Evidence of meeting #58 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was projections.
A recording is available from Parliament.
11:25 a.m.
Prof. Ian Lee
--according to the research, not according to me.
I want to respond to Mr. Mulcair, if you'll give me one moment.
11:25 a.m.
Prof. Ian Lee
He said that I was saying the research is legitimate because they're in the public sector. If I inferred that to you, I want to correct that. The research is legitimate because it's peer reviewed. Somebody like Glen Hodgson, who's not in the university, can publish--and has--through the peer-reviewed process. So it's legitimate because it's peer reviewed, not because they're from the public sector or the private sector.
People in the private sector are every bit as legitimate as people in the public sector, so I don't want to leave the idea, as Mr. Mulcair did, that only people in the public sector are legit and that people in the private sector are somehow, I don't know, illegitimate. That's not true, and I've worked in both the private and the public....
To answer your question, I'm obviously opposed to the policy, because the research is very clear. It harms...I don't think everybody heard the whole explanation. The OECD research for 10 years, across many, many scholars, has found that income per capita goes down. Or you can put it in reverse: the lower the corporate taxes, the higher the income per person. The scholarship is very clear on that.
So I'm answering your question: if corporate taxation goes up, income per capita will go down.
11:25 a.m.
Conservative
Shelly Glover Conservative Saint Boniface, MB
I note that in the fiscal outlook Kevin Page provided, in some of its columns, there’s actually a reflection of what we're saying here about income taxes. It shows that personal income tax—and he's taking into account the lowering of our corporate taxes--between 2010 and 2015 grows by almost 50%. Corporate income taxes are also going to grow. Non-resident income taxes are going to grow.
It shows that families, the workers, are actually going to either make more money or there are going to be more people working because of corporate tax.
11:25 a.m.
Prof. Ian Lee
The scholarship shows that indirectly.
11:25 a.m.
Conservative
11:25 a.m.
Conservative
11:25 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Thank you.
Mr. Lee, I'd like to ask you a couple of questions. If you don't mind, could you just relax and sit back in your chair and get away from the microphone. They're very sensitive, and you're popping ears.
You have some interesting things to say. Let's just have a conversation here for a couple of minutes. In your third area—and that really gets down to the pensions issue—you make the point that Canada's poverty rate is, relative to the OECD average, actually very good. So, don't worry, it's not as bad as you think.
Is Canada's target just to be better than average? Oh no, sit back.
You know what? We have union people who turn them on. You don't even have to touch that.
11:25 a.m.
Prof. Ian Lee
I'm sorry. You threw me off with that last.... What was your question again? Just the summary question.
11:25 a.m.
Prof. Ian Lee
I'm sorry. Yes. I've had this debate with the--
11:25 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Could you just sit back? Just have a conversation. Forget the mike.
11:25 a.m.
Prof. Ian Lee
Sure.
I've had this debate with the director at the Rotman International Centre for Pension Management. He came to Ottawa and argued that we want to be number one, not number three or four, in the world. I said we were really quibbling when we are two-thirds below the OECD average, and the OECD are the 30 to 33 wealthiest countries in the world, out of 220 or so countries. We are really quibbling about whether we want to be number four or number one. The differences are trivial.
Much more importantly, it comes back down to social return on investment. Do we want to put more money where it's not needed, or do we want to put more money into poverty? Jack Mintz has talked about this in his op-eds, that there's a much bigger problem with single-parent poverty, single mothers, than there is with elders in Canada.
I'm worried, because, like Glen, I have children, and I've even used this comment about greedy baby boomers, and I'm very conscious as a person in the public sector.... And, with respect to Mr. Mulcair, I do believe the university is in the public sector. I have a very generous pension, and I don't think I should be getting more money.
11:30 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Yes. Poverty is a big issue in Canada in terms of the discussion, and it's bigger than what we can handle right now.
11:30 a.m.
Prof. Ian Lee
Mr. Szabo, I don't know if you remember my comment in my presentation. I said there are 5%, per OECD; it's about 250,000 families, and I'm not suggesting they should not be targeted.
11:30 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Certainly. I'm sure that is the case, sir. Let's see if we can get at least one point settled on the corporate taxes. I suppose virtually all the expenditures that a corporation makes, other than the dividend cheques, are the cost of doing business. You have to inflate things.
Some businesses provide goods or services to virtually every Canadian, and some provide them only to those who can afford the products, because they're targeting consumers who have disposable income.
One of your diagrams says that a corporate tax is a tax on workers. I guess that's not exactly true, is it?
11:30 a.m.
Prof. Ian Lee
That's actually a paraphrase of a comment from the woman at the Federal Reserve. I was actually paraphrasing her, and it's a pretty close paraphrase. I don't remember her exact words, but essentially she concluded that in small, open economies it is a tax that falls on workers.
11:30 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Are we done? I see I have one minute.
The Parliamentary Budget Officer suggested that if you have a structural deficit, if it's not a sustainable financial position, corporate tax cuts in fact could have some negative economic impact. Did you understand that point? Do you agree with it?
11:30 a.m.
Prof. Ian Lee
Yes, I understood it very well. The OECD has actually modelled this, and again, it depends. I'm sorry for putting all these caveats on it, but it depends on the economy you're studying--how big, how small, and so forth. I'm now saying this very tentatively, but I think the evidence suggests that the economy adjusts in the medium term and will generate higher growth that will offset it. But I leave that up to you and your colleagues, because now we're really getting into forecasting the impact of a reduction.
As I said, the OECD has modelled this, as has Dr. Devereux at Oxford, and I think their research is suggesting that the economy will compensate by generating additional growth greater than the amount of the taxes cut.
11:30 a.m.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Szabo.
I'm going to take the next round here, as the chair.
I wanted to follow up on the issue of productivity that Mr. Page raised in his presentation to the committee.
Mr. Lee, you mentioned foreign investment and some of the protectionism within Canada through Canadian policy. I want Mr. Hodgson, perhaps, to expand on it.
If you look at the 0.8% growth in productivity since 2000, it's a very worrisome trend. But if you look at a lot of the policies introduced by governments since that time, a lot of things have been done that were advised by groups in terms of addressing the productivity issue. A lot of measures have been put in place by governments to address productivity: the reduction in business taxes; the reduction in capital taxes, both at the federal and provincial levels; investments in research and development through granting councils and other initiatives; the generous R and D tax credit; the national child benefit by a former government; and the working income tax benefit. And you look at the solid financial sector. If these figures are correct, they've had a negligible impact. In fact, things have gone the other way relative to what the intent was.
Perhaps you could expand on why the trend is going that way. What should we do to reverse the trend? And why have these measures not had the impact that people who advised them to put them in place thought they would have?
11:30 a.m.
Senior Vice-President and Chief Economist, Conference Board of Canada
As a starting point, I agree with you. I said the same thing to our board last week. To a great degree, our governments have done the right thing in terms of tax reform: getting rid of capital tax, which for me is the dumbest tax you can imagine, taxing capital accumulation; reducing corporate income tax; harmonizing sales tax in the provinces, and on and on. There has been investment in everything from university chairs to the heavy public sector investment in Canada in R and D.
So I think our governments have largely done the right thing. The truth is that we probably went 25 years in Canada during which, because of the structure of our taxation system, we encouraged firms to underinvest. We did a piece of research last year, for example, looking at investment in human capital versus physical capital, and the track record is very clear. We have fallen behind. It takes time to catch up. I'm seeing that a little turning point event may be occurring right now. We've seen investment in machinery and equipment accelerate in the last three quarters--but this is only three quarters--which is what should be happening. Private firms should be investing now, when they can import technology at a much better exchange rate than they could for the last 25 years and when they have a very strong incentive, because they're not as competitive in the U.S. market or around the world, by virtue of the strong dollar.
So we may be at a turning point. The trouble is that our track record is so poor. We gave Canada a D in innovation for the last 10 years in our report card on Canada. We're doing that again now. It will be out in the next, say, six weeks to two months. My fear is that we're going to keep getting a D, because we really have not had to build a culture in Canada of innovation. I think that's maybe the critical piece.
So you're absolutely right, Mr. Chair, that the ball is being passed from governments, who have done their bit, to the private sector. Maybe we're seeing the early signs in terms of their investment behaviour, but maybe not. I'd like to look for more signs that firms actually appreciate that with globalization, in a very different world, we have to change our behaviour. We have to take business models apart, be prepared to relocate parts of our production, frankly, offshore, where it can be done more cheaply, and then focus on the high-value, high-wage jobs within Canada. But that's not automatic, by any means.
We're actually thinking of creating a new research centre at the Conference Board around this whole theme. I've spoken to some major corporations about that, and there's an appetite to invest in that kind of research, because it's the big challenge facing Canada: how to boost our productivity growth.
11:35 a.m.
Prof. Ian Lee
I'll be very quick. I agree with everything Glen just said. In March 2010, Governor Carney gave a speech on productivity. It was an excellent speech. I have it on my laptop, of course. He identified the same things Glen did: underinvestment in machinery and equipment and ICT, which is technology.
But his third explanation was very interesting. He said that on multi-factor productivity, we are doing very badly, and this is because we are not using our capital properly or adequately or strategically. And that is the hook or the basis for me to argue that it's because there is insufficient competitiveness. We don't have enough competitors forcing our firms to compete. If we did, they would go up the machinery and equipment curve and up the ICT curve, and those that didn't would go bankrupt and new firms would step in.
11:35 a.m.
Conservative
The Chair Conservative James Rajotte
I have a quick question for both of you then. Would you keep in place the accelerated capital cost allowance that was put in place in 2007 for the purchase of machinery and equipment?