Good afternoon.
It goes without saying that using the tax system to promote public policy objectives must be done judiciously. For a particular objective, using the tax system must be weighed against other strategic instruments such as regulations, expenditure programs or subsidies.
The principles of sound public policy require that the government have a series of instruments, including tax measures, of course, that will contribute as far as possible to achieving these objectives at the lowest possible cost for the government and for the economy and in the fairest and simplest way possible. In addition, these initiatives must be undertaken in the context of a commitment toward a balanced budget and sound financial management.
The proposed new tax measures can be evaluated using the following criteria—and I hope you have all received a copy of the chart I distributed—: efficiency of achievement in the public policy goal, the legal and financial impacts, economic efficiency, fairness and simplicity. I would also mention that these proposals were evaluated individually, and that the weight given to each criterion may vary depending on the measure involved.
The first criterion, efficiency of achieving public policy goal, may be broken down into four aspects: targeting, consumer and producer responsiveness, experience in other jurisdictions and results measurement. There are two important factors involved in the first aspect, targeting. First, we must maximize the correlation between the products affected by the tax measure and the public policy objective. Second, we must choose the tax instrument to be used correctly. By tax instrument, I mean the individual income tax system, the sales tax, the excise tax, and so on.
In the case of the second factor, consumer and producer responsiveness, we have to determine whether the latter will change their behaviour as a result of a new tax measure, such as a tax, and to what extent they will do so.
A third very important factor is the experience in other jurisdictions, either provinces or countries. We have to analyze the context that existed when they were implemented and the results achieved compared to the objectives that had been set.
Results measurement is the fourth criterion, and it is very important to properly assess the government's ability to measure the results of a tax measure. That makes it easier to re-evaluate the measure and to take the necessary action.
The second main criterion is the legal and fiscal impact. The measures may be incentives or disincentives. Each of these measures will likely have an impact on government revenues. Of course, an incentive, such as a tax credit, will probably reduce the government's revenues, while a disincentive, such as a tax, should increase them. In both cases, in the context of a balanced budget, these increases or decreases in revenue could have an impact on other taxes or on government spending.
The second factor under this heading is indirect fiscal impact. In this context, it is important to evaluate the impact of a tax proposal on the income tax base, the GST base or the HST base. Any change of this type could have a financial impact on the provinces.
The third aspect is the precedents. It is important to bear in mind that some incentives targeting a particular industry could give rise to similar demands from other industries and, thereby, increase pressure on the government's fiscal framework.
Finally, it is essential to ensure that any tax measure put forward does not run counter to any agreements between Canada and other jurisdictions or to the Constitution, which of course includes the Canadian Charter of Rights and Freedoms.
I come now to the criterion of economic efficiency. In addition to an overall cost-benefit analysis, we will try to check the few criteria regarding the tax measure. For example, will it promote more productive use of resources or stimulate innovation? Or will the measure rather have some perverse effects such as creating a black market? Another possible perverse effect would be that by increasing a tax too much, the measure could become prohibitive and reduce revenues rather than increasing them. Consideration must of course be given to the impact of any measure of this type on competitiveness at the provincial or international level.
The administration costs of a measure are an aspect that should not be neglected. This is an integral part of any public policy, be it an expenditure program or a tax measure.
Finally, the adjustment costs change the behaviour of tax measures, and measures lead to new adjustments on the market, and in turn, result in social or economic costs. For example, if we put a tax on a particular product, it is possible that companies will experience a drop in sales and decide to close down some plants. That could lead to job losses, and so on.
It is important to estimate the fairness of the tax measures because they could result in a disproportionate burden or benefit for certain groups. This could be true of certain regions or industries as well.
The simplicity of the design, administration and compliance of a tax measure is the final criterion. A tax measure is more efficient if it is relatively simple to implement and easy to understand by the taxpayers it affects. However, if the targeting of the measure or adjustments to it over time require complex rules, this advantage may disappear. In such a case, there is a danger that the tax system may become too complicated with respect to the design, the administration or the compliance with the tax measures.
In conclusion, I would just like to say that the government has a range of strategic instruments it can use to meet its public policy objectives. They include economic instruments, and, of course, tax instruments such as consumption taxes or tax credits.
Any proposed tax measure may be evaluated using the five basic criteria we have just outlined. Whatever the objective, the government must take into account all of the strategic instruments available and select the solutions that can provide the best results at the lowest cost and of course in the simplest and fairest way possible.
We are now ready to answer your questions.