Thank you for having me here today.
My name is Mike Moffat. I'm a business owner, a chief economist with the Mowat Centre, and an assistant professor at the Ivey Business School in London, Ontario. Those are a lot of hats, but I'm here representing my own views.
I'm here today to talk about tax policies and regulatory burdens. I share the views of my University of Calgary colleague, Jack Mintz, who has called for tax simplification, stating in the National Post that the tax system has gone off the rails.
Before he enacted the Tax Reform Act of 1986, Ronald Reagan described the tax code as being complicated, unfair, and cluttered with gobbledygook and loopholes. The same criticisms can be applied to the Canadian tax system, which is in dire need of reform.
Let's start with income tax. The current system is riddled with a variety of tax expenditures. The system, while well intentioned, has Canadians overpaying tax each month, then has some of that money returned to them if they remember to save a receipt and fill out the correct box on their tax form. This places a burden on families, lengthens tax forms, and requires the government to police credit claims.
This added complexity could be justified if the credits increased the use of public transit or got more kids playing sports, but research in the Canadian Tax Journal shows that the children's fitness tax credit largely pays families for what they were planning on doing anyway.
We can greatly reduce regulatory burdens on Canadians by ridding ourselves of many of these tax expenditures and use the savings to either lower income tax rates or by strengthening the universal child care benefit or HST rebate programs and allow families to decide how to spend their hard-earned dollars.
Much can be done to reduce the regulatory burden the tax system places on Canadian businesses. The tariff system is a prime example. During the so-called iPod tax debate, government departments were divided on whether televisions and MP3 players were considered computer parts for tax purposes, with the CBSA and the Department of Finance providing opposing answers to Canadian businesses. If the government cannot decipher the tariff code, what hope do Canadian businesses have?
This government has eliminated tariffs on many items, and I commend them for doing so, but much more can be done at little cost to the treasury. One such example is propylene copolymers that are used as an input by plastics, foams, and auto parts manufacturers in southwestern Ontario. There is a 2% tariff rate on imports of this chemical unless it is from a country that Canada has a free trade agreement with, such as the United States, in which goods come in tariff-free.
In 2012 the WTO estimates that the government collected only $360,000 in tax revenue on over $485 million in imports for an effective tax rate of 0.08%.
The customs tariff is littered with items from grape crushers to storage heating radiators where tariffs generate almost no revenue, but impose significant regulatory burdens. In a recent paper, the Canadian Council of Chief Executives detailed the expenses companies face in importing goods at preferential tariff rates. Firms must keep detailed records for several years and ensure their imports meet the rule-of-origin requirements in order to claim a preferential rate. These rules are not simple or trivial. The NAFTA rules-of-origin regulations alone are 556 pages long.
A study by Keck and Lendle found that many companies find it cheaper to avoid these regulatory costs and simply pay the higher rate, bypassing the benefits of Canada's free trade agreements. Due to the high fixed costs involved in tracking and claiming preferential tariffs, small and medium-size enterprises are less likely to take advantage of free trade deals.
To summarize, large portions of the tariff code impose significant regulatory burdens and discriminate against small and medium-size businesses while generating very little revenue for the government.
My primary recommendation is to set a zero MFN rate on tariff items with very low effective rates as it would provide substantial benefits at minimal cost.
I could talk for hours on these issues and I suspect many in this room feel that I already have, so I look forward to your questions.