Finance Committee on April 7th, 2008

[Prof. Luc Godbout]

That is certainly a good plan but it is spread out until 2012. Currently the industrial sector is not making a profit. A lower corporate tax rate is therefore not particularly helpful right now, and the same applies to the new accelerated capital cost allowance. If businesses are operating at a loss, providing greater capital cost allowances or a lower tax rate will achieve nothing in the short term. However, lower tax rates on investment in 2012, Mr. Mintz's TEMI, is definitely a good idea.

Could we have done something more in the meantime? That is the question that I put in my opening statement.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Monsieur Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you for your presentations

Mr. Godbout, you talked about the last two GST reductions in terms of industrial strategic choices. If I understand correctly, if that money had been channeled into assistance for productivity, regardless of the method used, the impact on job losses in the manufacturing sector would have been quite rapid and very different from the impact we are all aware of.

[Prof. Luc Godbout]

We're talking about two different things. A GST reduction could have been used, as my colleagues pointed out, for the purposes of harmonization with provincial taxes, but it shouldn't be forgotten that four provinces have already harmonized their taxes. Quebec in particular has done this with no assistance and at its own cost. With respect to lowering rates, it has often been pointed out that the money could have been used to decrease income tax, which would have been more effective. There were other ways to help the manufacturing sector. For example, this year's federal surplus could have been used to act directly. The proof is that a billion dollars has already been used to assist traditional sectors. The distribution should be questioned rather than the method of helping the sector.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

You said that it would have been more effective to reduce personal income tax rather than the GST. Can you explain why?

[Prof. Luc Godbout]

When you reduce the GST, you reduce the cost of a consumer product, whether that product comes from Canada or abroad. When you reduce income tax, you reduce the cost of labour. When you reduce income tax, you give people an incentive to work in Canada rather than abroad. Reducing income tax has a greater effect on Canadian economic growth, whereas reducing consumption taxes has an effect on Canadian economic growth but also on production abroad.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

So if I use an exaggeration, we have to an extent subsidized jobs in China, in a manner of speaking.

[Prof. Luc Godbout]

Indirectly. The cost of goods was reduced, whether they were produced here or abroad.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

In the light of the most recent budget, what type of measures would you like to see? Is it still possible to create a temporary modernization fund such as the one you suggest given the numbers that suggest there will not be a surplus?

[Prof. Luc Godbout]

I think that an analysis of the numbers shows that last year, which ended on March 31, 2008, was the last year of large surpluses. I have not undertaken a comprehensive analysis, but the simple fact that $3 billion was taken out of the reserve shows that surpluses will be much more modest, at least over the next two years. If there were going to be a modernization fund it would have to draw on the surplus of the year ending March 31, 2008.

I am not a legal expert. Can this fund still be created with this surplus, given that the year is not yet over and that financial statements will not be signed before September? I do not know and I leave that debate up to the legal experts. Perhaps it is possible.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

That is a question I myself have been wondering about these days. I wonder if the Conservatives could still change their mind.

Let us say that it is not possible and that the $10 billion were gone by the 31st of March last. Given the current situation, what will happen to jobs in the manufacturing sector because this type of action wasn't taken?

[Prof. Luc Godbout]

That is a really difficult question to answer. What I can readily say is that if we cannot use it, the $10.2 billion amount will go to pay down the debt, which is not a bad thing to do.

As well, action has been taken so that in 2012 our investment tax rates will be among the lowest of all G7 countries. But could we not have tried to do things faster, given the crisis in the industrial sector and the statistics I referred to showing that Canadian businesses are facing investment problems? I said that we needed to take specific action in the short term. But close your eyes, we are headed in the right direction, even without such action.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Is it possible that, through the sole use of generalized tax cuts up until 2012, a great number of businesses will want to benefit from that tax environment? At the same time, a huge number of corporations will have been bruised and battered and will not have been able to make it through the difficult times.

[Prof. Luc Godbout]

That's possible. The rate cuts on investments, especially those reducing taxes on profits, are geared towards profitable businesses. Take away the profits and the plan holds little interest. Companies may well get battered between now and then, given that economic growth will be rather weak over the next two years, particularly in Quebec and Ontario, two provinces with industrial problems.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Could current losses have such a negative impact that, even if positive fiscal measures are adopted overall, there could be a major shift in the manufacturing sector preventing it from reaping any benefits?

[Prof. Luc Godbout]

I cannot answer that, but perhaps my colleagues can. We will be well positioned in 2012, although some businesses will have closed their doors by then.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

You gave the example of an income that would go from $35,000 to $40,000, a $5,000 increase. Of that amount, only $1,200 would not be clawed back. What measures would you suggest so that the incentive... Basically, you are confirming what we have heard from the public: it makes no sense to earn $5,000 more if you have to give it all back to the state. That is the consequence. What could be done to correct the situation?

[Prof. Luc Godbout]

First of all, the good news is that the problem has been identified and governments have tried to not make matters worse over the past few years. The federal government has implemented working income assistance. Quebec did the same thing two years earlier, with its working bonus. And yet, despite those measures, some people were worse off after receiving federal assistance because those measures were not fully harmonized. Governments have to talk with one another.

One of the problems is that two orders of government are taxing the same income at the same time. And then there are the payroll taxes collected by para-public agencies. Assistance programs have been implemented especially for people with low incomes, and these are positive initiatives. But when all these programs bear down on an additional dollar of income at the same time, in some instances, the government ends up clawing back 75¢ on that dollar. People are wrong not to work overtime and claim that they have no money left over, but in fact, they are not entirely wrong. In some cases, the problem is due in part to taxes but also to the effect of three distinct actions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to Mr. Del Mastro, I believe--or is it Mr. Wallace?

[Mike Wallace, Conservative, Burlington, ON]

That's fine.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair. I appreciate that.

I want to go back to the carbon tax issue that was raised and discussed at some length when Mr. McCallum was asking questions around that. There was some discussion on taxing imports and tax-exempting exports. Bearing in mind that Canada is an exporting nation and not an importing nation, aren't we opening ourselves up to the real danger of countervails and damaging the Canadian economy under that kind of theory?

[Prof. David Duff]

I'm not an expert in trade law, but that's why I've mentioned this ozone-depleting substances tax that the U.S. introduced. They had a domestic tax on ozone-depleting substances and wanted to make sure their industries weren't at a competitive disadvantage to imports. That was considered to be acceptable under the GATT at the time, I think, not the World Trade Organization.

If it's acceptable, you're not subject to countervailing duties, right? It's legitimate under international trade law. So obviously you have to make sure that any arrangement satisfies international trade law, but there's a precedent out there for that.

[Dean Del Mastro, Conservative, Peterborough, ON]

Well, there's a stark contrast, though, in the comparison of our two nations, because the United States is a net importer, not a net exporter, so sometimes they can get away with some laws, and as the largest consuming nation on the planet and the number one economy, sometimes they can get away with things that we might not be able to get away with as an exporting nation. I think that's why the Prime Minister has been working towards a global consensus on the environment, something that would actually get things headed in the right direction. It might incorporate a carbon tax here in Canada and allow us to remain competitive, because ultimately we want our Canadian companies to be able to compete. We don't want to put undue penalities on them so that they're not competing.

But what you're speaking to is relevant, and I might get your opinion on this. There's a lot of opinion out there that many nations with a better record than Canada's on reducing greenhouse gas emissions have in fact just exported their emissions to emerging economies such as China. That's what you're getting at and trying to battle. Is that correct?

[Prof. David Duff]

People say that. People say Germany doesn't really produce any oil, so they've had an easier time satisfying the emission standards and they're importing from other countries that are burning coal or whatever. I think that's one of the rationales for trying to think of this as a destination-based tax rather an origin-based tax, which is the way we've generally thought of carbon taxes. I'd agree with that.

I don't want to slam Germany, though.

[Dean Del Mastro, Conservative, Peterborough, ON]

Right, and I understand that--