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.
4:05 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
Thanks.
Jack, go ahead. I have a question for you, but if you want, do a quick summary.
4:05 p.m.
Professor, School of Policy Studies, University of Calgary
Okay. I have just one very quick point.
I agree with Kevin's comments about selected, targeted tax credits, but there are some tax credits that are very important, and in fact aren't wrong to do, in my view. One of them is the GST tax credit. The whole concept of that was to make the GST progressive so that low-income people wouldn't pay as much. So I think there's a good argument for that credit, and I don't think one should detract from it.
On the other hand, when you get into various targeted credits.... For example, Quebec had a special tax holiday for high-tech companies in two Internet towers in Montreal. That created very significant distortions, but it was ultimately eroded by high rental prices charged for the two Internet towers. So that kind of very targeted thing often doesn't accomplish what you're really hoping to achieve.
4:05 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
To that end, maybe this expands a little on your point that I'm intrigued by, and that is, the whole concept of encouraging provincial tax reforms by providing a grant for those provinces that undertake sales tax reforms. Could you expand on that a little? The point I'm trying to determine is that we're taking the same approach. We're not necessarily dealing with income tax or tax on corporate gains, but in fact we're moving to a system through which we're trying to encourage provinces to do something that perhaps they should be doing anyway, without our encouragement.
4:05 p.m.
Professor, School of Policy Studies, University of Calgary
I think that's a valid point.
First of all, we have a bit of history. Back in 1997 the federal government gave a billion dollars to New Brunswick and Nova Scotia and Newfoundland and Labrador to harmonize their sales taxes with the federal GST and to eliminate the provincial tax. This was a grant to offset revenue losses that were going to rise because the retail sales tax rates were quite high and the federal government wanted them to go to an 8% rate.
I think today you can make a case that a similar type of grant should be provided to other provinces, as was done ten years ago, in part because that would really help improve the system and allow better growth, which the federal government will make up for in terms of getting their own higher taxes, especially when you get some of the very large provinces, particularly Ontario, to move towards a value-added tax.
4:10 p.m.
Conservative
4:10 p.m.
NDP
David Christopherson NDP Hamilton Centre, ON
Thank you, Chair.
Thank you, professors, both of you. I appreciate your taking the time.
Professor Mintz, I believe it was you who raised the experience rating, and that was fine until you got to the part where you made reference to Ontario's WSIB. That caused me to generate this question. The experience rating at WSIB right now is a nightmare. In fact there was just an acknowledgement by Steve Mahoney, a former member of this place--and I served with him in the Ontario legislature--who is the chair and who has acknowledged that the whole system is just a nightmare. There are companies that are finding it cheaper to have employees who are injured sit in the lunchroom and pay them their wages rather than have them make a claim because a claim affects this rating. The downside for the workers is that without a claim going in, if they have a problem down the road, particularly as they get older and the problem becomes a debilitating injury or illness, for that matter, they're out of luck.
There is more money paid out--unless it has changed since I was there, which is going on five years ago--in experience-rating benefits than there were benefits to injured workers. So I'm just trying to understand how, given that experience in Ontario, you're seeing it as a real plus nationally. Maybe you can help clarify that for me.
4:10 p.m.
Professor, School of Policy Studies, University of Calgary
First of all, there's no system or policy in the world that doesn't have some effects that you don't like, and of course the question is how you deal with that. I won't comment about Ontario because I don't know enough about the actual way the experience rating is put in. I do know that, for example, in New Brunswick, when they introduced experience rating--and this was Frank McKenna who did this back in the 1980s--it had a tremendous impact in encouraging growth in the service sector, in call centres, for example, because premiums were very sharply reduced for service companies that had very little layoff or worker compensation experience. Therefore it really did achieve a much more efficient system, and you'll find that people in New Brunswick, from what I understand, are really quite happy with the experience-rating system that operates there.
I do know that Alberta has gone to individual firm experience rating, and I'm not aware that there have been significant problems, although I know that there have been issues over deficits, which is another type of difficulty that one gets with government-owned enterprises, but that's an issue they've had to deal with over time.
4:10 p.m.
NDP
David Christopherson NDP Hamilton Centre, ON
Yes, well, certainly unfunded liabilities remain an ongoing problem in Ontario.
I also want to pick up where Rick left off, or at least touch the same issue, in terms of the boutique taxes. I was equally surprised, Professor, to hear that you are opposed to them. I listened to your answer, and I understood it from both a revenue and an efficiency point of view, but I didn't quite understand how that trumps what the attempt is, without commenting on this particular tax; that is, the whole notion that if you want to use the tax system to affect behaviour in a positive way for the nation without acting like big brother, this is one of the means. So I still need a little help understanding why the efficiency of it is more important than the social goal, if you will.
4:10 p.m.
Assistant Professor, Economics Department, University of British Columbia
I'll take that one. Thank you for the question.
You're right in saying that one way to affect outcomes they might want to see is through the tax system. Taxes can affect people's decisions and are one way to get things done, but taxes aren't the only way to get things done. You can also spend money out of the budget directly on the expenditure side of the budget, rather than doing it through the credit side, the tax side.
My argument is perhaps a bit subtle.
Certain types of things might be better done on the tax side--for example, those affecting equity concerns that are raised by the GST through the GST tax credit, as Professor Mintz mentioned. Other things might be better done on the expenditure side. Take the example of the fitness tax credit. To go further on that, an issue with the tax credit approach is that an awful lot of families don't have taxable returns at all. They don't see any benefit at all from a fitness tax credit, so if you're trying to focus, say, on lower-income families, they're not going to see any benefit from that at all. On the other side, some kind of expenditure program that helped local community centres or something like that would be something you could perhaps use to improve the outcomes for all families.
It comes down perhaps to a case-by-case basis, but in general the broader the measure is, the less likely it is that you're going to have to worry about these kinds of small distortions and changes we've alluded to.
4:15 p.m.
NDP
David Christopherson NDP Hamilton Centre, ON
Okay. I'm still not sure I'm convinced, but I hear your argument.
I have one more question, Chair, if I have time.
On the dual income tax, one of the things we're seeing over the last 30 to 40 years is that more of the overall revenue for the country is coming from personal income tax and less from the corporate side. In fact, over the last.... Obviously you're the professors, and you'll correct me if I'm wrong, but over that time period there's been a dramatic shift away from having the majority of it come from the corporate side. The personal income tax has long surpassed that now.
I won't get into the politics of what current governments are doing, but when you suggest this system, can you give me some assurance it would go toward rebalancing that, or do you not see the rebalancing coming? Are you prepared to defend that it's right for so much of our revenue to be coming from personal income tax rather than from the corporate side, which is the reverse of what it was as early as the 1960s?
You can tell I'm getting old.
Thank you.
4:15 p.m.
Assistant Professor, Economics Department, University of British Columbia
Let me address that with a brief point.
One thing that's really interesting is that there has been a rise in income inequality in Canada over the past 25 years, but a lot of that is driven not by changes in capital income but by changes in earned income. People at the very top of the wage distribution of earned income have done very well over the last 20 years. People even at the 90th percentile of the earnings distribution have actually been pretty flat over the last 20 years; it's really the top 1% who have done very well.
My point about the dual income tax is that if you're really concerned about equity and this inequality problem, this approach might allow you to address it through a system that allows you to separate out the capital income side from the earned income side, because the earned income is actually the source of the greatest growth in inequality.
4:15 p.m.
NDP
4:15 p.m.
Conservative
4:15 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you, Mr. Chair.
Thank you to the witnesses for appearing.
Professor Milligan, I think you touched upon the reason that we're here.
I think we're seeing a shift. You can look at what the Nordic countries are doing in terms of shifting away from corporate taxes and going towards wage or personal income taxes. Another prime example is Ireland.
I'm not sure I understand why that's happening. What is the benefit of taxing what you've lumped all together and called capital? Whether it's capital gains, dividends, or interest, what are we trying to accomplish with that? You would attract capital, but what would that do in turn for the country as a whole?
4:15 p.m.
Assistant Professor, Economics Department, University of British Columbia
There are two or three points.
For the country as a whole, if you want to have more business investment--better investment, better job creation--one way to do it is to make sure Canada is an attractive location for investment dollars. One way to do that is to make sure we have a competitive taxation regime for capital income.
The second thing, about why I'm lumping together capital gains and other types of capital income--
4:15 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Professor, let's focus on that.
If somebody brings in capital, what does it generate for the country? Does it make a foreign investor richer because he's not paying taxes here? Should we put some conditions that would require capital investment to create jobs? It seems like an open invitation to come and invest your money here, and if we decide to change the rates, you can go elsewhere tomorrow.
4:15 p.m.
Assistant Professor, Economics Department, University of British Columbia
So the argument is that for people who have dollars to invest in lots of different countries around the world, one of the key things they're going to look at is the after-tax rate of return on those investments. The more amenable the Canadian choice is to them, the more likely they are to invest. What does that do for us? That means we get new plants opening up, we get new technologies being developed, and we have good-paying jobs that are going to come out of the greater corporate investment.
4:15 p.m.
Liberal
4:20 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I just want to.... Then I'm going to go to you, Jack.
Is that actually happening? Are we just attracting people to put money in term deposits, and the banks are increasing the amount of reserves they have? Or are there actual jobs being created when we do reduce the corporate taxes, when we do reduce the capital rates, when we do reduce dividend income? Are there studies out there? The great example is Ireland. That's the reason we're here. Are there studies out there? Is the proof in the pudding? Is it really something we should be looking at and recommending? Because, that's the purpose of this study. I believe it is, but I have nothing on which to base my decision.
What we're seeing, if we look at the forestry sector, is that, yes, businesses are putting huge amounts of money into a factory. We saw it in Quebec with the automobile sector where they were given tonnes of money. They put in two automobile factories in the span of three or four years, and once the grants ran out—I don't even think they waited for that—the plants closed down. In the forestry sector, the dollar turns and they're gone the next day. So can we really rely on these? Should there be more conditions or heavier conditions?
4:20 p.m.
Professor, School of Policy Studies, University of Calgary
Could I comment on that?
4:20 p.m.
Assistant Professor, Economics Department, University of British Columbia
Sure, I'll defer to Jack.
4:20 p.m.
Professor, School of Policy Studies, University of Calgary
First of all, let me say that I think the question is wrong in the first place, and the reason it's wrong is that corporations don't pay tax. It's going to be either shareholders who get lower after-tax returns, or it's going to be workers who are not going to get as high wages.
The reason I raise that is that in today's global world, the one thing that corporate taxes don't do any more is get shifted back onto shareholders. The reason is that if you impose high corporate income taxes and it lowers the profits that are going to be paid to shareholders or to investors, then they'll take their money and go elsewhere around the world. So in the end, the corporation has to pay the same after-tax rate of return to shareholders as it would with or without corporate taxes.
Right now I'll get to some important studies that have recently come out. But what we have seen in the past number of years is that there is a growing body of evidence that corporate tax reductions actually do generate more and higher wages paid to workers.
A recent study done by Mike Devereux at Oxford University—quite a good one with a colleague—looked at the incidence of corporate income taxes in Europe and I think particularly in Britain. This was one of the first studies that had been done in quite a long time. He found that in the short run, if corporate taxes are reduced by $1, then wages increase by 50¢, and in the long run they increase by over 100%. The reason he got over 100% is that companies would invest in new technologies and that would increase the productivity of workers and then that would allow them to pay more wages to their workers. Or they would be able to reduce prices, and that would have the impact of increasing the purchasing power of wages.
4:20 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Did studies look at other things—for example, standard of living? When I say “standard of living”, I mean the fact that post-secondary education is not as expensive and neither is health care or medicare. Are those factors also taken into consideration or is it just corporate taxes? What does a corporation look at?
4:20 p.m.
Professor, School of Policy Studies, University of Calgary
They were just looking at the corporate tax. As you might know, there's work that I personally have done in which I have tried to actually look at what's called the “fiscal burden” on businesses. It's a way of trying to aggregate up different taxes on different inputs—labour and capital—but also take into account various subsidies, like health care subsidies and education subsidies, etc., that could impact the fiscal burden on the cost of producing goods and services. I've done that for Canada and for Ontario particularly.
Let me just very quickly add that there's been a recent study that was done by Ken McKenzie, at the University of Calgary, with a colleague. They looked at these effective tax rates on the cost of doing business in Canada; they looked at inter-provincial differences. He found that those provinces that had lower effective tax rates on costs would actually end up having more companies operating in that jurisdiction.
