Evidence of meeting #16 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rate.
A video is available from Parliament.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
You referred to the Guaranteed Income Supplement. However, the income of the middle class senior is generally between $25,000 and $35,000. In that case, the Guaranteed Income Supplement does not apply.
Vice-President, Research, Institute for Research on Public Policy
Indeed.
NDP
Policy Analyst, Institut du Nouveau Monde
When we assessed the federal budget—this is the fourth time we do this exercise for a provincial or federal budget—we were struck by the fact that this was the first time that a budget had the net effect of reducing inequalities. Moreover, we felt that all of the measures assessed, and there were 12 of them, would reduce inequalities.
I agree with Mr. Veall and Ms. St-Hilaire: the system to reduce inequalities has to be considered as a whole, and social programs also have to be included. Also, when we talk about reducing inequalities, we have to see what inequalities we are talking about. Are we talking about the inequality between the rich and the poor, between the middle class and the poor, or between the middle class and those with higher incomes?
It is certain that increasing income tax on incomes of $200,000 and more will not solve the inequalities between the middle class and the poor, but that was not the objective. The objective of this measure is not to collect money, but to place a cap on the capacity of the 1% to increase their income, because we know that this has adverse effects on the economy and brings about a series of other social ills.
Liberal
The Chair Liberal Wayne Easter
I'll have to cut you there. We're well over on all of the first three questioners.
Mr. Sorbara.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Good morning to everyone.
When I look at the tax system, for me it's always a balance between a progressive tax system and a tax system that's efficient, or I can use the word efficacy. I think over the last number of years, especially over the last 10 years, the tax system has become much more complicated and much more convoluted, and I think that simplifying the tax system is always a good thing, but it's always a balance between progressivity and the efficacy of the tax system.
Personally, I don't think we need to go back to the 1960s or 1970s when marginal tax rates were 70%, and I think during the 1960s they were at 90%. I don't think that's a good thing, but I think that, where we have it right now, there is a good balance. We've achieved a balance in the progressive tax system.
Much like my colleague Mr. MacKinnon, I have argued for the need to take a look at our tax system, but I think that also encompasses looking at retirement and so forth, how people are retiring, and the big picture.
Mr. Zorn, starting with you, I've read your report. Very quickly, I see that you've graded our establishment of the new Canada child tax benefit with an A in reducing inequality. If I'm reading your graph correctly, it's about a 1.75, so you've graded it an A. I believe you've also graded the increase in the GIS for seniors living alone, and you've also given that an A-, if I'm not mistaken.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
I believe there are a number of things you've put into the B+ or A category. If I were a student or if I were the finance minister, you've actually given me pretty good marks.
Policy Analyst, Institut du Nouveau Monde
I didn't do it myself. Actually, the 33 experts on the panel gave a certain note, and it corresponds to those letters. Yes, actually it's a very good grade, and at about C or C- going under that notation, you see an augmentation of inequality. Anything above a C reduces it, so it's a good grade.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Just to dispel something, which needs to be put on the record, when you look at the marginal tax rate and the first tax bracket—which I mention because some people called for a reduction in the first tax bracket—about over half of tax filers in that tax bracket don't pay any personal income tax at the end of the year when they're filing.
Reducing the second tax bracket will affect nine million filers this year. So nine million filers will pay lower taxes and have more disposable income to save, invest, and spend money on their families. It is, you know, several hundred dollars, and $100 is a lot of money for a lot of people, including me. It's important that we point out that in the first tax bracket, more than half of the tax filers don't pay any income tax.
Is that correct? Would you agree with that?
Policy Analyst, Institut du Nouveau Monde
It makes sense, because you have a lot of deductions. With that 50% mark of people who don't pay taxes, most of them are students, the elderly, or people who don't have a job, and it all balances out. You have to look at it in a life-cycle pattern. When you're working a lot, you pay more taxes, but when you're studying or you're retired, you pay less taxes. It balances out.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
My final question is for Mr. Mintz and about looking at the Canadian tax system and possibly a review of it, because the goal is to have a competitive tax system, not just globally, obviously. Could you expand on your comments on lower rates and a broader tax base?
I'll leave it to others after Mr. Mintz answers, if anybody else wants to jump in as well.
President's Fellow, School of Public Policy, University of Calgary, As an Individual
When I look at the tax system today, I see a number of various credits and deductions that have been introduced over the years. What typically happens is that you have a system where special credits, deductions, and preferences are brought in, and then you look at it and say, “What are we doing? Why don't we have one rate reduction, get rid of this mess, and make it simpler?” That would reduce administrative costs and compliance costs for taxpayers, as well as reduce distortions in the system.
Typically countries every 20 years, or maybe even longer—the United States hasn't done this since 1986, and needs to do it badly—finally undertake to reform their tax system. In Canada we did quite a bit of reform from 1985 to 1987, which was completed with the 1991 GST.
If you look at the system today, there are a lot of special preferences, albeit with a little less on the business tax structure because of the technical committee on business taxation report. I chaired that panel in 1997, and it did lead to a lot of business tax reform, and I would say good tax reform in Canada in the subsequent years. We haven't done this with the rest of the system.
If you look at the personal tax, for example, it has all sorts of credits and deductions. Studies have shown that some are not only ineffective, but even harmful to the economy, such as the labour-sponsored venture capital credit that has been brought in with this budget. Flow-through shares haven't worked very well. I can go through a litany of the stuff.
We also have a complete misalignment between capital gains tax rates and the top dividend tax rate, which we often try to keep aligned so people don't try to pass out income in the form of dividends or capital gains, depending on which is more heavily taxed. That I think is leading to problems.
The two dividend tax credits and the two corporate tax rates have created a lot of complexity and distortions in the system. We clearly need to go to a single corporate income tax rate, and a single dividend tax credit I think would be much better.
When I look at the current system, I think it is in need of review, including the GST. Economists often say that the GST rate should be raised, but we have a mediocre value-added tax compared to the rest of the world, collecting roughly half of what it could collect on consumption because of all the special credits and special exemptions in the system. There are a lot of problems with it, especially around the treatment of financial services.
We need to have a good look at the whole system, including looking at changing the mix of taxes. We need a better GST base, more reliance on consumption taxes at the federal level, and less reliance on those growth-inhibiting taxes such as corporate and personal income taxes.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I appreciate all our witnesses' testimony.
Dr. Mintz, I'm going to start with you. By the way, I used to be a small business owner and worked very hard in the B.C. Chamber of Commerce movement, so I've met a lot of small business owners who, whether they be professionals, in the retail sector, or whatnot, are extremely hard-working people.
You mentioned that increases at the upper tax rates, coupled with the cessation of the preferential small business reduction, equates to an increase in taxes on small business owners. Could you please elaborate a bit on that?
President's Fellow, School of Public Policy, University of Calgary, As an Individual
First of all, when you look at the data and you see who benefits from the small business income tax reduction or from owning Canadian-controlled private corporations, many of the taxpayers—a very large share, 50% to 60%—have household income of more than $200,000. The increase in the personal tax rate on dividends, which will lead to an increase in taxes on dividends and capital gains coming out of the small business, even if you take into account such offsetting provisions as the lifetime capital gains exemption—another issue I would deal with....
When you take that into account, plus taxes on other income that you withdraw from the business, you get a very significant increase in the effective tax rate for the entrepreneur, with respect to the ownership in his or her business, just by raising the top rate. That is because so many are in the top income tax bracket. Again, when you're at $200,000—I know that many people always think of this as high income, but really, many of the entrepreneurial class are in that group—it is an issue; small business owners are going to be more heavily taxed as a result.
The original article I wrote took into account moving the corporate income tax rate—the small business rate—down from 11% to 9%, as promised in the election campaign and by the previous Harper government. That, of course, has been reversed, and now the small business rate will stay at 10.5%.
By the way, I support that change in the budget, not going further with that tax cut, because I want to go to a single corporate income tax rate and not have differential ones. However, I think that means that this personal tax hike will have an even bigger impact, as a result, on many small businesses.
One final point is that I think we really need to look at small business incentives and try to make them more effective. I think many small business owners are going to be facing potential hikes, as they have seen in property taxes, and there will probably be some payroll tax hikes down the road, if we go into CPP expansion, etc. These are issues that are going to be important for small business, but there are ways to address them better than we're doing through the small business deduction.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
You also mentioned the CRA collecting the information of people moving out of province and out of the country. Do you think it would be wise for any government to make these kinds of changes, not just so that we in the public sphere understand what the results of a policy are, but also to add to the academic literature? Do you believe that good evidence-based decision making involves tracking? Would you suggest that the government actually take this up and track the ongoing movements, particularly through the CRA?
President's Fellow, School of Public Policy, University of Calgary, As an Individual
Yes. It's not hard to do. The Department of Finance gives a request to the Canada Revenue Agency for certain types of information. They can even bring in some good academics to work on it—someone like Michael Veall, who is a witness today.
Let's try to understand how migration is impacted. It's not going to happen in a year, when you change the tax rate; it's something that could take two to three years before you see the migration. You need to understand more of the dynamic effects to understand it more. That's why I think it's an issue that we really haven't had a good study on to fully understand, at the top end, how sensitive people's residency is to changes in tax rates.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
[Inaudible--Editor] recommendation coming out of this so that people can understand it, and also so that we can add to the academic literature because, as you and I think some of our other other witnesses said, there's not a lot of information on these kinds of issues. I hope all sides take hold of that.
Just jumping—
Liberal
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I forgot one thing, Dr. Mintz.
Succession planning is a huge issue for small business, because of our aging demographics. You said that 50% to 60% of small business owners make more than $200,000. Will this be an issue for them as well? Will the timing for many of these entrepreneurs from suddenly raising taxes, which is quite hard on small business, create extra challenges from a demographic viewpoint?
President's Fellow, School of Public Policy, University of Calgary, As an Individual
It may. I don't really know the answer to that question, because it's something one would have to study a little more carefully.
I do know that succession planning is a huge issue for small business. Of course, selling a small business itself is important. That's where the lifetime capital gains exemption comes in. However, we also have to think about rollover provisions under capital gains taxes and incentives for encouraging initial public offers, like the ones we have in the United States.
Liberal
The Chair Liberal Wayne Easter
Thank you both very much for your responses.
I would like to thank the witnesses for their presentations. This will conclude our witnesses on Bill C-2.
We will suspend for a few minutes and come back to deal with clause-by-clause.
Liberal
The Chair Liberal Wayne Easter
I'll recall the meeting to order.
Just before we start clause-by-clause consideration of the bill, I certainly welcome the witnesses from the Department of Finance, who are here if we need assistance going through the bill. I'm not sure if both of you were here last night, but I certainly know one of you was. You had a fairly long evening, till 11:45 p.m., I'm told.
Trevor, I believe you were there answering questions. Mr. Champagne was there as well, chairing. You had a good night of providing information.
Just for the committee's consideration, I'll go through this. I know there are a lot of new members on the committee. I'll just go through an explanation of clause-by-clause consideration of a bill by a committee, so we're all on the same wavelength. Some of you will know this procedure; some won't.
As the name indicates, this is an examination of all clauses in the order in which they appear in the bill. I will call each clause in succession, and each clause is subject to debate and a vote. If there is an amendment to the clause in question, I'll recognize the member proposing it, who will likely want to explain it. The amendment will then be open for debate. When no further members wish to intervene, the amendment will be voted on.
Amendments will be considered in the order in which they appear in the package each member received from the clerk. In this one, there's only one amendment proposed, and that's by Mr. Caron. If there are amendments that are consequential to each other, they will be voted on together.
In addition to having to be properly drafted in a legal sense, amendments must also be procedurally admissible. The chair may be called upon to rule amendments inadmissible if they go against the principle of the bill or beyond the scope of the bill which were adopted by the House when it agreed to the bill at second reading, or if they offend the financial prerogative of the crown.
If you wish to eliminate a clause from the bill altogether, the proper course of action is to vote against that clause when the time comes, not to propose an amendment to delete it.
Since this is a first exercise for many new members, the chair will go slowly to allow all members to follow the proceedings properly. If, during the process, the committee decides not to vote on a clause, that clause can be set aside by the committee so that we can revisit it later in the process. That quite often happens if there's discussion on a clause, or a little bit of uncertainty.
As indicated earlier, the committee will go through the package of amendments in the order in which they appear and vote on them one at a time, unless some are consequential to one another and are best dealt with together. Amendments have been given a number, shown in the top right corner, to indicate which party submitted them. There is no need for a seconder to move an amendment. Once moved, we will need unanimous consent to withdraw it.
During debate on an amendment, members are permitted to move subamendments. These subamendments do not require the approval of the mover of the amendment. Only one subamendment may be considered at a time, and that subamendment cannot be amended. When a subamendment is moved to an amendment, it is voted on first, which is standard procedure. Then another subamendment may be moved, or the committee may consider the main amendment and vote on it.
Once every clause has been voted on, the committee will vote on the title and the bill itself, and an order to reprint the bill will be required so that the House has a proper copy for use at report stage.
Finally, the committee will have to order the chair to report the bill to the House. That report contains only the text of any adopted amendments, as well as an indication of any deleted clauses.
That is the procedure. With that, we shall start with clause 1.
(On clause 1)
There is an NDP amendment, NDP-1. Guy, the floor is yours.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Thank you very much.
During the various committee meetings on Bill C-2, I have quite frequently brought up the change in the tax rate and its potential effectiveness in reducing inequalities or stimulating the economy. To me it is clear that all of the presentations we have heard on this show that the tax cut for the so-called middle class introduced by the government is probably the least effective measure among those that were presented or promised by the government, despite the fact that this is a key measure.
If we really want to reduce the tax paid by the middle class through an amendment that would still fit into the framework and the mandate of the bill, we could amend this proposal; rather than reducing the tax rate of the second bracket from 22.5% to 20% as proposed in the bill, a measure that would cost about the same would be reducing the first tax bracket from 15% to 14% for all incomes of over $12,000, rather than targeting incomes above $45,000.
That is the proposal we have made. I won't debate it any further, because I think I have had ample opportunity to do so in the work of the committee. I sincerely hope that the government, if it really wants to give the middle class a break, will allow all of the middle class to benefit, and not only a certain number of them by including incomes that are far superior to what can be defined as middle class, such as incomes of $200,000 to $217,000.
Thank you.