Over the years, the federal government has shown a penchant for muddling the tax system with a myriad of tax credits, deductions, exemptions and exclusions. But tax expenditures—as they are collectively known—recently drew fire from Canada’s auditor general.

Specifically, the auditor general criticized the lack of regular review on the relevance and effectiveness of tax expenditures, and identified a dearth of available information for assessing their long-term costs.

But there are broader problems with tax expenditures that fall outside the scope of the audit. Before we offer any solutions, let’s better understand the scope of the problem.

The most pressing issue, perhaps, is the ever-growing list of tax expenditures, which add complexity to the tax system. From 1991 to 2011, the number of personal income tax expenditures increased from 105 to 123.

And virtually every federal budget since 2006 has contained new or expanded tax credits related to a specific activity or group of individuals. The credits cover everything from enrolling your child in a violin class or soccer to taking public transit.

At first glance, an abundance of tax credits may seem like a good thing. Everyone likes to save money. But each new tax credit can add to the complexity of Canada’s tax system and consequently increase the cost of compliance.

Every year taxpayers spend a significant amount of time (collecting and organizing receipts, understanding the rules) and money (paying accountants, buying software) to file their tax returns. The cost of complying with the personal income tax system alone is estimated at around $6 billion—or roughly $501 per household per year.

According to a recent study, taxpayers who claimed at least one tax expenditure (out of a list of 10) spent an average 20.3 per cent more in compliance costs (after controlling for factors such as age and income). Tax expenditures add to the cost of filing an income tax return since claiming a tax credit or deduction requires keeping records, ensuring eligibility, and perhaps hiring an accountant to check that you’re not missing out on any tax benefits.

And compliance costs fall disproportionately on lower-income Canadians who spend a greater share of their income complying. In fact, higher compliance costs might explain why lower-income Canadians are less likely to claim some tax expenditures or be aware of them in the first place. Independent research on the Children’s Fitness Tax Credit and tax credits for post-secondary education finds that tax preferences disproportionately benefit higher-income Canadians.

A more complicated tax system is also more costly for government to manage. Both the compliance and administrative costs equal money that doesn’t go to investing in productive things that helps grow our economy or incomes.

Also troubling, tax expenditures tend not to change behaviour. Instead, they subsidize things people are already doing.

So what’s the solution? A simpler tax system.

Tax expenditures currently cost the federal government approximately the same amount collected annually from personal income taxes ($130 billion). Indeed, with more tax expenditures, the government has to keep other tax rates higher to raise the same amount of revenue.

By doing away with at least 68 tax expenditures worth about $20 billion, the government could, in exchange, enact broad-based tax relief by scrapping the two middle-income tax rates (22 and 26 per cent). This would leave just two tax rates with an overwhelming majority of Canadians paying a single 15 per cent marginal tax rate and a small minority paying the higher 29 per cent rate.

These reforms would spawn a much simpler, pro-growth tax system that improves the incentive for Canadians to work, save, invest and undertake entrepreneurial activities.

While the auditor general highlighted important concerns about tax expenditures, the path forward requires more than operational tinkering. The real solution is to simplify Canada’s tax system.