Evidence of meeting #34 for Finance in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was system.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Jack Mintz  Professor, School of Policy Studies, University of Calgary
Kevin Milligan  Assistant Professor, Economics Department, University of British Columbia
Clerk of the Committee  Mr. Jean-François Pagé

4:25 p.m.

Conservative

The Chair Conservative Rob Merrifield

Thank you very much.

Mr. Crête.

4:25 p.m.

Bloc

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

Thank you, Mr. Chair.

My question is for Mr. Milligan.

You told us about the dual taxation system, that is income taxes and capital taxes. You gave the example of Sweden. Could you tell us in more details why, in your view, this could be relevant in Canada? We in Canada have an enormous neighbour, namely the United States, while the situation is different in Sweden. Please give us some more indications as to the results and the feasibility of such a system in Canada.

4:25 p.m.

Assistant Professor, Economics Department, University of British Columbia

Kevin Milligan

Thank you for the question.

I will pick up the last point that you made first. I think you're right that there might be some differences in a place like Canada, where there's a lot more bilateral investment with a larger partner, than in Sweden, where it's more of a multilateral, within-Europe situation, but it's not necessarily the case that that makes it harder to think of why a dual income tax would be good. The reason is that in a case like Canada it might even be more likely to be the case that capital flows freely across the border because we're in the NAFTA agreement with the United States, and the more freely capital flows, as Professor Mintz was just saying, the less likely it is that capital income taxes will actually be borne by those who are investing in the country. In other words, what you're going to do when you're taxing capital income is you're just going to decrease the amount of investment in a world where capital flows very freely.

So part of what the dual income tax is trying to do is to recognize that fact, that capital is flowing freely, and to design a tax system that accounts for the fact that by taxing capital income more heavily, we're not actually doing ourselves any favour. For the most part, what we'll be doing is just scaring investment across the border.

4:25 p.m.

Bloc

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

Does the Swedish model succeed indirectly in obtaining a better return not in terms of creation but rather distribution of wealth? Does this model have an impact on distribution of wealth? Centrist governments and even rightist governments have been elected in Sweden. However, it has been a social democratic model for a long time and it remains so.

Do you have an idea of the impact this model has on the distribution of wealth, on social programs? How does it compare to the model that we are applying here?

4:25 p.m.

Assistant Professor, Economics Department, University of British Columbia

Kevin Milligan

Thank you for the question.

I haven't seen a study of Sweden in particular, but I was just reviewing a study of Finland, which also has a dual income tax system, and it found that there was a gain for those who were heavy recipients of capital income within Finland and also some slight gains on the employment side as well. But one difficulty in making comparisons of the social changes that have happened through the 1990s, as Finland and Sweden made these tax changes, is that many different things were changing. So as we see the progression of these societies, it's hard to be sure what exactly was caused by this tax reform and what wasn't. In Finland, in any case, there was no evidence from the study that there was a great change in the distribution of wealth.

4:25 p.m.

Bloc

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

Thank you.

Mr. Mintz, you talked about an independent employment insurance account. That is an interesting idea. I don't know whether you know that model, but in Denmark, employment insurance does not work the same way as it does here, since they are not waiting for the people to be out of the system to offer them training and reintegrating them within the system. Here, we begin to train people once they have lost their job. In a context of globalization, it is not a very efficient way to proceed.

I understand that in Denmark, there is an employment insurance system that enables workers to have access to training within the system. Moreover, when they are laid off, they benefit from a security lasting up to two or three years. They in turn make a commitment to receive some training.

Have you examined this aspect in the context of a potentially adequate employment insurance system?

4:25 p.m.

Professor, School of Policy Studies, University of Calgary

Prof. Jack Mintz

The short answer is no. I'm not aware of the Danish reforms in detail. All I do know is that Denmark, unlike many other European countries, has avoided the use of payroll taxes to fund all social security and health and other expenditures. What people have found is that actually the Danish labour market is much more flexible compared to other European countries, and part of that is attributed to the payroll tax, but I think maybe some of these other factors are playing a hand as well.

4:30 p.m.

Conservative

The Chair Conservative Rob Merrifield

Thank you very much.

Mr. Del Mastro.

April 9th, 2008 / 4:30 p.m.

Conservative

Dean Del Mastro Conservative Peterborough, ON

Thank you, Mr. Chair.

Thank you, witnesses, for appearing before us today.

Professor Mintz, one of the things I've been talking about a lot, and something I've been studying and working on, is the harmonized sales tax or value-added tax and the benefits of transitioning toward that. I note that it's one of the points in your presentation today.

We've had some discussion here before the committee, which I happen to agree with, that it's often not a matter of the tax rate even, but where you're generating the tax revenue dollars from. So where you're applying it would often determine how you're positioning your economy productivity-wise and whether you're optimizing your tax system.

I do know our government has put in place some incentives for harmonization of taxes, and one of the things we keep coming back to is that we should come up with perhaps a larger subsidy, or create an impetus for that to occur. But one of the things I don't really understand is why this change can't be made revenue-neutral for the provinces. Why can't they transition to a value-added tax without taking an enormous economic hit, especially considering that most tax revenues in the provinces are generated—as with the federal government—by personal income taxes, not through value-added taxes or corporate taxes? It would seem to me that this transition could be made, with the exception of administrative changes, fairly revenue neutral for the provinces.

4:30 p.m.

Professor, School of Policy Studies, University of Calgary

Prof. Jack Mintz

First of all, I think you're right that it can be revenue neutral. In fact, there's going to be a paper coming out on Ontario value-added taxation, which I've done with a couple of colleagues at the University of Toronto, where we've gone into this in detail.

First of all, let me say that if Ontario converted its retail sales tax into a value-added tax, whether fully harmonized with the GST, or maybe with some deviations from the GST, like the Quebec sales tax, it could levy the tax rate at about 8% without losing revenue—but it wouldn't gain any revenue either.

There is one virtue, though, which is what we found out. Retail sales taxes in Ontario have only grown 3% per year in nominal terms—not when inflation is taken out—over the past five or six years, while value-added tax collections in Ontario of the federal GST have actually been more buoyant with the economy and have actually increased 5% per year. In a sense, Ontario is hurting itself by maintaining a retail sales tax that actually is not growing very well with the economy, and that's because of the way it operates.

Now, there are some things that Ontario—

4:30 p.m.

Conservative

Dean Del Mastro Conservative Peterborough, ON

Could I just ask you to expand to the next step?

If most of Ontario's taxes, as with most governments, are generated by personal income taxes, reducing the marginal effective tax rate by eliminating retail sales tax on investment into industry should relate to more employment, and certainly more investment, which would also lead to higher personal income tax revenue for the provinces. So it would seem to me that it would really marginalize or negate any potential loss from the transition to a retail sales tax.

Is that not accurate?

4:30 p.m.

Professor, School of Policy Studies, University of Calgary

Prof. Jack Mintz

It's not quite accurate. In the work we've done, using the FOCUS model of the University of Toronto, we did take into account the investment impacts, which would be positive and actually help to generate more revenue in the future. There is also a more immediate impact, different from the longer-run impact, that would have to be taken into account.

But overall, I think there's a very strong case to be made for Ontario—and I'm sure this would also apply to the other four provinces—to move towards a value-added tax, even from the point of view of the government getting a better and growing source of revenue.

4:35 p.m.

Conservative

Dean Del Mastro Conservative Peterborough, ON

Thank you.

Professor Milligan, I want to come back briefly to what I guess we've been tied up about--that is, your comment about boutique tax credits, that environmental taxes are good and boutique tax credits bad. But then you expanded on that a little bit and said that one of the other things that could be done is spending money, versus creating a tax credit to encourage a behaviour.

As a Conservative, I actually look at it the other way. If I look at public transit, for example, I would rather encourage people to ride public transit and have the transit system become economic, and actually be able to provide for itself, than the other way, which is to pour money into a system and have a whole bunch of empty buses with nobody riding in them.

Do you see how that might be a better approach—which is where the government has gone with it?

4:35 p.m.

Assistant Professor, Economics Department, University of British Columbia

Kevin Milligan

Yes, I can see it, although it depends maybe upon what city you're in. In Vancouver, the problem is getting on a bus; the problem isn't empty buses going around, I can tell you for sure.

In general, the argument I was trying to make is that on the spending side it is possible to perhaps be more targeted than on the tax credit side. As I mentioned with the fitness tax credit, a lot of people riding buses are students. Students quite often don't have taxable returns, and they won't see the benefit of this tax credit. Maybe these are people we want to encourage to take the bus more, rather than to drive and park at the university. That's one of the issues I'd like to raise.

4:35 p.m.

Conservative

Dean Del Mastro Conservative Peterborough, ON

Obviously, the goal of it is not to give tax credits, necessarily. We want to reward the people who are currently using transit through that system—and this is only an example—but secondly, we want to create an incentive for people who aren't using transit, and those probably aren't, generally speaking, students.

4:35 p.m.

Conservative

The Chair Conservative Rob Merrifield

That will be the last. We'll move on now.

Mr. Bagnell.

4:35 p.m.

Liberal

Larry Bagnell Liberal Yukon, YT

Thank you.

Thank you both for coming.

I have just one question, then I'll let my colleagues.... They have more questions.

Just to change stream a little bit, do you have any comments on regional development and how the system can be used in that respect? There have been suggestions occasionally over the years that one way would be to have different tax rates, for instance, in depressed regions. Do you have any comments on that? If not that, then how would we deal with those depressed regions, because it is in our constitution that we're trying to get everyone up to the same level of prosperity and equal services, etc., which are provided by taxes.

4:35 p.m.

Professor, School of Policy Studies, University of Calgary

Prof. Jack Mintz

Several years ago I gave a major speech on regional development programs in Canada and went into a lot of the literature about what people have found around the world with them. There was a comment made by the World Bank that just about every regional development program that was ever tried didn't work, in the sense of really doing anything.

But there were two things I found that were quite effective in trying to improve more depressed regions. One of them was to link them better with the urban areas in terms of both communication and transportation networks. That allowed people more easily to trade from the outlying regions with the major urban centres. It was found in Europe and in a number of other studies that these things did tend to work.

The other type of regional development effort that was successful was getting over jurisdictional boundaries, and in particular, when you get to smaller regions, enabling a sharing of the costs of major expenditures by getting several communities to share the costs rather than each, let's say, building their own centres. If you could get some economies of scale and efficiencies that way, that actually succeeded.

I was quite surprised that one of the jurisdictions was a Canadian jurisdiction that actually put some significant effort in that direction. That was Alberta. With its regional development policies, it was trying to get smaller towns to share resources more, so that they could have better facilities available to them.

None of these things is on the tax side, and so I think maybe we have to go back to trying to recognize what we are trying to achieve and how best to achieve it. I think those are interesting directions to think about anyway.

4:35 p.m.

Liberal

Larry Bagnell Liberal Yukon, YT

Are there any other...?

Mr. Milligan?

4:35 p.m.

Conservative

The Chair Conservative Rob Merrifield

If he has any more comments, he may go ahead.

Go ahead, Mr. Milligan.

4:40 p.m.

Assistant Professor, Economics Department, University of British Columbia

Kevin Milligan

No, I'm fine.

4:40 p.m.

Liberal

Larry Bagnell Liberal Yukon, YT

He doesn't want to say anything.

4:40 p.m.

Conservative

The Chair Conservative Rob Merrifield

Okay, that's fine.

Yes, you have a minute or two.

4:40 p.m.

Liberal

John McKay Liberal Scarborough—Guildwood, ON

All right. Well, I may have to go into another round, but....

It's pretty obvious at this stage that, one way or another, governments have to price carbon. It's easy to say and extremely difficult to apply.

It's also obvious that we are under-taxing consumption vis-à-vis other G-7 comparators. I was wondering whether the tax pricing of carbon would be easiest as, if you will, a consumption tax, both at a manufacturing stage, but also at an ultimate consumption stage for import purposes.

4:40 p.m.

Professor, School of Policy Studies, University of Calgary

Prof. Jack Mintz

Let me first of all say that this kind of proposal really was made ten years ago by the technical committee on business taxation, which I chaired. I was appointed by Paul Martin when he was Minister of Finance.

In fact, we recommended taking the federal fuel excise tax, which really lost its rationale.... It was introduced in 1975 to reduce imports of oil. That's really irrelevant today. There's a question of why it even exists at the federal level, since the federal government really doesn't fund highways and roads, as the provinces do, and one could argue that it's a user-related tax. Can't the federal government do something better with that tax? We recommended at that time a broadening of the federal fuel excise tax into a tax either on energy or on toxins. It would effectively take into account these things.

Today I presented a paper and gave a speech at the Economic Club of Toronto. In that presentation Nancy Olewiler and I developed in more detail some of these arguments, taking up the report's recommendation from ten years ago. We looked at what would happen if you kept the gasoline tax at 10¢ and then decided to apply a broad-based environmental tax on other fuels. It could be on carbon; it could be on sulphur and NOXs or on some combination of these things. That's a choice that could be made, but we worked through the carbon case because it actually was easiest in terms of the data.

A tax of 10¢ a litre, which is currently existing under the federal excise tax, is equivalent to a carbon tax of $42 per tonne. If you apply $42 on everything else, what would happen in our calculations is that instead of raising $5.1 billion under the federal fuel excise tax, one could raise $17 billion under a full-blown carbon tax that would be based on consumption. In other words, you try to exempt exports and tax imports, although there's a very significant problem in trying to do that beyond the fuel combustion stage.

The reason is that if you bring in a toy from China, it may not just include lead; it will include carbon, but it may not be carbon in China, because it could have been assembled from components produced all over the world, including the United States and Canada. Then you want to know the price of carbon in all different parts of the world in measuring that carbon and everything else. Putting tariffs on manufactured goods would really be quite a challenge, but as we've seen with the B.C. carbon tax, it is possible to consider that.

I think there is some room at the federal level to take a restructuring of the existing federal excise tax and maybe use it for a better purpose than simply grabbing revenue.