Finance Committee on April 14th, 2008

[Prof. Neil Brooks]

I'm not aware of any Canadian studies on how much income of Canadian multinational corporations is put in tax havens and lost through tax evasion or avoidance. But there are some American studies, and the numbers are absolutely huge. There isn't any reason to believe that the numbers wouldn't be comparable in Canada.

We should undertake a study. A number of years ago, in one of its reports, the Auditor General suggested there were billions of dollars of Canadian tax revenue lost through the manipulation of transfer pricing by Canadian corporations. So Canada ought to look at the rules in its international tax system that permit that.

Canada should also be supporting the OECD and other international organizations that are trying to prevent harmful tax competition, reduce bank secrecy laws in tax haven countries, and increase the use of exchange of information from countries we've traditionally regarded as tax havens.

So it's a crucially important area.

[The Chair, Conservative, Rob Merrifield]

Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chairman.

Mr. Heady, are there any examples of G7 or G8 countries that have higher corporate taxes, higher value-added taxes, higher personal income taxes--especially at upper-income levels--and higher productivity than Canada; where they have lower unemployment than Canada and are outpacing Canada in growth; where they have ongoing budget surpluses or decreasing national debt? Are there any examples of those countries right now, other than Canada?

[Christopher Heady]

I'm not completely sure about the unemployment rates in all of the OECD countries. Certainly there are countries with considerably higher taxes than Canada that have good economic performance and good productivity growth. Sweden is one example that has a tax-to-GDP ratio of about 50%--very much higher than Canada's. Finland is another country with good economic performance and high rates of tax.

As Professor Brooks said earlier, looking across countries it's very difficult to see any consistent relationship between tax and economic performance, because there are so many other things that influence economic performance.

[Dean Del Mastro, Conservative, Peterborough, ON]

I would personally argue--and I'm sure I could make a pretty strong tax case--that it's likely not in a country's interest to have very high taxes across the board, and consider that you could maintain growth, high employment, and so forth, and have no penalty on the broader economy.

I noticed in your presentation that some countries significantly increased their value-added taxes, comparing 2005 to 2007. One of them was Italy. When Norway and Sweden increased their value-added taxes, did that result in higher personal savings? Did it result in higher employment or anything like that?

[Christopher Heady]

First of all, I have to say that chart is not showing the VAT rate in two different years. It's showing the VAT revenue in 2005 and the VAT rate in 2007. It doesn't show, for example, that Italy has increased the VAT rate.

[Dean Del Mastro, Conservative, Peterborough, ON]

I see. So there are no examples of countries that have actually increased their value-added taxes over those two years?

[Christopher Heady]

A lot of countries have increased their VAT rates. The most recent example that comes to mind is Germany, which increased its VAT rate by three percentage points.

[Dean Del Mastro, Conservative, Peterborough, ON]

What did that do for its economic growth, or employment, or personal savings?

[Christopher Heady]

I don't know about its personal savings. I think its economic growth has improved, but I'm not sure it's necessarily due to the increase in VAT; there were other changes.

[Dean Del Mastro, Conservative, Peterborough, ON]

I'm sorry. I don't have a lot of time.

If there are zero savings in the economy, or you're approaching zero savings.... Is there any difference between reducing a personal income tax or reducing a VAT if people are spending virtually everything they're earning? Isn't is true that virtually everything becomes a consumption tax?

[Christopher Heady]

There is a difference, which is that the personal income tax is more progressive than the consumption tax.

[Dean Del Mastro, Conservative, Peterborough, ON]

I wouldn't argue that with you. But very broadly speaking, if you have zero savings it doesn't matter what form the taxes are; everything is being consumed anyway. Is that not correct?

[Christopher Heady]

That is correct.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Mr. Conway, I want to get to you on a couple of points you made.

First of all, this is in the spirit of non-partisanship. You mentioned that the federal government should maintain projected debt reduction in a schedule whereby the majority of annual surplus is directed at federal debt. The government has paid off $37 billion in debt in just over two years. Would it have been a good idea at the end of the year to create an additional $7 billion fund toward unspecified infrastructure programs? In your opinion, would that have been a good idea, or were we better to pay down debt, as the government did?

[The Chair, Conservative, Rob Merrifield]

Mr. Conway, go ahead.

[Michael Conway]

One-third of the program spending relates to old age security and health care, something we know is going to increase as the population ages. That should provide us with the incentive to find the money through various means, and one of the ways we were suggesting was to pay down the debt in order to reduce the interest so we have the money to meet the obligations that the elderly and the sick have.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Mr. Gorman, I appreciate that you mentioned the difference between tax evasion and tax avoidance. We'd love to help investment in Canada avoid what we see as a very regressive tax, the retail sales tax, by moving toward a harmonized GST across the country. Your report talks about it being the single most important action that these provinces can take to improve their overall provincial, and Canada's, tax competitiveness.

Could you elaborate on that a bit? Do you see examples of where that is in fact the case?

[Barry Gorman]

In my personal experience, at least in Nova Scotia, the major benefit of harmonization has been the elimination of red tape, the number of auditors, the number of sales tax returns, etc., virtually all of which gets translated back into the business, especially small businesses. Unfortunately, you really can't isolate the impact of a measure like that and say it created something or other. But as a general statement, I am quite convinced that there is no business person in Atlantic Canada who would go back to the old system.

[Dean Del Mastro, Conservative, Peterborough, ON]

Would it help foster better east-west trade, in your opinion, more domestic trade east-west?

[The Chair, Conservative, Rob Merrifield]

Mr. Del Mastro, no, that's it. I'm sorry.

Don't worry about answering that.

Mr. Turner, the floor is yours.

[Garth Turner, Liberal, Halton, ON]

Thank you.

Mr. Conway, do you agree, yes or no, that spending money on infrastructure is a good idea?

[Michael Conway]

We have indicated it is appropriate to control spending, but that spending on infrastructure is the way to go. If we are going to look at what we're spending our money on, infrastructure spending is a good direction.

[Garth Turner, Liberal, Halton, ON]

All right, good enough.

Mr. Brooks, it's good to see you again. I haven't talked to you for a long time.

Mr. Brooks, when the Minister of Finance was introducing his most recent budget he said his tax-free savings plan was basically the jewel in the crown of this particular budget. You've just told us that this thing is going to cost billions, in your own words.

I think the minister only allocated $50 million in there as revenue that would be lost because of the tax-free savings plan. Can you tell us briefly why this thing is such a bad idea and will be so costly?

[Prof. Neil Brooks]

Well, Chair, I'm just using the government's own number. It doesn't cost anything in the first couple of years, or it costs very little, because you don't get an upfront deduction. In effect, you get to put your after-tax savings in and then any income from capital that you earn is tax free forever.

So when it's going to get costly is 20 years from now, or 10 years from now, and I think the government itself has estimated the cost 20 years from now is somewhere close to $3 billion.