do, and reduce the overall progressivity of federal and provincial tax systems.
The great majority of Canadians would enjoy no significant benefits. In fact, they
would bear the burdens of an expanded TFSA by enduring the reduced public
services or bearing the increased taxes needed to offset the lost revenues.

First, the existing TFSA already reduces the progressivity of federal and
provincial tax systems, and doubling the limits would exacerbate this bias in
future years. This study finds:
• When the existing TFSA scheme matures in 40 or 50 years, the cost to
the federal government is projected at up to $15.5 billion annually. This
represents a sharp increase from $65 million in its 2009 inaugural year,
growing to a $410 million cost in 2013.
• Provincial governments will also suffer revenue losses from the tax-free
nature of TFSA balances, growing to as much as $9 billion annually when
the system matures, figures that would similarly be inflated by a doubling
of the TFSA limits.
• Commitment by the federal government never to consider TFSAs in
the income tests for the Guaranteed Income Supplement and the Old
Age Security benefits will expose the program to growing numbers of
dependants and mounting costs in future decades. By 2050, annual
program costs could rise by $4 billion to several times that figure. econd, this study dispels the notion that doubling the TFSA contribution
limit would be of broad benefit to the taxpaying public and would boost the
economy’s performance. It finds that:
• The current combined contribution limits for RRSPs and TFSAs allow
ample room for the lifetime saving requirements of all workers earning up
to at least $200,000 annually. With the current $5,500 limit, one could
accumulate between $690,000 and $4 million depending on the rate of
return; an individual with the doubled limit or a couple with the current limit
could accumulate twice that amount, or between $1.4 million and $8 million.
• Usage of the current TFSA provision already displays a skew favouring
individuals at higher incomes, and this bias would be accentuated and
accelerated by a doubling of the contribution limits.
• The long-run benefit from doubling TFSA limits would go overwhelmingly
to the wealthy; current retirees and older workers would gain over a
transitional period but could be served without unconditional doubling of
the limits for everyone.
• Much of the increased contributions to TFSAs would come from the
transfer of taxable savings into accounts or the diversion of savings that
would otherwise go into RRSPs.
• Given the weak and broken linkages between household saving and
domestic business investment, doubled TFSA limits offer little prospect
for improved economic performance.
In short, the proposal to double TFSA contribution limits shares and even
surpasses many of the deficiencies exhibited by the government’s Family Tax
Cut scheme for income splitting: significant and growing loss of revenues,
differentially favourable benefits for high-income households, and reducing
the tax system’s progressivity. But unlike the family income-splitting scheme,
doubled TFSA limits will visit all of these afflictions upon defenceless provincial

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