Thank you very much Mr. Chair.
I also thank the members of the committee for giving me the opportunity to speak with them and the other witnesses on this important review of tax planning through the use of private corporations.
I am an economist and professor of economics at the Université du Québec in Montreal. I have worked at the university since 1988, with the exception of a nine-year period during which my class was bigger and less disciplined, and I was the one taking the exams; I was a member of the National Assembly. I occupied different positions there, but whatever position I was in, I acted as the premier's senior economic advisor, and was one of the senior drafters who contributed to preparing the government's economic program between 2003 and 2012. I also had the opportunity of being the chair of the Public Finance Committee for seven years. And so this to me is like a homecoming, but on the other side of the table and in another of the country's parliaments. For a few years I was also minister delegate for Finances, the equivalent of the Minister of State for Finance at the federal level.
And so I was often privy to matters related to the budget. I knew both the theoretical and empirical aspects as a professor and researcher, and the practical aspect, since I dealt with budget preparation and the issues the various persons concerned had to debate. Ultimately, when we talk about taxation, we are talking about its impact on the economy and on the people who participate in the creation of wealth and the distribution of that wealth.
In that context my preliminary remarks will bear on a certain number of principles. I will probably have the opportunity to talk about them more in detail in the subsequent discussion.
The last broad tax reform in Canada goes back to 1971, following the 1966 Carter report. In many regards our current fiscal system is based on that. There have been a few ad hoc important changes made. Among others, the very good economic reform of putting in place the GST, and the improvements that followed.
Other elements were introduced following the report tabled by Jack Mintz in 1997. This allowed businesses to benefit from a tax reduction, which was necessary at the time, in addition to improving the neutrality of the taxation system, a principle I will get back to.
However, the economy has changed in the meantime. For instance, the service sector is increasingly important within our economy. This does not mean that we should sacrifice other aspects of the economy; however, we have to take economic reality into account as a whole, and ensure that taxation really attains its goals. These goals are established and analyzed in particular from the perspective of fairness and efficiency. These two principles are the subject of a public debate that is sometimes very rapid, unfortunately. The newspapers have a tendency to systematically present those elements as being opposed to each other, but that is not always necessarily so.
In the context of the elements of reform and the principles behind them that are being put forward by the Department of Finance, the Minister of Finance, and the government, it is clear that in some regards, one of the elements identified does pose a fairness or non-neutrality problem. In fact, we may encourage businesses or entrepreneurs to incorporate in order to benefit from the tax system in a legal way, insofar as the current laws and regulations apply. However, we have to pay the costs, deploy resources and find ways of reducing taxes, not only to improve the growth of businesses but also for fiscal reasons, quite simply.
In my opinion, you should not do indirectly what could better be done in a direct manner. As to whether taxation is too high or too low, that can be debated. There are in fact several debates on that topic, and several positions, and I would be happy to contribute to that debate myself. One thing is certain, we have to make sure that taxation does not become excessive. To meet that objective, we encourage very careful planning. This is done in particular through income distribution by incorporation. People resort to this not to become entrepreneurs but for taxation purposes. Passive investment portfolios can also be used, but these do not allow the corporation to grow and to prepare for the future. In my opinion, certain elements could be improved in various ways. We could encourage income distribution through capital gains in order reduce taxation.
Neutrality means ensuring that comparable situations are treated in the same way. We should aim to improve that neutrality, which is in my opinion an important principle. In principle, the proposals which have been made are a step in the right direction.
That said, we have to avoid what may appear to be exceptions—the point is not to provide for all possible scenarios—where the same income might be imposed in different ways, as well as cases where there would be retroactive taxation. Such situations need to be avoided, both in economic theory and economic practice.
There are also issues related to transferring businesses. That is one concern that was submitted to me. Some work needs to be done in that regard, and we will have an opportunity to discuss it further. When I was with the Quebec government, I examined that issue. There were epic debates with government taxation experts. These were not partisan debates, but the taxation people wanted to avoid creating precedents when some problems could be solved.
Comprehensive tax reform that would take all of the principles into account would be desirable. That does not mean, however, that there aren't specific aspects that could be better calibrated to eliminate the unfairness that exists in the current system.
In conclusion, may I repeat that the point is not to jeopardize the tax competitiveness of Canadian businesses. That being said, there is certainly cause for concern regarding what is looming, that is to say the measures the American Congress will be taking in the next weeks or months, whatever form they take.
We must certainly maintain the principle of tax competitiveness, but we have to do it the right way. That does not mean that we should allow unfairness in taxation, as we see now in certain cases.
In conclusion, I'd like to refer you to a few words from a recent article entitled “Les enjeux d'efficience et la fiscalité”—efficiency and taxation issues—which I penned with a colleague. Without aiming for perfection, and while taking into account imponderables and democratic requirements, with leadership and education, we can do better.
Today's hearings and the work that must be done should not be rushed, but this process should not lead to inaction either.