Finance Committee on April 7th, 2008

[Prof. Robin Boadway]

It was introduced as a substitute for the resource allowance, which was sort of an across-the-board allowance that all resource industries got. My point of view is that there's no economic reason for there to be a deduction of royalties in the oil and gas industry against the federal income tax. Basically all it does is transfer revenues from the federal government to the province while really having no other effect.

[Pat Martin, NDP, Winnipeg Centre, MB]

That's an interesting point.

Mr. Duff, do you have any ideas on that?

[Prof. David Duff]

Well, I guess the counter-argument sometimes--and I haven't studied this in detail--would be that it's a cost of doing business, like any other cost of doing business. So it should be treated as a deduction. I see it has these federal-provincial implications.

[Pat Martin, NDP, Winnipeg Centre, MB]

That was the reasoning regarding fines, though. We have a labour movement that objected, because if you get fined half a million dollars for killing a worker at work, it's not just a cost of doing business.

[Prof. David Duff]

I agree. I wrote about the fines and thought it was a terrible decision when the Supreme Court did that. But the rationale is different from that for a royalty. You're not killing anybody by....

[Pat Martin, NDP, Winnipeg Centre, MB]

But you aren't supposed to be paying out of pocket, though. This is supposed to hurt somewhat. This is like paying rent. I don't know, I don't agree that it should be, but....

The last thing I'll say is that what the poll tax did for Maggie Thatcher the inheritance tax almost did for my leader in the last federal election, when we had the temerity to suggest a tiny little inheritance tax after your first $1 million of inheritance. Believe me, it is not a popular sell in this country. We know from experience.

[The Chair, Conservative, Rob Merrifield]

Thank you.

We'll now move to Mr. McKay.

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

Thank you.

There seems to be a universality of opinion here that the GST cut was probably the worst of all tax policies, but that was...a loonie will get you a cup of coffee at Tim Hortons.

I just want to ask Professor Godbout a couple of questions with respect to consumption taxes anomalies.

The rationale for downing income tax and corporate tax is in upping consumption tax, largely in the area of productivity. Yet the United States has low consumption taxes, but it also has very high productivity.

In your other charts here you have France, which has high consumption taxes and, indeed, high productivity. Can you give me a comment as to the central core of your argument, which is that higher GST and downing your income tax leads to better productivity? Can you explain those anomalies?

[Prof. Luc Godbout]

I did not suggest increasing the GST to boost productivity. Productivity is not the only factor. There are also research and development, human capital and education. We talk about production per hour worked, and in that regard, investing in machinery is a significant factor. In fact, I was saying that we had to help businesses invest in machinery, but that is another topic.

Furthermore, as we have the highest income tax rates in relation to GDP, should we not reduce them to make up for lost revenues? I believe that one of the themes was whether it was possible to redesign the taxation mode without affecting revenues, i.e., by reducing income taxes while increasing consumption taxes. That is something that could have been done in the past few years.

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

But it is anomalous, isn't it? Your argument is tax mix, and your tax mix, particularly in France's case, is high consumption, high income tax, high productivity. It doesn't seem to jive with the basic theory of tax mix.

[Prof. Luc Godbout]

The consumption tax in France is based on the value added. Consequently, it does not affect business productivity. Their exports are not burdened by that heavy consumption tax. The tax is imposed on the value added, as is the case with the federal GST. That is also the case in the Maritime provinces and Quebec. The tax is not reflected in the price of exported products. However, that is still the case in Ontario, where there is an indirect effect. In fact, the sales tax is applied to machinery and inputs, in particular, and thereby increases the price of exported products.

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

Thank you.

Professor Duff, regarding this notion of putting on a carbon tax, anybody who lives in 2008 knows you have to price carbon somehow or other, and whether it's a tax or whether it's cap and trade, or whatever it is, there are all kinds of ideas out there.

I'm curious as to how you would see the application of the tax on a destination basis. That's not clear to me. Could you use an example of a product originating in China or India? Then if it comes to a Canadian consumer or industry, how would that tax apply and how would that affect our competitiveness?

[Prof. David Duff]

I think this is where you'd have to have presumptions about the carbon content in the import that would have to be based on rough figures from wherever the origin of the product is, and what kind of energy sources they're using, and presumptions about the energy sources that are built into the products. I think the only way it could be done in any practicable way is with rough-and-ready calculations or rough-and-ready judgments. That's why there's a potential problem with protectionist implications of a tax based on that approach.

And you'd have to make sure it satisfies WTO standards. That trade stuff is something I haven't done. I know there's a precedent for it out there, using presumptions about what the...probably, I admit, in a more simple context than carbon. Carbon enters into everything, and that makes it a problem.

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

Is my time up?

[The Chair, Conservative, Rob Merrifield]

Your time is gone.

Mr. Menzies, five minutes.

[Ted Menzies, Conservative, Macleod, AB]

Thank you all.

I'll share my time with Mr. Wallace, because he's just chomping at the bit to get some questions here.

On this chart on some choices for government, I find that 10% of the assistance went to Alberta. I find it terribly misleading and a little too easily confusing. I don't think it's helpful to pit province against province with something like this. I would suggest the low unemployment numbers in Alberta are probably pretty important in here. The only unemployed people we have in Alberta right now are the Liberals after the last election. We'll take that into account.

I'd like to pursue a number of things, but corporate investments by government.... Right now we're dealing with the issue of MDA, and we put a lot of taxpayers' dollars into this company. In the big picture, now we're all wondering if we're going to lose those dollars. So when you look at putting government money into supporting industries to make sure they're competitive and viable, how do we make sure those dollars don't then leave the country? Now we have a difficult decision ahead of us: how we protect the tax dollars that went into it. How do we protect a Canadian investment?

I look at the forest industry, which said we shouldn't give them money, that they should sort this out, that the government shouldn't distort the market further. Further to Mr. Del Mastro's comments, they said we shouldn't set them up for tariff intervention against their products.

So the government has a very difficult balancing act. How do we support them? We've suggested the tax cuts, the accelerated capital cost allowance, those sorts of things, helping the communities that help the people, putting money into the communities. But funnelling money into companies that don't have an anchor tied to them, that don't have to stay in Canada, that's what concerns me.

Perhaps all three of you could address that.

[The Chair, Conservative, Rob Merrifield]

Who would like to start? Not all at once.

[Prof. Robin Boadway]

I certainly wasn't one who recommended that the government should deal with the manufacturing problem by throwing money at it and using the tax system or the subsidy system to do so.

The problems we face with manufacturing are problems that are brought about by fundamental things that you can't touch with the tax system. If you want to think of it this way, we're facing the equivalent of a resource curse. Our activity is moving west and chasing resources; the exchange rate is rising because all of the revenues from resources are not being saved the way they are in Norway, for example; and one of the consequences is that the whole economy is tilting toward the west, which is fine for the west, but that's the source of the problem. I don't see how responding to it by subsidizing manufacturing....

It's not just manufacturing, by the way. Manufacturing is not the only industry that's facing problems in this part of the country.

The idea of using the tax system to try to address an issue that is fundamentally a macroeconomic imbalance issue would be precisely sending good money after bad, if you want to think of it in those terms. I wouldn't contemplate using the tax system to try to address the problems that manufacturing industries are facing because of the pull of resources to the west and the increase in the value of the Canadian dollar.

[The Chair, Conservative, Rob Merrifield]

Anybody else?

[Prof. Luc Godbout]

Perhaps I can add a few things.

Indeed, we do not want to keep companies artificially alive or throw money out the window, especially when we are dealing with taxpayers' money, which is our money. We cannot do the investing for companies. But if we give them a tax credit or help them with investment support measures, such as 20¢ on the dollar, they would still have to find the other 80¢. Companies have to make the decision to invest. If you reduce their investment costs, you make investing more interesting. It might the only way for companies to become productive and profitable in a sector which, today, is feeling a lot of pressure.

We do not want to invest for them, nor tell them what to do. We do not want to tax at a lower rate the profits of companies in a single sector, as was done in the 1970s, 1980s and 1990s, on the pretext that they are less profitable than companies in other sectors. Everyone has to pay the same rate. The rate could be applied across all sectors, regardless of the level of investment, but the process would be benchmarked and companies would be helped.

I said 20¢, but it could just as well be 10¢, 12¢ or 15¢; it's up to you to decide. Quebec introduced this type of credit in its most recent budget and it was adapted to the particular characteristics of each region. The rate varies between 5% and 40%, depending on the region. I don't think that in Canada we could vary the rate by region, but the least we could do is offer an interesting rate to signal to companies that we encourage investment and that we want to help them invest for a certain period of time.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. Laforest.

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

Thank you, Mr. Chairman.

I have a question for you, Mr. Godbout. In the chart on personal income tax rates, you provide a visual answer to the general question which was asked of you before coming here: how should Canadians be taxed and what is the current impact of our tax system on Quebeckers and Canadians?

You mentioned an income which would increase from $35,000 to $40,000. Would the same calculations apply to an income which went from $40,000 to $45,000, or does the change occur specifically between $35,000 and $40,000?

[Prof. Luc Godbout]

Those rates are relatively high and they are not good. I personally have to pay much lower rates because my income is much higher. When your family income is over $100,000, social programs are not relevant any more, because at that income level, no benefits are paid out. The Canadian Child Care Benefit is not universal. Income earners above a certain threshold do not receive it. In those cases, the combined federal and provincial tax rates do not exceed 48%.

If you still pay premiums for social programs because your income is still going up, such as for the Quebec pension plan, the Canada pension plan or employment insurance, you still have to pay federal and provincial income tax, which is normal. Further, you don't have the right to access non-universal social programs. The GST credit goes down as your income goes up. All these small reductions, taken together, affect those people who are subject to a high rate. When your income is above $80,000—I don't know the exact figure—the rate is much lower. So the income bracket which is really affected—

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

It's between $30,000 and $80,000.

[Prof. Luc Godbout]

It's between $25,000 and $60,000, I would say. For families with children, those earning between those two amounts really feel the crunch. For a person who is single, it's perhaps between $25,000 and $40,000. If your income is above that, the worst is over. But if you have children, it's harder for a longer period of time.