Thank you very much. It is a pleasure to come back to the House of Commons finance committee. I have been involved many times in various sessions over the past number of years.
I find the question-and-answer period particularly useful, and I am sure useful to the members. I am going to be as brief as possible about several things, to leave more time for discussion with the committee.
Let me, first of all, start by saying that since 2000 a considerable effort has been made in Canada to reduce the impact of taxes on investment and savings that are critical to ensuring that Canadians can enjoy economic growth and provide resources for their retirement as our population ages. Both Liberal and Conservative governments have achieved much in the past eight years.
Federal-provincial general corporate income tax rates have been cut from 43% in the year 2000 to 32% today and will be further reduced, to 28%, by 2012.
Capital taxes have been or are being phased out. In this, I am referring to both federal and provincial capital taxes. The federal one has already been phased out.
Capital cost allowances are being matched better to economic depreciation, although some tax preferences have been scaled back and others enhanced.
Income taxes have been reformed to remove the tax penalty on savings, for example by broadening contribution limits for RRSPs and pension savings and introducing the new tax-free savings account, which I thought was a terrific idea, in the last budget.
However tax reform is a process that continually reacts to new changes. Given the state of the U.S. economy and global imbalances and the continued concerns over productivity, Canada should keep moving the agenda forward.
Tax issues that should get some attention are the following.
First, while Canada has made tremendous strides in reducing business taxes, personal income taxes should be reformed, especially to remove high rates induced by high marginal tax rates and clawbacks of income-tested benefits and credits. It might make sense to cut down the number of tax brackets to three—15%, 20%, and 25%, as examples. We should also consider that various approaches can be taken for removing clawbacks, based on RSP asset sales, or by pooling benefits to reduce overlapping clawback rates.
Second, Canada should consider the demographic trends, which in the long run are quite important in terms of labour shortages, even though in the next couple of years we will be challenged by a contracting U.S. economy.
The separation of employment insurance into a separate fund, which the last budget has introduced, I think gives opportunities to rethink EI reform to put it more on an insurance basis. Employment insurance provides important insurance to help people cope with job loss, but also gives them an opportunity to adjust to new jobs, and that is where retraining programs could be useful.
It should also be changed to reduce contribution rates on businesses that do not lay off workers as much. This has been referred to as experience rating and is used quite well in worker compensation programs at the provincial level. In the case of unemployment insurance worldwide, the United States has practised experience rating for many years now.
Third, Canada should look at the tax treatment of small businesses, which undermines growth and job creation. Incentives such as the lifetime capital gains exemption and the small business deduction tend to impose a penalty on growth, since incentives are lost above a threshold or when the small business becomes public. Instead, small business incentives should be developed to improve growth prospects, such as the U.S. half capital gains tax reduction for investors holding initial public share offerings, for a certain number of years.
Fourth, the federal government could encourage provincial tax reforms by providing a grant for those provinces that undertake sales tax reforms through adopting a value-added tax similar to the GST. This was done more than ten years ago for the Atlantic provinces, and it would be good if Ontario, British Columbia, Saskatchewan, Manitoba, and Prince Edward Island all fixed up their antiquated sales tax systems, which are distortionary and less elastic with growth in the economy.
Fifth, many of the above proposals suggested will cost money at a time of a slowing economy. The finance minister would like to avoid deficits and should do so, and to help pay for tax reforms, the federal fuel excise tax should be converted into a true broad-based environmental tax that would be comprehensive and affect all regions of the economy in a fair and neutral manner. The revenues could be used to reduce corporate and personal income tax as well as being used to support investments to new technologies needed by businesses to deal with environmental costs.
And that, sir, is what I would like to mention as the main issues that I want to cover today.