I want to thank the Standing Committee on Finance for its invitation to discuss Canadian taxation and international comparisons. I will raise some of the topics outlined in the committee's news release, as well as those found in the notice of motion tabled by Mr. Dysktra.
Obviously, in a span of 10 minutes, we will not have time to make all of the comparisons possible; I will make a few observations about the Canadian tax system and its current state. In keeping with the mandate of the committee, I will also talk about tax mechanisms that can be created in light of the current economic scenario in the second half of my presentation.
The most recent year for which it is possible to compare Canadian tax revenue, as a percentage of GDP, with that of other G7 countries, is 2005. At the time, Canada stood below the average. Taking into consideration tax amendments made by federal and provincial governments in 2006, 2007 and 2008, it can be said that Canadian taxation will be further reduced. We compare favourably to other G7 countries. However, as regards income tax taken in isolation as a percentage of GDP, our performance is less sterling: income tax in Canada is the highest among all G7 countries. Obviously, we include taxes collected by both federal and provincial orders of government.
Income tax as a percentage of GDP is not only high, but rather heavy for earners whose income is rather modest. There are three factors which explain this situation. For a low-income earner, income taxes rise taking into account social premiums, such as the Quebec pension plan, the Canada Pension Plan and the Employment Insurance Plan, whereas state benefits such as the Canada Child Tax Benefit are reduced.
Take for example a single or two-parent family seeking to raise its income by $5,000, from $35,000 to $40,000, a rather modest amount for 2008. Under federal and provincial taxation, once social and tax deductions are made on the combined income, the family takes home only 25% of the $5,000 in additional income.Therefore, the implicit tax rate in this case is 75%. Obviously, there's not a great incentive to work more.
In Canada, the weight of consumption taxes as a percentage of GDP is the lowest among G7 countries. We established an index to compare our standing to that of other countries. We took the weight of consumption taxes divided by the weight of income taxes. A ratio higher than one means that consumption taxes are higher than income taxes; inversely, a ratio lower than one indicates that income taxes are higher than consumption taxes. Canada sets itself apart with a significantly lower ratio than the average of G7 countries. In fact, with the exception of the United States, Canada has the lowest ratio.
All of these factors argue in favour of an increase in consumption taxes which would result in a decrease of income taxes having no impact on total tax revenue. Some claim that the exact opposite occurred with the recent cut in the GST, that went from 7 to 6%, then 6 to 5%. These claims are correct.
Companies are taxed on their profits, payroll, and capital. Canada finds itself below the average of G7 countries in terms of weight as a percentage of GDP. Taking into consideration the effect on government revenue of the government's plan to reduce taxes, effectively bringing the rate down from 22.12% in 2007, to 15% by 2012, this indicator in terms of percentage of GDP will continue to drop. Therefore, Canada will find itself in an enviable position in the eyes of G7 countries.
Let us turn now to taxation and how it can be used as a tool that takes into consideration the changing economic situation. What do I mean by "changing economic situation"? I mean that in Canada, economic growth for last year, this year and next year is different according to whether you are in Quebec, Ontario or the rest of Canada. This can be explained by the crisis that hit the manufacturing sector, and between January 2005 and January 2008, 280,000 jobs in Canada were lost. In fact, 92% of these jobs were lost in Quebec and in Ontario. This means that economic growth in these provinces is markedly different, and clearly weaker depending on whether you are in Ontario, Quebec, or the rest of Canada.
If the government is to intervene, the problem that the Canadian economy faces must be clearly identified. To do so, we must assess three elements: productivity per hour worked, growth of this productivity per hour worked, and the level of investment in production equipment.
If we start with productivity per hour worked, Canada stands below the average of G7 countries. Each hour worked in Canada produces less output than the average of G7 countries. We are less productive than our American neighbours. This is the first observation.
Another element concerns the growth of this productivity, and how it has changed over the years. Between 2001 and 2006, the average annual growth rate of productivity for Canada placed this country second-last, just before Italy, of all the G7 countries. This means that the productivity gap between Canada and other countries is widening. To understand growth and productivity, and the determinants of growth and productivity, three factors must be considered: technological progress, human capital, and physical capital. Physical capital can be quantified by an average rate of investment in production equipment for all G7 countries between 2001 and 2005. This rate is a percentage of GDP. Of all G7 countries, investment in production equipment in Canada is the lowest, which explains which factors we need to emphasize if we are to increase productivity. These last three slides are rather eloquent on the situation.
Let us now turn to choices that governments can make, and what has been done recently to help the industrial sector. It has been noted that the industrial sector is experiencing a crisis. In January, assistance was given to traditional sectors. This slide shows the percentage of jobs lost between January 2005 and January 2008, as spread across Quebec, Ontario and Alberta. Conversely, you have here an illustration of the percentage of assistance given last January broken down on a pro rata basis. Ontario suffered 57% of job losses, and received 36% of the assistance targeted to traditional sectors. As for Quebec, this province lost 34% of jobs between January 2005 and January 2008, and received 22% of the assistance. Alberta suffered only 2% of job losses between 2005 and 2008, and received 10% from the same envelope. If we are to convert these amounts into dollars per job lost, then Alberta received approximately nine times more than Quebec and Ontario, on a per capita basis. Seen in this light, it can be said that apportioning assistance on a per capita basis to help the industrial sector is an insufficient measure.
Other measures were implemented to spur economic growth and stimulate certain economic activities. There were corporate tax cuts. I don't know if it's worth bringing up again, but earlier I talked to you about cutting taxes on profits. There was also the accelerated capital cost allowance. I will not focus on these points, but we can certainly discuss them if you wish. Rather, I want to talk about what would be helpful if we want to help companies invest.
We saw a rapid rise in the Canadian dollar—I think you're in a good position to know that—and this harmed our exports. However, this rapid increase in the value of the Canadian dollar had a positive effect as well because businesses have been able to acquire imported equipment at a better price. Therefore, these economic circumstances have to be used in order to help businesses modernize. How? One way would be to use last year's surplus for the purposes of helping businesses. Thus, over the next 12 months, we could tell them that for every dollar of investment a certain percentage will be given back to them. I illustrated this using 20¢ for every investment dollar but it could be done another way. Therefore direct action would have to be taken given the low level of investments over the past few years.
Regardless, it should be pointed out that we're moving in the right direction. Reducing corporate income tax means that in 2012 there will be an attractive corporate tax rate, however, we could have moved faster by directly helping businesses to invest between now and then.
In conclusion—I know that I do not have much time left—Canada's tax system compares favourably internationally even though income tax measured as a percentage of GDP was higher than in all the G7 countries. Furthermore, in some income tax cases, the implicit income tax rate results in 75% of additional income earned by some families being confiscated, and there is an under-utilization of consumption taxes in this country compared to other G7 countries.
The tax system could also be used to help the manufacturing sector get through the current crisis. The tax system could also be used to counter slow productivity growth. There has been a lack of investment in production equipment and businesses could be told that they will receive assistance if they make short-term investments.
Even if this does not take place—although I believe it should—the Canadian tax environment for businesses and investments will be an attractive one in 2012, based on the information we have now.