The Growth of Direct and Indirect Transfers to Persons in Canada: 1988-96

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This paper analyzes the growth pattern of transfer payments to persons in Canada during the 1988-96 period. We find that indirect transfers (tax expenditures) are large in magnitude, both in dollar amount and in relation to direct transfers; that direct transfers are aimed largely at social policy objectives while indirect transfers are aimed mainly at economic policy objectives. Our analysis suggests that the government uses two different vehicles for delivering "social" and "economic" transfers to persons. For the former it uses direct cash payments and for the latter it uses the personal income tax system. This separation of delivery mechanisms may distort policy priorities. While social programs delivered through direct transfers receive annual scrutiny under government spending review, economic transfers remain largely hidden behind a complex tax code. We suggest that tax preferences be treated as transfers payments also for budgetary purposes and their rationale reviewed periodically as is that of direct transfers. This review should address the following fundamental question. Do these selected tax breaks generate sufficient economic benefits to cover the economic costs of the higher income taxes required to pay for those programs?