Mr. Chair and members of the committee, thank you for inviting me to appear before you today.
You will see my submission once it's translated, so I will go through it very quickly, highlight the main recommendations, and boil it down for you. A lot of the concepts are in the submission or in other literature. You're always invited to read what I wrote on these topics.
First of all, let me talk about the personal income tax system. You'll all agree that reforms should be conducive to economic growth, especially in this tough environment. Here we have both good news and bad news stories.
The good news is that the reform of federal child benefits, as promised in the new government's election platform, will actually do something good for the economy, good for work incentives. The money reinvested from the UCCB and the family tax cut will serve to lower the clawback rates, or the benefit reduction rates, that are reduced with income. The clawback rates will be reduced significantly. Those clawback rates act like hidden tax rates. When you take all contributions, all tax, and those hidden tax rates that are benefit clawback rates, and sum them up, at their very low end, at between $25,000 and $45,000 in family income, the effective tax rates can be as high as 70% for some families.
This is really high. It hinders work incentives. The reform, as proposed in the election platform, mentions a reduction in clawback rates in the range of 5% to 17%. This is significant. It would have a positive impact on work incentives, so a positive impact on the economy. It would be important to see that the reform effectively does reduce clawback rates and does not only make the system more generous.
That's the good news. The bad news is that overtaxing top incomes is economically inefficient. I have written a lot about this. Tax rate hikes at the top, when the rates are already approaching 50%, are economically damaging. Using a measure of behavioural response that is consistent with the economic literature, I estimate that the four percentage-point increase in the top tax rate will yield about $1 billion in new federal revenues but will cost provincial governments $1.4 billion. That's a net loss, a consolidated government net loss, of $400 million. That means we have reached the top. We cannot go higher. We're pretty much at the point where we extract as much as we can from top earners.
Ironically, it also means that reducing the top tax rate, or even reversing the latest increase, would be a cost-effective way to provide fiscal stimulus at this point in time. I know it's ironic, but it would be a cost-effective tax reform.
Now that we're talking about deficits, there's definitely a need for the government to tightly manage its internal operation costs. You will agree with me that when times are difficult, you need to manage your own house very effectively. One of the things we've been repeating at the C.D. Howe Institute for many years is that the total compensation package for federal employees results in average compensation per hour much higher than what is found in the private sector. For federal government services jobs, the average compensation per hour is $64. That comes from Statistics Canada. For professional, scientific, and technical services jobs, it's $40 per hour. In the finance and insurance industry, it's $45 per hour.
There is a significant difference, but that difference is not attributable to wages and salaries. It's mostly attributable to the cost of pensions and the cost of other future benefits. That's the important thing here. Those costs represent about 43% of wages and salaries for federal employees.
It's very high, and if there is something to do, it is to work on this aspect of the compensation package. Ottawa should continue its reform of the sick leave management system, the reforms that are currently under way. They should continue because they lead to major savings, and pension plan contributions as an employer should be capped at 50% of what is available for people saving in RRSPs and people in DC pension plans, which is 9% of pensionable earnings, along with a move to a shared employee-employer governance, as is found elsewhere in the public sector.
Finally, let me talk a little bit about infrastructure spending because there is a lot of talk about it. Infrastructure spending is good. It would provide economic benefits that are greater than the costs of the investment. It can improve productivity in the long term, and that's a good thing. It can also increase demand in the short term, so it's a good stimulus, but the scope for such action is limited if the investments are in big capital investment projects in partnership with provinces and municipalities when these projects are not shovel-ready, so we need to be careful of that. We need to focus on federal infrastructure when we know that the implementation times will be quick, and that's when we will get the bigger bang for our buck.
Thank you very much.