Finance Committee on Feb. 25th, 2008

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

Mr. Lee.

[Marc Lee]

Thank you.

First of all, I would dissent from my co-presenter about the relative merits around productivity of cuts in various taxes. Most of these are based on theoretical propositions around how different taxes affect the economy. The way the modelling works is that because income tax, which is progressive, moves away more from a so-called natural equilibrium, they are by definition more distortionary. When numbers have been attempted to be put on those, they are usually done as a sort of quasi-empirical framework. The evidence in terms of tax cuts, different types of taxes, and tax mix actually leading to improvements in productivity is quite thin if you actually look at the empirical evidence.

Coming back to your original question, I believe you might be interested in our section on the full alternative federal budget, starting on page 94, where we outline a sectoral development strategy. In a nutshell, we recommend an increase in the corporate income tax rate on the oil and gas sector back to 28% from its current level, which would raise approximately $1.7 billion per year. We would use that to fund the creation of a new value-added sectoral development agency. This would look at projects in the auto sector, the forestry sector, and in other up and coming areas, whether that's high tech or biotech or what have you, in order to get Canada back in the game in terms of more active industrial policies.

We think this would be a much better use of funds. If the program were well designed, targeted assistance of that order would have a much better benefit over the long term than across-the-board tax cuts, which have had huge benefit in areas like banking and oil and gas, for example, with very little return in terms of productivity benefits for the Canadian economy.

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

In the same vein, after servicing the debt by $3 billion from the surplus, wouldn't it be wiser to use the surplus for 2007-2008 to create a reserve dedicated to preventing the repercussions of an economic slowdown rather than allocating the entire sum to the debt? If we subtract the $3 billion used to service the debt, we have approximately $7 billion remaining. In your opinion, what would be the most productive option for our society...

[The Chair, Conservative, Rob Merrifield]

Very quickly, please.

[Marc Lee]

I believe we are at a stage where we need to make major investments in retooling the Canadian economy. Coming from British Columbia, where the carbon tax and other measures to fight global warming have just been introduced, I would suggest that those are some of the really important areas where we need to do that. If we are entering a period of economic downturn where we could see a growing slack in the employment market, it would be an ideal time not only to use fiscal policy to maintain full employment, but also to make those much needed investments that equip our economy for the future.

[The Chair, Conservative, Rob Merrifield]

Thank you.

Do you have an answer?

[Glen Hodgson]

All of our research points to infrastructure as one of the big unfunded gaps within our economy. If Parliament were going to weigh the various alternatives, clearly a bit more weight on infrastructure is something that the Conference Board would support.

[The Chair, Conservative, Rob Merrifield]

Thank you.

We will now move to Mr. Menzies. I believe you are going to share your time with Mr. Dykstra. You have seven minutes. Go ahead.

[Ted Menzies, Conservative, Macleod, AB]

I am indeed, and I will go as quickly as I can.

Thank you, all three gentlemen, for coming today.

I'm always interested in the advice I get from people and their source of financing and how they gather their advice.

Mr. Hodgson...I can refer to you as Glen, I think.

[Glen Hodgson]

We've seen each other a few times.

[Ted Menzies, Conservative, Macleod, AB]

Yes, we have.

I believe you've already stated that your funding comes from memberships and your consulting work. You provide a service and you're paid for that service.

[Glen Hodgson]

We have no endowment, unlike many other think-tanks. In fact, our board has taken a very explicit decision not to have an endowment, not to pursue the money available through trusts, for example. We have to earn our way in the world, and we do that through selling economic forecasts and doing analyses for people, and organizing conferences and networks. That's the core business of the Conference Board. It is basically doing research and facilitation.

[Ted Menzies, Conservative, Macleod, AB]

Good, thank you.

Mr. Lee, what is your source of financing?

[Marc Lee]

Our largest single source of financing is from individual memberships. We also receive funding from organizational members, including trade unions, credit unions, and progressive businesses. A third source would be from foundations, and a fourth would be government.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

Mr. Lee, I would ask a very pointed question. How close have your past projections been to reality?

[Marc Lee]

The whole reason for the creation of a parliamentary budget office stems from concerns the CCPA raised in its alternative federal budgets, going back almost 10 years. We consistently argued, back when Paul Martin was finance minister, that he was understating revenues and using very conservative economic assumptions, and we made our own projections around what the surpluses would be. Year after year, our projections were far more accurate than those coming out in the actual budget documents. So I would say we have a very good record in our projections for fiscal finances.

To be quite frank, we don't use very sophisticated economic models that take days to churn out their results. They're using some very straightforward principles around the relationship of the growth of revenues to overall gross domestic product and trying to make those based on reasonable economic assumptions about the future.

[Ted Menzies, Conservative, Macleod, AB]

That's good. I guess we'll go back and look tomorrow afternoon, after Minister Flaherty is done, and see how close you were.

Mr. Hodgson, you raised my interest when you talked about sales tax harmonization. This is something we've talked about both in budget 2007 and in the economic statement. We realize it's provincial jurisdiction, but I would like some more comment from you, if you could, about the benefits. We're encouraging provinces but we can't tell them what to do. I'd like a little insight from you on why that's a good thing.

[Glen Hodgson]

I don't want to give away everything in my written brief. I'm having a highly reputable outside reader go through it right now. But our thinking is fairly simple, that simpler is better when it comes to the design of a tax system, and right now we do have a patchwork quilt of sales tax regimes across the country, both in terms of rates and in terms of coverage.

We've seen three of the four Atlantic provinces—it's three out of four, but not P.E.I.—sign up for the harmonized sales tax and come up with one tax collector, one auditor. Clearly that's going to save money for businesses of every size at every stage along the way, and for the taxpayer, because we really have made a very simple administrative system. Quebec has done the same thing. The collections are different, but basically it's a harmonized system.

But if you look at other large provinces, the two most prominent are B.C. and Ontario of course. There is an element of misalignment. Their coverage is different. Maybe the most punitive thing is that businesses who buy business inputs don't get the benefit of a cascading value-added tax system, so they have to pay the sales tax on goods that are covered by the provincial sales tax.

I've had the privilege of giving advice to many ministers of finance, so we've met with Minister Duncan in Ontario and talked about this. I think he's a bit intrigued. I think as a philosophical matter he understands there are benefits, but he's also worried about the revenue impact for his own budget, because if you were to harmonize, he would probably be looking for some sort of bridge. As you know, Mr. Menzies, there is a bigger debate about Ontario's place in the federation when it comes to transfers and having a level playing field. I would suspect that as that dialogue goes forward we're going to have to put a lot of those issues into the pot.

But clearly, I would argue that almost every Ontario business would benefit from having a single sales tax regime that is built on value-added taxation, where they don't have to pay taxes on business inputs that they then often can't even pass on to their customers.

Then there's another level of benefit, of course, in terms of administration and efficiency. That's the argument I make with Mr. Duncan directly, and therefore I'm quite happy to make it to you today.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

Mr. Dykstra.

[Rick Dykstra, Conservative, St. Catharines, ON]

I have a question for both Glen and Marc.

You indicated pretty stridently throughout your document and in your presentation today that tax reductions are not the way to go and you don't see that as sustainable in the long term. Having said that, one of the things that certainly have benefited the manufacturing sector has been the accelerated capital cost allowance. All parties, except perhaps the NDP, believe the extension of that accelerated capital cost allowance is a good thing, meaning that what we did is a very positive thing for the economy.

I know you've spoken about this, Mr. Hodgson, that one of the things we need to do with respect to China is the whole issue of competitiveness. If we're going to be competitive, at least when the dollar is closer to par, we'll have to find the machinery and equipment that will make us more competitive, that will make a greener environment in terms of the potential output of that machinery. So I see that as a tax cut, if you will, but one that has been very specific, very targeted.

You suggest in your document as well that we need to be more targeted. I would suggest to you that that is one of the most targeted tax cuts we could have done, supported across the country, $1.3 billion in investment.

So I'd have to think, Marc, you'd have to suggest at least on that one issue that reduction in itself has been very good for the country.

[Marc Lee]

Actually, in our alternative budget we don't roll that back, and I would agree with you that these types of targeted measures can be actually more effective.

In years past, we have called for, instead of across-the-board corporate income tax cuts, something more along the lines of investment tax credits so that we reward actual investment that boosts our productivity over the long term. You simply don't necessarily get that with across-the-board tax cuts. So I'm happy to see the extension of the accelerated capital cost allowance.

[Rick Dykstra, Conservative, St. Catharines, ON]

I have a couple of minutes yet. Glen, do you want to comment?

[The Chair, Conservative, Rob Merrifield]

If there's another answer from Mr. Hodgson, that'd be fine.

[Glen Hodgson]

I very much like your comments. I would actually add another idea into the mix.

This will probably not appear in the budget tomorrow, but one of the things we linked into our briefing on green taxes was the idea of an investment tax credit for environmental goods. If we're going to try to move to a lower carbon future, we can do things within the tax system to try to accelerate the adoption of greener technologies. There are a couple of paragraphs in our brief, if you're interested.

You would probably want an arm's-length group deciding which technologies would qualify, but as we head down the road, that's the kind of thing you could do, in addition to accelerated CCA, to try to encourage firms of all sizes to adopt the latest clean, greenest technologies.

[The Chair, Conservative, Rob Merrifield]

Thank you.

We'll now move to Mr. Christopherson.