Thank you very much, Mr. Chairman. This is a real smorgasbord of different topics, but I guess that's what you'd expect with an omnibus bill like Bill C-97.
Thank you very much for your invitation to speak about Bill C-97, an act to implement certain provisions related to the budget. I will specifically comment on the tax provisions.
To begin, a number of measures introduced in the budget are appropriate from the point of view of addressing some specific problem areas of the tax structure, and I won't go into those. Some are initiatives that I want to applaud, particularly the tax credit to assist Canadians with training costs.
In this day and age, with rapidly evolving technologies, some of them disruptive to specific sectors of the labour market, a focus on training is helpful to address. The good thing about a tax credit such as this, or at least some help in some form, which could be a grant instead of a tax credit, is that it nudges people to think about saving for training costs. Of course, it's going to have to be carefully monitored and carefully put into place because there could be a lot of wastage involved with that if one's not careful.
However, what I wish to discuss is the plethora of new credits, accelerated cost reductions and other forms of targeted assistance in this and previous budgets. I have seen that more harm than good is done with a tax system increasingly looking like Swiss cheese. In particular, tax preferences for investments in manufacturing, clean technologies, mineral exploration and the purchase of housing and electric vehicles in this budget, added to past preferences, raise several well-known issues about the effectiveness of these various policies.
First, governments trying to pick winners often end up supporting losers. By favouring some activities over others, the allocation of resources in the economy is distorted, resulting in lower incomes and productivity.
Second, targeted incentives might generate some additional activity, but they also reward activities that were already planned. This undermines the cost effectiveness of the incentive, and in many cases leads to little new activity.
Third, incentives can only be used if the household or business is paying taxes. If taxpayers cannot use the credit, it is often of little value unless the credit is made refundable, enabling the taxpayer to effectively receive a grant. An important question, though, is whether it is better to provide subsidies as grants or refundable tax credits. There's a long discussion about the advantages and disadvantages of grants versus credits.
Fourth, tax credits, accelerated depreciation and other tax preferences push some companies and higher-income individuals into positions whereby they are no longer paying taxes. Taxpayers look to shift their deductions or credits to others through complicated planning procedures. Governments then try to stop so-called loopholes that are caused by their own policies. The tax systems become increasingly unstable with new limitations and minimum taxes introduced to claw back the incentives.
Fifth, targeted incentives to producers also cause great demand for tax-assisted goods and services, blunting the incentives as prices or input costs rise. In other words, the tax incentives might look politically good but basically make the suppliers of the products richer without encouraging the activity they were intended to support.
My favourite example of that was the Quebec tax holiday for a few buildings in Montreal that effectively just led to higher rents in the buildings as opposed to really helping startup businesses. In fact, it led to a lot of angry landlords in other buildings that didn't get the same incentive.
Sixth, someone has to pay for the tax incentives, today's taxpayers or future taxpayers, as a result of higher deficits.
In my careers, I participated in two business tax reforms—the Honourable Michael Wilson's budget in May 1985 and the Right Honourable Paul Martin's business tax reform panel in 1996 and 1997. Both reforms had to deal with a non-competitive tax system in which tax rates became too high, discouraging successful activities. Past policies that led to the introduction of numerous tax incentives undermined the tax system, which eventually led to the only sensible reform of reducing tax rates and removing incentives.
Did the reforms help the economy? I would suggest that has been the case based on various economic studies.
Many of you might have read my critical comments on the adoption of accelerated depreciation in November 2018 and contained in Bill C-97. I believe it was a policy error for the reasons given above. As Philip and I have shown in a recent Canadian Tax Journal article—which I sent to you for members to look at if they wish—the introduction of temporary accelerated depreciation was biased toward machinery investments in certain industries, thereby almost tripling economic distortions.
Bonus depreciation in the U.S., or accelerated depreciation of machinery, has been placed in the United States since 2001 without significant consequence to Canada. A recent study has shown that the policy undermined U.S. growth and, interestingly, increased economic inequality by favouring skilled workers, who benefited most. The same will be true with this budget policy.
Even worse, the accelerated depreciation provisions fail to address the effect of U.S. tax reform that will erode certain business activities and public revenues in Canada. The business tax reform with competitive corporate income tax rates in the United States will attract not just more tangible investment to the United States from Canada but also intangible income and profits. Canada needs a corporate tax reform to protect our tax base and encourage companies to keep profits in Canada. A reduction in corporate income tax rates would also help counter the competitiveness effects of U.S. reform without mucking up our own tax system.
In other words, we should have approached this with a mini-type of corporate tax reform, which by the way, is being pursued by 12 other countries in the world at this point. In fact, Canada sticks out as the only country that responded to U.S. reform with accelerated depreciation. Congratulations, you are unique, at least.
The key point is that we need to get back to the basics of running a good tax system that is efficient, simple and fair. We are straying away from these principles in recent years, which we will regret in the future.