Finance Committee on April 12th, 2016

[Miodrag Jovanovic]

Yes, it is.

[Lisa Raitt, Conservative, Milton, ON]

If we were to break that down, when we see the average tax reduction for couples, it's two. Maybe they'll have children and maybe they won't. But it's simple math. If you break it down, 540 divided by 365 is approximately $1.48 a day in income tax savings. You can use your calculators. This is not a math test. Or you can take my word on it that I've done the calculation appropriately. So it's $1.48 a day for a couple or a family of four. Does that make sense to you? For me what that says is that it's 75 cents a head if you don't have any children. That doesn't even buy you a cup of coffee today. That was my theme on that.

Also, in terms of the middle class, I understand fully the conversation with respect to TFSAs and the reduction. Has Finance Canada ever conducted a study on whether or not these TFSAs are being utilized as micro-sources of funding for small or medium-sized businesses? I don't have an ulterior motive on this question; with others I do, but not on this one.

I'll give you an example. You're a parent, you have a TFSA, you've been able to save up, and it's a pool of capital. Instead of your son or daughter starting up a small business by using their credit card, they come to mom and dad and ask to utilize his or her TFSA as their seed money.

Have you ever tracked anything like that in terms of understanding where TFSAs are being employed? I think that right now Canadians assume it's just a big pot of money that people are sitting on and saving. But presumably there must be some investment that goes back into society.

[Miodrag Jovanovic]

Indeed, a TFSA is used for many different reasons, and it was designed to be as flexible as it is to allow for these different motives. For instance, the fact that you can actually withdraw money and re-contribute what you withdrew is an important feature.

Unfortunately, we don't a detailed.... It would require some form of survey to answer that question, because we don't have that information. We don't collect that type of information. But clearly it's a vehicle or a tool that allows that.

[Lisa Raitt, Conservative, Milton, ON]

If you are a parent and you're asked to cash out your RRSPs, you take a tax cut on it. Or if you're using stocks or something, you get a capital gains issue. Therefore, it's not as easy a way to use as seed money for innovation and encourage small.... So that's where my point of view is on that.

On the second topic of the cost associated...obviously I read the parliamentary budget officer's report, and I'm sure you read it. One aspect I found interesting, with respect, had to do with the PBO's analysis that the change of tax charges is actually going to drag down real GDP in our country. What's your rebuttal to that?

[Miodrag Jovanovic]

You're going to have to give me a bit more detail; I'm not sure what you're referring to.

[Lisa Raitt, Conservative, Milton, ON]

On page 15 of the PBO report, it's the final table and it takes a look at comparing estimates of the economic impacts of budget measures. Personal income tax measures flatlined in 2016-17, but the PBO is estimating that there's going to be a drag, a negative impact, on real GDP as a result of this personal income tax change that the government has introduced and is seeking passage of.

[Miodrag Jovanovic]

First of all, I can provide you with the multipliers that have been used by the Department of Finance for personal income tax measures, which are basically 0.2 over the short term and 0.6 over the longer term. These are relatively low multipliers, and if you apply them to the net personal income tax measure effect in dollar value, which for 2016-17 is about $1.3 billion, I assume you end up with less than 0.5% percentage points, which probably explains this. When you round that, you get to the zero in this publication.

[Lisa Raitt, Conservative, Milton, ON]

You're showing zero in 2017-18 and they're showing a negative impact on real GDP. Presumably if this tax change is being sold on the notion that we're going to stimulate the economy, the parliamentary budget officer says that this theory is incorrect.

[Miodrag Jovanovic]

That's what the PBO is saying.

[Lisa Raitt, Conservative, Milton, ON]

Yes, and your analysis is that, at best, it has zero effect on stimulus.

[Miodrag Jovanovic]

Yes, when you round out, it's zero.

[Lisa Raitt, Conservative, Milton, ON]

Can I ask a question about the interplay of provincial tax charges and federal tax charges, again along the theme of what it is that Canadians are getting for this tax change? I'm very interested to read a lot about whether or not going over that marginal rate of total taxation over 50% is something that is almost a psychological barrier for a lot of people, and sometimes they take lifelong decisions on the basis of it. Which provinces will now have a taxation rate that is in excess of 50% as a result of this tax change?

[Miodrag Jovanovic]

It's going to be New Brunswick, Nova Scotia, Ontario, Quebec, P.E.I., and Manitoba.

[The Chair, Liberal, Wayne Easter]

Thank you both. You're a little over.

Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair.

Mr. Jovanovic, I would like to begin by confirming certain figures with you.

Let's talk about the cut to the second tax bracket.

A person whose income is under $45,000 will not benefit in any way from the tax cut. Let's take the Statistics Canada figures for non-economic family members, who are generally single people. There will be absolutely nothing for the first seven deciles, that is to say the 70% of the population with the lowest incomes. The average income of the eighth decile was $52,600 in 2013. So, a few people in this 70% to 80% will benefit from a tax reduction, but all of those below that will get nothing. Are we in agreement up till now? You seem to acquiesce.

The government says that nine million taxpayers will benefit from a tax reduction. According to my calculations, 18 million taxpayers are under that threshold and will not see a tax reduction under this bill. Once again, correct me if I am wrong.

You have probably seen the report of the Parliamentary Budget Officer I requested. This is what he concluded. If we were to reduce the first tax bracket, this would affect 83% of taxpayers. However, the percentage of taxpayers affected by the decrease in Bill C-2 is far lower, since it is approximately 30%.

Have you evaluated the impact of a 1% cut to the first tax bracket rather than a 1.5% reduction of the second bracket, as proposed in Bill C-2?

[Miodrag Jovanovic]

Thank you.

I cannot really speak to the other options that were discussed with the minister. However, I can say that the objective of this measure is to rebalance the progressive income tax system so that the progressivity is more effective.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I will stop you here. We often hear about the middle class and there are one or two questions in that regard. What would your definition be? Could you summarize it in 30 seconds?

[Miodrag Jovanovic]

The Department of Finance does not have a definition of the middle class. It is a generic term.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

If I proposed one to you, could you tell me whether it is consistent, at the very least?

Let's take Canadian incomes in their totality and exclude the 20% of the population with the lowest incomes as well as the 20% with the highest incomes. The middle class would be made up of the remaining 60% between the two. Does that definition make sense to you?

[Miodrag Jovanovic]

There is no common definition of the middle class because it is very difficult to define it. It varies enormously by region and the age of the individuals and whether or not they have reached their maximum income cycles.

You used the national income distribution, but someone in the middle class living in downtown Toronto would have to have a much higher income than someone in the middle class living in a rural area.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I agree entirely. However, someone who lives in Toronto or in a rural area will receive the same income tax reduction, depending on their salary. When we talk about the Canadian distribution, we are talking about an aggregate. I think that we can talk about taxpayers as a whole.

According to Statistics Canada figures, the average for the third income decile is $17,800 and that of the eighth decile is $52,600. If you include the 20% with the highest incomes and the poorest 20%, you could define the middle class as people who earn between $17,800 and $52,600. However, the income tax reduction in Bill C-2 really begins to apply around $45,000.

Once again, you can confirm what I am saying. We really reach the maximum income tax reduction as of the third bracket, that is to say the one that applies to people who earn between $89,000 and $90,000. Those people and those who earn up to $200,000 will benefit from the maximum income tax reduction.

[Miodrag Jovanovic]

I would like to get back to the objective of the policy, which is to rebalance the income tax system

First, 35% of the people in Canada who file a tax return do not pay any income tax. So the first two quintiles are already made up of people who do not pay any income tax at all.

Then let's take the people who are in the first federal income tax bracket of 15%. They are still at the income level where they benefit from several advantages, for instance child tax credits or other direct credits.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

The ones in that bracket are mainly single people.

[Miodrag Jovanovic]

Single people are entitled to the GST tax credit, for instance.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Of course, I agree with that, except that many of the tax credits they are entitled to are not refundable.