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.
4:40 p.m.
Conservative
April 9th, 2008 / 4:40 p.m.
Conservative
Mike Wallace Conservative Burlington, ON
Thank you, Mr. Chair.
Thank you, professors, for being here.
I'm going to start with Mr. Mintz. Your first recommendation was to go to three tax brackets instead of four, which I believe we have now. Do you have any comment on changing the thresholds at which they apply--the income you have to earn before they start to take effect?
4:40 p.m.
Professor, School of Policy Studies, University of Calgary
I think that if you did do that, you would want to recast the thresholds. I have to admit that I haven't done the calculations, and of course all of it would depend on the amount by which you want to reduce personal tax.
As I said in my comments, if you did bring in a restructuring of the federal fuel excise tax that raised a bunch of revenue, and some of it was used for reducing personal income taxes, then I wouldn't mind seeing a reconfiguration of the personal tax. Perhaps it could go down to three rates. It would mean recasting the thresholds, which could go up. It depends on how much revenue one wants to--
4:45 p.m.
Conservative
Mike Wallace Conservative Burlington, ON
When I look at your four or five points here, you haven't done an overall calculation of whether this is revenue neutral for the government or any of that type of analysis, then.
4:45 p.m.
Professor, School of Policy Studies, University of Calgary
No. You have to work out all the details. I don't have a Department of Finance to do that for me; I'm just one person.
4:45 p.m.
Conservative
Mike Wallace Conservative Burlington, ON
No problem.
Your third point I haven't seen before. I'm not sure I agree with you.
We've provided an incentive for a small business owner to get a lifetime capital gains exemption of, I think, $400,000 now. If I read you correctly, you're recommending that we get rid of that exemption completely, because once you've made over $400,000, you start paying tax on it, so it's a disincentive after that point, based on what I'm reading here.
Could you explain to me what the better system is? I don't understand it at this point.
4:45 p.m.
Professor, School of Policy Studies, University of Calgary
I was very brief in my comments. But first of all, the lifetime capital gains exemption is available for anyone who owns Canadian-controlled private corporate shares.
In fact there are many large companies that have restructured themselves so they might create a private management company, in which the managers--who could be people quite wealthy, actually--end up claiming the lifetime capital gains exemption for their shares, because it's a Canadian-controlled private corporation, when they sell off their shares within that private corporation.
But the problem that I have with the lifetime capital gains exemption is that it only is available for private corporate shares. So if you become public, you can crystallize and fully claim your exemption, but effectively, sometimes if you haven't built up enough capital gains yet, then you may want to keep the company private.
What I'm suggesting is that I think we need to start thinking about incentives for small businesses that would allow them to grow. An example I was always struck with was in the United States when they gave a half capital gains tax treatment for investors holding initial public offerings of small companies, and small companies were defined as up to $60 million in assets, the last time I looked at the rules. There was a study done at Harvard that indicated that investors actually got about half the benefits of that and the company got half the benefits in terms of a lower cost of capital. But it was interesting, as it was an incentive to actually encourage companies to go public, as opposed to what I see as an incentive to keep small.
4:45 p.m.
Conservative
Mike Wallace Conservative Burlington, ON
Either economist can answer the next couple of questions--hopefully, both.
In this country, as you know, the capital gain in your own personal home can grow and grow and you never pay tax on it when you sell it. In the United States, I know there's a minimum under which you can do that and then you can write off your interest, and so on and so forth.
Do you have any suggestions on any changes to that, or do you like the Canadian system over the American system?
4:45 p.m.
Professor, School of Policy Studies, University of Calgary
The Canadian system is much better. It's equivalent to what I called an expenditure tax treatment for housing, just like RSPs and the tax-free savings account that's just been introduced by the government. I think we have exactly the right system for the treatment of housing. I wouldn't change it one iota.
4:45 p.m.
Conservative
4:45 p.m.
Assistant Professor, Economics Department, University of British Columbia
I'll just echo that.
I notice that one big difference between Canada and the U.S. is the lack of deductibility for mortgage interest. I think we made the right choice in Canada.
In the U.S., there was a commission last year that recommended ways to try to remove that tax preference. Once created, it's very difficult to remove, and they found that in the U.S.
I think we're much better off in Canada with that.
4:45 p.m.
Conservative
Mike Wallace Conservative Burlington, ON
As my final question, of the items that you've recommended to us, is there one, each, that you particularly would like to emphasize for us? We can't do everything, of course. Is there one that you'd recommend as a top priority among your suggestions?
4:50 p.m.
Assistant Professor, Economics Department, University of British Columbia
I'll go first with the easy one. It's the retail sales tax and the GST thing. There are precedents for how to do it within Canada, and I think there are big gains to be had for doing so.
4:50 p.m.
Professor, School of Policy Studies, University of Calgary
My first choice is the very first bullet point on the personal tax. I think we need to start paying more attention to reducing personal income taxes in Canada. It may require a shift toward consumption taxes in various ways, including an environmental tax, being a form of a consumption tax.
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thanks.
Just to get back to a question I think Mr. Wallace was asking you, Professor Mintz, do you believe that we should be giving incentives for individuals investing in small business or that there should be no incentive at all and everybody should be treated equally?
4:50 p.m.
Professor, School of Policy Studies, University of Calgary
We need more current studies, but past studies have shown that actually many small businesses are created but then they don't grow in employment growth. Only a few do. In fact the last study that was done, which was almost ten years ago, had shown that only 12% of small business companies actually grow.
As we know, many people have used the small business tax treatment, really, as a way of trying to reduce taxes and they've incorporated themselves, as opposed to really going ahead and growing.
What I'm trying to say is that I don't think our system has worked well. I think we need to rethink our incentives for small business. I'm not arguing against trying to have some incentives; I think we should, but I think we need to rethink what we're doing.
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
But would the solution be—and this what I'm trying to reconcile between you and Professor Milligan—to lower the income tax on capital income, whether it be capital gains, dividends, or interest, just lumping them all together and reducing the tax on that? Would that solve it? Or would there still have to be something for a small business owner? The small business owner will need to have some type of incentive to take a chance on opening up a business.
4:50 p.m.
Professor, School of Policy Studies, University of Calgary
Right. First of all, one thing I would disagree with Professor Milligan on is that, even if you try to lump capital gains and dividends and interest together, you're not going to simplify the system. First of all, capital gains are only taxed on a realized basis, when people actually sell assets. That already creates an important differentiation, and a lot of tax law is built on trying to cope with that differentiation from other sources of income.
Also, for dividends, and in the case of capital gains too, we know that if a company is paying corporate income taxes, it's actually reducing its value and in fact the capital gains and the dividends. The reason we've had dividend tax credits, especially for small firms, and lower capital gains taxes on shares has been as a way of trying to recognize that the income the owner gets has already been subject to one layer of tax, and that's at the corporate level. So you're going to have those kinds of differentiations.
In the case of small business, I think there is an issue of building a company and of people having sufficiently low costs of capital to grow their company. Taxes, especially capital gains taxes, can impede risk-taking, because governments are there to share the gain, but they don't necessarily share the loss entirely, although we've tried to deal with that in the tax system.
But because we don't have a perfect system of capital income taxation—we will never get there—sometimes you have to do some offsetting incentives. That's where I think we need to rethink this, but what I'd like to do is rethink incentives by which we can actually encourage growth and not have very high marginal tax rates, such that if a company grows, then they're facing much higher levels of taxes on their income, should they grow.
It's very similar to low-income people trying to—
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Would a gradual type of rate perhaps be a better solution than just going from the small business rate of 13% and jumping directly to 22%?
4:50 p.m.
Professor, School of Policy Studies, University of Calgary
That is one thing that could be considered. As I mentioned, I'm going to be doing some work in this area. I think there may be some really interesting incentives one could think about. Right now I'm not exactly sure what to recommend, but I like this U.S. incentive, because it's a good example of something that can be done that encourages growth.
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
When the small business deduction was at $200,000, everything I ever read coming out of accounting firms was that you had to bonus down to $200,000. Now that it's at $400,000, they're suggesting bonusing down to $400,000. There are still corporations that should be at much higher levels, but they're all bonusing down, just for tax purposes. That doesn't make sense; you're not going to grow a company by doing that. You'll do it in the short term, but not in the long term. I agree that it's a disincentive.
Do I have--
4:55 p.m.
Liberal
