Finance Committee on April 14th, 2008

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Menzies.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

Mr. Conway and Mr. Gorman, I know you've done a lot with assessing the provincial taxation systems, and we've also heard from you and many other prior witnesses about the need for harmonization. I think we all recognize that, especially our witnesses on asset-backed commercial paper last week also pushing for that.

Could you give us some assessment? We realize it's provincial jurisdiction and we can't interfere, but could you give us some assessment on how we might move forward with that, how we would encourage the provinces to listen to what you and others are saying?

[Michael Conway]

We'd be pleased, because we think HST is one of the things that would really move forward in terms of the simplification of the system.

One of the resistances you'll meet for the provinces taking it on is obviously a concern for loss of revenue. There are various ways to recover this perceived lost revenue. Number one, the increased efficiency that runs through the simplification theme of our brief will lower the cost of businesses. So those lower costs will result in either reporting higher profits, on which they'll pay taxes, or it will enable various companies to employ more workers, who will pay more income taxes. So it'll be back-filled by taxes from those two areas. It'll be not only less costly for the corporations to administer, but less costly for the provinces to administer, so they'll save money there.

Finally, though, we do underline that the federal government will probably have to provide incentive to the non-harmonized provinces to adopt HST, just as they did with Quebec and the Atlantic provinces when they went the harmonization route. But through the careful discussion of that, I think it's something that will benefit all.

[Ted Menzies, Conservative, Macleod, AB]

We've heard from one particular association, a large group, the Canadian Restaurant and Foodservices Association, about the impact on them of a harmonized sales tax, and I can't help but agree that it is going to impact them. They're not the only ones, I'm sure, who see some problems with this. How do we deal with those situations? What type of tax do we put in place, or what type of tax do we remove, if that's the case, to allow them to compete with the homemade meals in the supermarket?

[Barry Gorman]

From a basic competitive position, if the tax in a particular jurisdiction on a particular good or service is all the same and the compliance costs of collecting that tax are quite reduced, competition should naturally take its own course. I'm not sure the federal government is looking to find specific industries that it would benefit; I think your objective is to benefit all industries equally. All industries in, say, Ontario or Saskatchewan would benefit equally from the simplification of the sales tax system.

Your problem is overcoming the perception that individual provinces will be worse off after harmonization. The only evidence available is, of course, the three eastern provinces, which harmonized eight or ten years ago. Looking at the revenue trend in those three provinces, they're certainly collecting more sales tax now than they were before harmonization. There are all kinds of variables over a period of six of seven years that would go into the consumption tax yield, but it's quite clear that those provinces are collecting more now than before, helped a lot by the federal government agreeing to a monetary stipend to shoulder the blow.

[Ted Menzies, Conservative, Macleod, AB]

That's the sort of incentive that takes long-term planning, to make sure it does benefit the whole country.

[The Chair, Conservative, Rob Merrifield]

We'll now go to Monsieur Crête.

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

My question is for Mr. Heady and the other witnesses here.

In Canada, we are unique in that our neighbours are the Americans. Even though it seemed impossible several years ago, the Canadian dollar is now almost at par with the U.S. dollar.

Based on your European experience or your expertise, do you think that a significant increase in the GST would prompt more people to go shopping in the United States? How can we curb that trend? It that even possible?

[Christopher Heady]

The experience in Europe is that there is a certain amount of cross-border shopping when there are countries that have very significantly different rates of tax. But it's usually a very limited phenomenon, because the difference in value-added tax rates between neighbouring countries in Europe is usually fairly small, and therefore you would need to be planning to purchase a great deal for it to finance any significant sort of trip. I think, in fact, the greatest incidence of cross-border shopping is not with respect to differences in value-added tax rates, but differences in excise duty rates.

On things such as alcohol and tobacco, there's considerable cross-border shopping between, for example, the United Kingdom and France that is driven by the differences in excise duty. The VAT difference would go the other way, but I don't think French people go to England because of the 2% difference in the VAT rate.

[Michael Conway]

Thank you.

I agree with Mr. Heady. A 2% variance in the consumption tax is not what's going to do it; it's the fact that the Canadian dollar has significantly surged from 67¢ up to par that has made the big difference. That really underlines the need for improved productivity in this country, which is one of the reasons we're calling to enhance skills training through the tax credit. If you want to get at the flight of people across the border to Buffalo and Plattsburg, it's not the 2%; it's the 30% differential in the currency, which now really makes it time to start focusing on productivity and competitiveness in Canada.

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

The Canadian dollar is now at par with the American dollar. Please clarify your example; I may not have understood.

Where are we in terms of productivity with respect to the Americans? We have to keep in mind that most of our trade is with the U.S.

[Michael Conway]

Canadian corporations were less efficient before. That was not as obvious when the Canadian dollar was worth 67¢. Now that it's worth $1, things are much more expensive. Canadian companies are becoming far less competitive abroad. That's why it's very important to focus on Canadian competitiveness above all.

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

I do not want to make value judgments, but I would like to understand why—what was the thinking when companies pocketed money during those years and did not put any aside to improve their productivity?

[Michael Conway]

That's a good question.

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

Were they doing what the shareholders wanted or were they just going with the flow?

[Michael Conway]

That's a good question. There are many examples of companies taking drastic measures when they are in trouble, but those same companies don't tend to do anything when things are going well. When their products become less competitive internationally, they decide that it might be time to take measures similar to the ones suggested for employees.

[The Chair, Conservative, Rob Merrifield]

Your time is up.

Mr. McKay is next.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Conway, in your presentation, you--as have many others--quote the Irish tax experience favourably, and certainly there's a lot to be said. It's quite a dramatic drop from 24% to 12%, and the growth in GDP and the foreign direct investment is pretty astronomical, particularly for a country of that size. Being of Irish descent, I'd like to think that's all because we're way smarter than everybody else. However, I have this sneaking suspicion that it may have as much to do with the subsidies from the EU as it has to do with smart tax policy.

So I'd be interested in comments from Mr. Conway, Professor Brooks, and Mr. Heady on the dramatic growth in the GDP of Ireland, and what's attributable to their tax policy and what's attributable to subsidies from the EU?

[Michael Conway]

Since I'm also of Irish descent, I like one of your suggestions.

[Voices]

Oh, oh!

[John McKay, Liberal, Scarborough—Guildwood, ON]

On that point, we're agreed.

[Michael Conway]

Other European countries receive subsidies as well, and the difference with Ireland is that they did the reduction of corporate taxes, and in our view, this drove a significantly higher growth than their counterparts.

[Barry Gorman]

I was just going to make a comment that a tremendous percentage of the EU subsidies to Ireland are in the agricultural field, so if you're talking corporate taxes and comparing them, or increased productivity, economic growth, and economic subsidies, or subsidies from the EU, I think you have to be careful that you don't take a broad brush and make the simple statement that there's one cause to some economic reaction. On the other hand, you don't mix everything into the pot, because as I said, economic activity in Ireland--and I'm sure Mr. Heady can support this--has clearly increased. Taxes have clearly gone down. But whether the economic increase is totally attributable to EU subsidies or tax rates, you could never say it's one or the other. It always has to be a combination.

[The Chair, Conservative, Rob Merrifield]

Professor Brooks.

[Prof. Neil Brooks]

I have two really quick comments.

One is that I don't think the tax had very much to do with it. A whole series of factors led to that growth of direct investment in Ireland. Among many others, they just got their timing right. It just happened to be at the time when these large high-tech U.S. firms were looking for a place to locate their firms in order to export in the EU. There was an English-speaking population, highly educated. Indeed, one of the cleverest things they did with those EU subsidies was to get rid of all tuitions for higher education. They had this very highly educated, low-wage workforce all ready for the big high-tech U.S. firms, so they located in Ireland in order to get into the EU. If it had happened at some other time, the effect would have been very different.

The second comment is that even if it did work, it only worked for one country. It's a beggar-thy-neighbour policy. What if every European country reduced their corporate taxes to 12%? What would be the effect? Zero. There's an enormous collective action problem with respect to corporate taxes. That's why the most you can advise a country is to keep its corporate taxes about in the middle of the pack and to try to negotiate with countries around the world not to try to beggar their neighbour in the way Ireland did. Why did Germany put up with it? In part they put up with it because Ireland was such a poor country at the time. There were just very unique circumstances that can never be duplicated.