Industry Committee on June 9th, 2009

[The Co-Chair, Conservative, Michael Chong]

Mr. Mulcair, the order of speaking and the length of time is actually at the discretion of the chair, as per the routine motions of this committee—

[Thomas Mulcair, NDP, Outremont, QC]

Yes, but I only hope that you use your discretion to show equal concern for the opposition and your Conservative colleagues.

[The Co-Chair, Conservative, Michael Chong]

—so I can assure you that time has been fairly allocated.

Mr. Mulcair, you have the floor. Go ahead.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Carr, Mr. Scholnick, Mr. Lee and Mr. Ware, good morning and welcome.

I will begin with you, Mr. Carr, because earlier, you tried to dodge the question about loyalty programs. You said that you are an economist, and do not deal with matters like that.

I also want to thank you for stating from the outset, in a very transparent manner, that your work was sponsored by Visa.

I do not think that you can easily evade the issue of loyalty programs. Take, for example, a television ad that is now running, in which two women are leaving a supermarket, both pushing a shopping cart full of groceries, and one turns to the other and says that she paid with her Visa card from a certain bank, and received a $2 cashback on a $100-purchase. The other woman tilts her head and says that it's rather trivial. The first woman asks her how much she got back, and the second one says nothing because she paid with cash.

Therefore, it leads one to ask: Who else paid for the $2 cashback to the first woman, if it is not all consumers, including the ones who use cash to pay for increasingly expensive grocery items? Who paid for the $2 the woman got back because she used her Visa card?

[Prof. Jack Carr]

Let me answer your question.

First of all, you implied that my research is financed by Visa. I announced that, and it's certainly the case. But like loyalty programs, professors have brand names. I say what I believe. If the message is consistent and Visa wants to subsidize it, that's clear. But I believe in 100% transparency, and I told you that.

Second, on loyalty programs, what I said was that as an economist I wouldn't know how to design a loyalty program. But I know that they exist in many different industries and they're there.

Now your key question was, who pays? The interesting thing is you assume. Clearly, when people look at costs with credit cards...and one of the reasons why credit cards are more costly is because it costs something to bring those customers in, and the way you bring the customers in is you give them these points and loyalty programs. But the other part of the equation, when you look at the system, is the efficiency gained by bringing them in. When I take my card and I get 2% cash back at the pumps, what I find is that I can do that transaction, and for the merchant, it's much cheaper. I don't have to line up and pay cash. The merchant doesn't have to add cash. So it's more efficient.

The second thing is this. I recently bought an Air Canada ticket with my credit card for a year from now. Now, without the credit card, I wouldn't have done it. Why? Even I wouldn't have paid cash, because I'm worried that Air Canada won't be here a year from now. They may be bankrupt. But with my credit card and with that premium credit card, what they give me is insurance. They give me insurance that if Air Canada goes under, and they can't default—

[Thomas Mulcair, NDP, Outremont, QC]

Thanks, Mr. Carr, but that wasn't the question.

[Prof. Jack Carr]

No, no, but that's the—

[Thomas Mulcair, NDP, Outremont, QC]

Hold on, Mr. Carr.

The affirmation was made that it's an urban legend that people who are paying cash are somehow subsidizing people who are paying with credit cards.

[Prof. Jack Carr]

That's correct.

[Thomas Mulcair, NDP, Outremont, QC]

In the advertisement where two ladies are walking out with their carts, one of them says she just got two bucks for her $100 purchase off her card. My question to you is, who's giving her the two bucks?

[Prof. Jack Carr]

You're assuming, though, that it's just as efficient to use cash. Yes, there's the $2 paid for that $100 transaction—

[Thomas Mulcair, NDP, Outremont, QC]

You're still not answering the question.

[Prof. Jack Carr]

I'm trying to answer your question.

[Thomas Mulcair, NDP, Outremont, QC]

You're not answering it, so—

[Prof. Jack Carr]

Okay. If you stop me—

[Thomas Mulcair, NDP, Outremont, QC]

—so we're going to go somewhere else.

You're not a victim, Mr. Carr, but we will go somewhere else.

Mr. Lee, I have a question for you, and it does have to do with the economics, but it also has to do with the public policy.

I'm working in a business and I'm buying a $40,000 piece of equipment. It's my business. The person I'm buying from says they have a bonus this month and they're giving back 2% cash. I take the $800. If I don't declare it, I've just committed an offence under the Income Tax Act, if I'm trying to deduct the whole forty grand.

Or I'm the employee of somebody's business and a client says they've got a special this month and they can deliver a flat screen TV worth $800 to my cottage if I'm buying this particular piece of equipment. If I do that, I've committed a fraud on my employer.

We've just described how much fun it is to get bonuses, to get the 2%, and why not 4%? How do you deal with that, in terms of public policy, when you've got a lot of people.... I have a friend who's a medical professional. Last year he took a $25,000 trip all on points—hotels, everything—because everything he buys in his medical practice, a lot of equipment, he puts on a credit card. Last year that amounted to about $25,000, for a couple million bucks of purchases.

Where is that money accounted for, and is it taxed? Or is this just an entry-level kickback scheme that society has decided they're going to accept?

[Prof. Ian Lee]

Actually, I would take the opposite tack. It is a reduction, a discount on the purchase. People who buy big ticket items know this: that when they go into the car dealership, they can negotiate a deal better than some other customer. So this is a diminution.

[Thomas Mulcair, NDP, Outremont, QC]

But if somebody is declaring a $40,000 expenditure and they have in fact got $800 back in points to buy another trip and it's not declared, why is that less of an offence under the Income Tax Act than the case of a person who gets $800 cash? Why is one morally, ethically, or legally different from the other? I put it to you that it's not.

[Prof. Ian Lee]

I'm not dealing with the Income Tax Act. I am not a tax accountant, nor a tax lawyer. I'm dealing with the strategic decision by companies.

[Thomas Mulcair, NDP, Outremont, QC]

But isn't it part of the consideration we have to have? Mr. Carr wants to duck the issue, saying that these loyalty programs have nothing to do with him, that he's an economist.

[Prof. Ian Lee]

I don't want to duck the issue. I want to confront it head on. I just don't want to deal with the tax issue. If you want—

[Thomas Mulcair, NDP, Outremont, QC]

Well, what's the difference between getting $800 cash back and not declaring it to the income tax department and getting $800 cash in the form of trips and so on and not declaring it? Is there any fundamental difference between the two?

[Prof. Ian Lee]

First off, when you're buying something, you're buying it out of after-tax income. If I buy an airplane ticket, and then you, as Parliament, want to tax me on the savings, you're taxing me twice, because I've already bought the ticket out of net income.

[Thomas Mulcair, NDP, Outremont, QC]

I don't think that works, Mr. Lee. In the example, I have $800 cash as a kickback for the purchase of a $40,000 piece of equipment. We all agree that if the person takes the $40,000 and applies it as a business expense, they've just committed an offence under the Income Tax Act.

If I buy the same $40,000 piece of equipment and put it on a credit card and get $800 back in the form of.... There is one bank that even lets you buy RRSPs with the 2% you get back on their credit card, and then you're getting a further tax decrease on that. And that's all money lost from the economy.

How is it possible to discuss this whole issue without looking at the effect of those on the bottom line of the government and at the lost taxes?

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. Mulcair. We're out of time on this round.

Perhaps you can answer very quickly.