Madam Speaker, I would like to congratulate the member for Guelph-Wellington and her colleagues for engaging in a serious effort to understand the nature and the size of the underground economy and come up with some suggestions on how we could reduce the size of this unfortunate development in our economy.
As an academic economist I have a long tradition of studying this subject. I have attended a number of international conferences. I was first attracted to it when I met a professor from the University of Wisconsin, Ed Feige, telling of his experience when he stayed with a relative who came home one evening with a brown paper bag. He asked him naively what was in the bag. He opened it up and inside was cash. That person had a small retail store and he had taken a lot of his profits that day home in cash. They did not go through the banks.
It also brought back my own memory from childhood in Germany where my father had a grocery store. In the evenings he would draw all the shades and make sure that nobody could see in when he punched on the cash register a new tape reflecting a much lower cash receipt of the day that went into the official books. I know, and everybody seems to know, that these kinds of practices are very widespread. However, I found out at these conferences there is a very wide range. There was a very wide range of estimates of the size of the underground economy. It all depended on the methodology that was used by the people who studied it. On the one hand there was Ed Feige who said we have so much more cash floating around in the economy than we did before for a given national income that it must be used for the financing of the underground economy. He was driven by this example of his relative bringing in a brown paper bag full of cash. He estimates that it may be as high 15 per cent of national income, if not higher.
However, to me the most impressive and persuasive argument was made by people from Statistics Canada and other national data keeping organizations. Let me have a quick taxonomy. There is the underground economy that exists of barter where a dentist in a small town might accept a supply of chicken for 10 weeks, one a week, in payment for dental services. That kind of a barter undoubtedly takes place. Every once in a while I run into people who say "you are so naive that you did not know we were doing this". But the estimate of the importance of this kind of activity, given the size of the economy, is trivially small.
The second source of underground economy activity arises in the context of smuggling. Here the most outstanding example relates to goldsmith jewellery which is burdened not only with GST and PST but also a very unfair 10 per cent luxury surtax which is totally inappropriate for this age. It has created a huge underground economy. In the finance committee we heard regularly pleas from the industry for the government to abandon this absurd tax. I hope the government, as soon as it has breathing room, will follow this advice. It might produce more revenue than is being lost because the return to smuggling is destroyed.
The persuasive argument as to size came to me from national income accountants who said they knew from episodal evidence that the biggest cheating takes place in the construction industry, car repair, tailoring, barbers and a few other such industries.
We have statistics on the size of those industries. They may be important to individuals but given the size of the economy, a refinery or an automobile manufacturing plant those industries are very small. They make up no more than 2 per cent of national income.
A large proportion of those activities is undertaken by a large firm and a large firm that engages in car repair cannot cheat. Furthermore, let us look at home repairs where they might give a deal if they do not have to pay GST on building an addition to a house. Let us remember the person has to buy windows, doors and all materials that go into it. The addition may cost $10,000 but the value added by the person who does the work is probably about $1,500 or $2,000. GST is paid on all the inputs because the person cannot claim back a rebate on the input.
I am persuaded that it is a relatively minor problem. I believe the hon. member for Guelph-Wellington was overstating the case when she said that Canada's future was in danger because we had an underground economy. That is a vast exaggeration of the problem.
In the moments remaining to me I will talk about some possible solutions. The first solution would be more education. How can anyone be against education? How far can we go when the message being sent goes against individual self-interest? We know that in the end self-interest pays and dominates.
We should also remember especially in those cases that it is a victimless crime. The victimless crime morality is very hard to argue. The hon. member might say that other people will have to pay more taxes and services are down. That is remote. The amount of money being cheated is so small that the average person can rationalize very well the effect on society as a whole of minute actions. Nevertheless, let us have more education by all means but let us not spend too much money.
The next thing is to have more enforcement by the Department of National Revenue: more audits, more rat lines and all those kinds of things. Surely they will produce some benefit. Not only am I worried about the cost. I am also worried about the other side of the coin, that we are increasing the power of the state. We are letting human beings who are imperfect, who could fail and who
could abuse power go out and chase down a few individuals. This involves a great deal of risk.
Let us build partnerships. It is like education but I doubt that it will go very far. The conclusion I reached having looked at the subject is that the only sure way to do it is to lower the returns from cheating. How do we do it? It is by lowering taxes. There is a risk of being caught and a risk of social disapproval. The higher the rate of return from engaging in illegitimate activities and carrying the risks, the more will be undertaken. The converse is the lower the rate of return, the less will take place.
That is just another argument in a long line of arguments in favour of lower taxes which can only be brought about by Canadians accepting somewhat smaller government and going back to self-reliance rather than on any occasion possible screaming "Ottawa help me". That is the way to deal with the problem the hon. member has addressed in her resolution.