Finance Committee on Feb. 15th, 2011

[The Chair, Conservative, James Rajotte]

We go now to Mr. Hiebert, please, for a seven-minute round.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you all for being here. I found your statements and your comments to be very interesting.

I want to start with Mr. Hodgson. You had some very interesting things to say about your forecast for the Canadian economy. You said you don't see a structural deficit in 2015, as Kevin Page does. I thought maybe it would be helpful if we could put this in context.

The federal budget is about, what, $265 billion a year? And we have four budgets between now and 2015. So there would be a total of over a thousand billion or a trillion dollars in expenditures between now and then. Kevin Page is saying that we're going to be $10 billion over. We're saying we'll be at balance. You're saying we're going to be at balance. Are we not talking about a very small amount of money here, less than 1% of the overall budget over the next four years? Is this not really rather modest and insignificant?

[Glen Hodgson]

It's a modest number. It's really not insignificant, because that's money we have to go out and borrow from global capital markets. So that adds another $10 billion to the federal debt load, as we're adding this year with a deficit of about $40 billion. I wouldn't want to trivialize the number, but you're right, for a trillion dollars in spending over a four-year period, we're talking about a difference of $10 billion. That means that every year you have a chance to adjust that path a little bit to take it back to a balanced budget.

For me the really important message is that you have to anchor. You have to have a hard target and know where you want to be at some point to ensure that your debt levels don't run out of control, as they've done in Ireland and Greece and Japan.

We did a very thorough analysis of the budget when it was released last year and we liked the framework we saw. There's always room for correction. We can have a big debate about tax policy, for example. But for the most part, we think the framework is properly set. Now the government has to take the next step and actually build out the detail and implement the plan.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

But you like the plan as it is?

[Glen Hodgson]

I think we gave it a high B, a B plus. I don't give many 10 out of 10s, though.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

That's pretty good. You're a tough marker, I see. There's no great inflation here, I guess.

Moving on to the Canadian Worker Co-op Federation, you talked about all the industries that will be, even in the next few years, looking at transitioning, either closing or maybe selling. Wouldn't these business owners, even now, be contemplating their succession planning, and would they not, if they're profitable, be looking to their employees and saying, “This would be a great model for you to consider. Why don't we start talking about this now?”

I guess the question I'm asking myself is why there is a need even for the $70 million fund. Would the national incentive not be there? They're going to make more by selling their business, either to someone or to their employees, than they would by simply shutting it down, and that might be their retirement bonus.

[Hazel Corcoran]

It is their retirement, but this is the problem. It's the same force that puts a person into the position of putting off making their will. It's the same thing that has them putting off putting their succession plan in place for their business. It's an emotional thing, because this means they're going to be gone.

The other point, I guess, is that people often think they're going to be able to sell it to one of their children, and maybe they don't recognize that, number one, only about 30% of businesses that go on to children will actually succeed in the next generation, and by the third generation it's 3%, but number two, oftentimes these days the children don't want to take over the business, and they don't realize they need about 10 to 15 years to make that plan realistic. So someone might be thinking that they're 58 years old now and in seven years their child may be willing to take over.

I think there is a lot of wishful thinking going on, and maybe people don't recognize that this is what needs to happen.

In terms of why employees as a group can actually take it over much more easily than others as individuals can, they aren't business people, and not a single one of them would have the capital to do it, but you can help them as a group to become entrepreneurial and to do that through the cooperative model in a way they couldn't do individually. You're sort of making business people out of folks who wouldn't have been on their own.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

So part of your job is to educate these people to move beyond their wishful thinking and to set more realistic targets.

[Hazel Corcoran]

Absolutely, yes.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Mr. Lee, I was wondering if you could elaborate on some of your conclusions, particularly the comment you made at the end of your presentation that corporate income taxes are a tax on workers. Could you elaborate on that?

[Prof. Ian Lee]

I'll be pleased to.

I want to begin by responding to something that Mr. Paillé said. I don't want to leave the impression that scholarship has nothing to do with the problems of real people in the real world. I grew up on a farm in eastern Ontario. I dropped out of high school in grade 12 and I was on the wrong side of the tracks for a long time.

That is not an excuse to shut down or protect the Canadian economy. It means we have to come up with adjustment policies, like the workers collective and the ILO are talking about, to deal with people who don't have the skills for the new economy.

To deal with your question directly, there is a large body of research by distinguished scholars across the United States, Canada, and Europe. One of the leading scholars is Dr. Devereux at Oxford University, the Saïd Business School. He's the director of tax policy studies, and he's published extensively for the OECD. Another node of scholarship is the Federal Reserve Bank, which is the central bank of the United States, the counterpart of the Bank of Canada. There is also the Kansas City branch of the Federal Reserve—each branch has its own economist on the payroll doing all kinds of wonderful research that is available free of charge. They have done a lot of research on the so-called incidence of corporate taxation—who pays for it, how is it financed? I've always taken it that corporations don't pay taxes any more than they pay wages, because it's all passed on in the form of higher prices or lower wages. If you don't cover all your costs of doing business, you're out of business, so somebody is paying for those taxes, and it's not the corporation.

Then the question is, who's paying for it? The research coming out of the Federal Reserve branch in Kansas City—there have been several articles published by Alison Felix that I can provide to you—shows that in small, open economies like Canada, it falls on workers.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

More so than on consumers?

[Prof. Ian Lee]

Yes, and the effect is greater on smaller economies like Canada than on large economies like the U.S. This is the conclusion of this economist, who's on the payroll. She's not in the private sector, she's not a lobbyist; she's an employee of the Federal Reserve. It's as if she were working for the Bank of Canada. You're in the public sector; you're non-profit.

[The Chair, Conservative, James Rajotte]

Be brief, Mr. Lee.

[Prof. Ian Lee]

I'll be very brief. She has found that the incidence in small, open economies—Sweden and Canada—falls on workers. In economies like the States, it's passed on more frequently through the higher incidence of the cost of goods or services.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Hiebert.

Mr. Mulcair, s'il vous plait.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you very much, Mr. Chair.

Mr. Hodgson, always a pleasure.

Mr. Bridault, thank you very much.

Ms. Corcoran et Mr. Lee, welcome and thank you for bringing so much input to our discussion.

I will begin with you, Ms. Corcoran. You pointed out an element that was underdeveloped when we were studying various economic projection scenarios with a view to the upcoming budgets. Very few people have presented matters in the same light you and Mr. Bridault have.

Since you ran out of time earlier, I would like to give you the opportunity to finish talking about the possibilities of this economic model in preparation for business takeovers. You brought up two elements in support of your argument: the demographic challenge and the international trade challenge. Someone mentioned L'Islet. We all know about what happened to Stryker Médical Québec.

In the past, a Quebec representative would serve on the Standing Committee on Finance, but there are no longer any Quebeckers on the Conservative side. That speaks volumes.

I would like to give you the opportunity, Ms. Corcoran and Mr. Bridault, to finish sharing your input on the topic, for the benefit of this parliamentary committee.

[Hazel Corcoran]

Basically, what we are proposing is a plan that will enable that reflection to happen. First of all, the Canadian cooperative sector is substantial in size. Something like a third of the Canadian population are members of a cooperative. They have over $300 billion in assets, 150,000 employees. We believe they are part of the reason the Canadian economy has come through the crisis so well. The worker cooperative sector is quite underdeveloped. The program we're looking at here is to deal with the business succession crisis, which we think is putting something like two million to three million jobs at risk. We want a program to finalize a set of documentation on the potential of retiring owner succession using employee-owned co-ops. We want to carry out promotions so that we can go into all chambers of commerce, urban and rural, and economic development organizations, so that they will understand the potential and how it's done. We also want to start carrying out conversions to employee-owned businesses using co-op succession professionals.

The whole thing is just not known, so a big part of what we're doing is trying to get it known. We are trying to get the process out there and to start implementing.

[Thomas Mulcair, NDP, Outremont, QC]

Go ahead, Mr. Bridault.

[Alain Bridault]

I don't want to give you a course, but I wanted to point out that the global issue of businesses being handed over to workers has already been studied in depth. In some cases, we are not necessarily talking about workers. We could be talking about a small business, a small store with one or two employees. This is not necessarily a worker cooperative; it could be what we refer to as the coopérative de solidarité, a community multi-stakeholder coop. This has been developed through federal funding. There are many documents on the global issue. We have with us the French version of Relais COOP as well as the English version.

What I wanted to say concerns the research conducted by the CFIB, which sounded the alarm. Five per cent of the 200,000 businesses the research focused on are medium to large businesses with more than 20 or 25 employees. Everyone looking to cherry pick is targeting these companies. I am talking about accounting firms, banks, and so on.

However, 95% of businesses are overlooked because they are less profitable. Many of those businesses are in rural areas. These are the kinds of companies we are focusing on.

In the regions, a business owner who starts up a company with 20 employees is always proud of his business. These people don't want to simply sell and then go have fun in the sun without a care in the world. Their family reputation is on the line, since they live in the region where their business is based. This is our target. These are our main partners.

To complete the picture—and this is somewhat related to the question asked by Mr. Hiebert—business owners are not ready to let go. Ms. Corcoran talked about this. Research shows that 70% of business owners, who belong to my generation—grandpa boomers, rather than baby boomers at this point—don't want to think about retirement. They see their company as their baby. They are having a hard time thinking about leaving their company, so they are not preparing for this eventuality. The failure rate is huge when someone does not prepare.

That is why we were saying that people must prepare for this in advance. We must implement a system that will help prepare the aging business owners, raise their awareness, guide them and help them along in the process. We also need a financial system. That is why we were talking about the CIP and similar types of plans. A Canadian fund could offer loan guarantees so that workers can buy their share, invest in their company and buy it back.

[Thomas Mulcair, NDP, Outremont, QC]

I have only one minute left. Thank you once again.

I will now go to Mr. Lee.

Mr. Lee, you made a statement before, and I'd like to give you a chance to nuance your answer. You made a statement that the person you were quoting from the United States Federal Reserve worked in the public sector and you said it's like the Bank of Canada. The Bank of Canada is indeed a crown corporation; it says that right at the beginning of its act. Is it still your position that the Federal Reserve of the United States is the public sector?

[Prof. Ian Lee]

I define the private sector as firms that sell private goods for profit in private markets to private people. The Federal Reserve Bank of the United States does not do that.

[Thomas Mulcair, NDP, Outremont, QC]

That's not the question, is it?

Are they public servants?

[Prof. Ian Lee]

If you mean under their legislation, I haven't looked under their legislation, but I think--

[Thomas Mulcair, NDP, Outremont, QC]

Don't you think if you're appearing here as an expert, before stating that somebody works.... This was the key point that you were making. To prove the objective nature of the quote you were providing to this committee you said this person works for the Federal Reserve in the United States and that this is identical to somebody in the public service who works for the Bank of Canada.