I'll continue then. A free trade agreement between Canada and Panama involving a considerable fiscal value has been signed but not ratified. You asked me here today so that I could give you my opinion on the matter. You are hoping to find out whether Canada should ratify this agreement.
First, this question is not getting so much attention from the Canadian government, because Canada is currently doing a lot of business with Panama. Nor is it because this agreement is necessary to make business with Panama possible. The earlier testimonies pretty much cover these two points.
In reality, this agreement is getting so much attention from the Canadian government, seemingly for fiscal reasons. Ultimately, this agreement could allow the wealth of Canadian companies piling up in Panama and being taxed at a lower rate, or not at all, to be exempt from Canadian taxes as well.
This type of agreement is harmful for the public finances of industrialized nations but, unfortunately, Canada is stuck in the dynamic of international tax competition. If the competing countries conclude these kinds of agreement, which is the case here, it will be difficult for Canada to say no.
However, in light of the current situation, allow me to respectfully bring forward another issue that should pique your interest. The issue is so important that it makes the current issue pointless. The issue is this: could the gradual reduction of taxes for businesses be a failing of globalization?
Globalization as it is now is fundamentally different from globalization in the past. In 2010, financial capital is more mobile than human capital. This new relationship between financial capital and human capital was made possible through recent technological discoveries that make an increased mobility of financial capital possible, and new barriers to immigration limit human capital.
This increased mobility of financial capital allows multinationals to set themselves up in the most fiscally generous countries, creating fierce fiscal competition and the gradual decrease in business taxes. Since human capital is generally more limited in a specific jurisdiction, it ends up forming the group of taxpayers who make up the difference.
The statistics show that, for a number of countries, the tax revenue losses caused by reducing business tax are not financially offset by anticipated increases in economic activity and the corresponding taxes. Some countries, such as Greece and Ireland, can no longer keep up.
In Canada, corporate tax rates have dropped 50% since 2000, dropping from 29.9% in 2000 to the planned 15% for 2013, the largest decrease in the taxation rate in Canada's history, and the largest for all OECD countries.
According to the most recent statistics compiled by the OECD, between 1975 and 2007, the substantial decrease in corporate tax rates in Canada supposedly created a decrease of 25% in the proportion of income tax that Canadian companies pay to the public purse. This trend can also be seen in other countries. Take a look at the situation in Japan and the United States, where there have been decreases in the fiscal burden of companies and in public finances as well.
So far, most countries have been able to avoid a tax crisis because those countries were growing. The tax bases were broadened as the taxation rates went down. The loss could be made up by increasing the countries' debt or the tax burden of workers. However, both have their limits.
In Canada, the public finance burden supported by personal income tax rose from 22% in 1975 to 37% in 2007, an increase of 70%. In May 2007, the newOECD Observer explained that:
Without action, we could be on the verge of a global tax crisis that could hurt economic activity. The tax burden cannot be carried by labour and consumption alone. The upshot of inaction would be a loss of revenue for governments and a downward spiral in economic activity.
In May 2000, when corporate taxation rates of countries began dropping, the Harvard Law Review showed that:
Thus, globalization and tax competition lead to a fiscal crisis for countries [like Canada] that wish to continue to provide social insurance to their citizens at the same time that demographic factors and the increased income inequality, job insecurity, and income volatility that result from globalization render such social insurance more necessary.
I hope that my presentation has helped you to understand that Canada is currently trapped in a tax competition. Obviously, regardless of what we say here today, Canada is probably going to sign what needs to be signed so that Canadian companies can benefit from the tax haven that is Panama because it is trapped in this global trend.
I invite the committee to think more about this. Because now that we are all in this dynamic and that is shown to affect the public finances of countries, perhaps now would be the time to ask the bigger question. Thank you.