Finance Committee on March 31st, 2008

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So they have a combination in which the corporate taxes are lower but the personal income tax rates are higher?

[Prof. Jon Kesselman]

That is personal income tax as it applies to labour-type earnings—wages, salaries, and self-employment earnings—but on investment incomes of individuals, like interest dividends and capital gains, they have pursued a lower rate and kind of a flat rate. The U.S. has also gone that way a bit.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Mr. Davies, would you agree with that?

[Prof. Jim Davies]

Yes, I agree with everything Professor Kesselman has said.

I would also point out that some of these initiatives that both he and I were suggesting on the personal income tax side—increasing contribution limits for RRSPs or for TFSAs—of course would also have a revenue cost, and that could be part of a package of tax reductions if there was room for tax reductions.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Okay, so having said that, what would happen if the government just concentrated, for example, on deductions and said we'll leave the rates as they are, but we'll increase RRSPs, and we'll increase the fitness deduction, transit deduction, all kinds of deductions? Is that a policy that is going to help the economy and raise revenues, or is that just revenue-neutral, or is that just trying to change the residents' behaviour to try to adapt to where you want them to go?

Mr. Kesselman.

[Prof. Jon Kesselman]

May I defer on that one?

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Yes, sure.

Mr. Davies.

[Prof. Jim Davies]

In the short run, increasing credits and deductions is going to reduce revenue, so I think you have to do that very carefully. I was flagging that. I had some concerns about proliferating tax credits or whatever. There has to be a really good reason for them, right?

So, yes, in the short run, it can be revenue reduction. On the other hand—

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So unless you're doing it for behaviour, you wouldn't do it to generate revenue?

[The Chair, Conservative, Rob Merrifield]

Actually, you both could defer, because the time has gone.

Monsieur Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

My question goes to both witnesses.

If you put yourself in an ordinary citizen's shoes, do you not find that, generally speaking, the tax system is complex? Could it not be improved, simplified or changed so that people can find their way around it more easily? A good number of measures target businesses and investments, but have we looked at the way in which ordinary citizens, workers and their families, perceive the tax system in Canada? In my opinion, people find it very complicated. Could we not simplify it without reducing national revenue as a consequence? Each of you can have a turn answering.

[Prof. Jim Davies]

I think that's a really good point.

[Prof. Jon Kesselman]

Shall I take a first crack here?

[The Chair, Conservative, Rob Merrifield]

We'll have Mr. Davies first, and then we'll go to Mr. Kesselman.

Go ahead.

[Prof. Jim Davies]

I think that's a really good point. Often things we introduce to try to achieve greater fairness or pursue goals that seem to be attractive add to the complexity.

If you think about the situation with children, we have the Canadian child tax benefit, child expense deductions, the universal child care benefit, and a Canada child tax credit. You could think of cleaning this up.

The working income tax benefit was introduced to try to reduce disincentives for working people, which are coming from the tax system in clawbacks and so on. These things do. You get a situation in which I think ordinary people, rather than doing some calculation and figuring out what their tax burden would be or how much their taxes would go up if they worked some more and so on, figure these things out in a more informal way. They kind of look around at their friends and relatives and they can tell that so-and-so went and got a full-time job but they don't seem to be any better off.

It is very complicated, and I appreciate that.

[The Chair, Conservative, Rob Merrifield]

Mr. Kesselman

[Prof. Jon Kesselman]

I quite agree with your observation on public concern and the complexity of personal tax. The GST itself is very complex. The question is what we do about it. We can't deal with it in generalities. We have to look at specific areas and ask the questions: What is the complexity achieving? Is it achieving something important in terms of any of the many dimensions of equity or efficiency? If it is not, then we have to look very carefully at the design of those provisions and at how to redraft the legislation. But again, we cannot do that in generalities. We'd have to take any of several hundred areas where there is complexity and deal with them in the concrete.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Wallace, you have five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman, and thank you, professors, for joining us today.

I have just a couple of questions. As you know, you live in academia, and we live in politics. Raising the amount of money you can make before the top rate kicks in might be a little bit difficult politically. I actually made that argument with my colleagues on this side of the table for this last budget. If we do it for the one rate, should we not be moving the income levels up for all the other marginal rates that exist? That's my first question.

Second, based on the models you've been working on, does that still generate enough revenue to run the government?

Does anybody want to answer?

[Prof. Jon Kesselman]

I'll be glad to try.

In my presentation I mentioned the threshold for the top rate, but I also mentioned stretching out the threshold levels for the other brackets. I think that would have to be part of the package, yes. Any politically astute budget that raised one would have to deal with the others as well, not only for political reasons, but because it would also move many taxpayers who are not currently in the top bracket into lower brackets, without explicitly cutting the rates on the various brackets.

On revenue, yes, there would be revenue costs. The most expensive threshold to raise is the bottom threshold, because all taxpayers bear that. We have been raising that bottom bracket beyond inflation in the last budget or two. It becomes less costly as you move thresholds for higher brackets, per dollar of move in the bracket. Yes, there would be significant budgetary impact. Finance people and your committee have the models to crank out the numbers for any conceivable change you might wish to explore.

[Prof. Jim Davies]

I don't have anything to add to that. I agree.

[Mike Wallace, Conservative, Burlington, ON]

My next question is something that, as a member, I hear on occasion from people, and I just want your opinion. As you know, and Garth knows this, with his new book, your own home is tax-free, in a sense. It's an investment; you don't pay tax on anything. Across the border, it's a capital gain for them and whatever happens with that, but they are able to deduct the mortgage interest. Would both of you like to comment on whether that's an approach we should be looking at here, or do you prefer the approach we have here in Canada today?

[Prof. Jim Davies]

I'll have a crack at that.

I think we should stay with our own approach, and I believe that very strongly. The way housing is treated at the moment is very good in terms of a consumption-tax approach. The argument is that even if you look at this from the income tax viewpoint, there's not only the capital gains but also the imputed rent. So the return to the homeowner is the imputed rent on the house plus capital gains. We're not taxing those things, so we shouldn't be deducting the mortgage interest costs. That's a good way of looking at it.

[Prof. Jon Kesselman]

I would fully agree with Mr. Davies.

With regard to the United States, in fact they do not take the full capital gain. They have a large exemption on capital gains—I don't recall, it's maybe $300,000—in addition to the deductibility of mortgage interest. They have gone overboard in giving fiscal incentives and stimulus for home ownership, and along with, of course, all the financing debacles of the last couple of years, that's part of the reason for the overinvestment and the bubble in the housing market in the U.S. We're seeing the downside of that now—not mainly tax, but their tax treatment has certainly encouraged this overinvestment in housing. It's simply an inefficient allocation of an economy's resources when people are buying a lot more home than they would under a more neutral system.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. McCallum, you have the floor for five minutes.