Herb Grubel

[Supply, March 20th, 1996]

Madam Speaker, I wish to ask the hon. member who is a well known, famous, most competent tax lawyer whether during the deliberations of the Liberal Party of which he is an influential member, he ever advised his colleagues that it would not be possible to get rid of the GST.

Was he totally unaware of the difficulties which exist in harmonizing and doing all the other things that we had proposed? Did he warn his colleagues about this? Was he ignorant about it? Did he just say it to himself and not tell them? Was he simply rejected? How could a distinguished tax lawyer, with as much influence as he has, get his party to accept a resolution which any informed tax lawyer would have known could not be kept?

[Supply, March 20th, 1996]

Madam Speaker, at stake today is not the Reform position on the GST. At stake today are promises made during the election campaign which were very influential. When knocking on doors I heard all the time: "Why are you not promising to eliminate the GST? Why are you not doing this?" I said that we could not do so responsibly. People said that nevertheless they would vote for the people who would get rid of it. I won in my riding but I wonder in how many ridings the Liberals squeaked by, especially in Ontario, because they made this promise which they knew they could not keep. That is the issue. It is not an issue of how we m

Co-operative as we are with the finance committee, we are trying to understand what is best for Canada given what we have known all along but what the Liberals had denied during the election campaign: We cannot get rid of the GST but how can we make it better? Harmonization will be better but it will not solve the fundamental problems which are documented in the examples I have given. That is the issue.

The Liberals continue to claim that they did not say they would get rid of it. They have twisted it and said they would harmonize it and do something else, as if that would solve the problem. After studying the GST more than I ever wanted to, I can say that harmonization will not solve the problems that have made Canadians unhappy enough to tell me they would vote for the Liberals because I would not promise to get rid of it.

[Supply, March 20th, 1996]

Madam Speaker, Reformers do not really know how the Liberals can or will deliver on their red book promise to scrap the GST. However, it is their problem, not ours.

I remember vividly discussions about the strategy which Reform should follow during the election campaign. The suggestion came up that the idea of scrapping the GST is very popular; it would gain us lots of votes. However, cooler rational heads prevailed and said we could never deliver on that. It is not responsible to go to the people of Canada during an election campaign and say we will get rid of tax revenue worth $17 billion when the country is going bankrupt. Appropriately, we did the responsible thing and said we would eliminate the GST, as the people of Canada want, once the budget was balanced.

The difficulties in which the Liberals find themselves could not have happened to nicer guys.

I will address a question which has not been raised. The defence on the other side is: "We did not say we would get rid of it; we said we would replace it with something else. We would harmonize it". Harmonizing sounds like a good and interesting idea. However, it does not meet the requirements I believe the people of Canada have for a taxation system.

The general idea of a value added tax is supported widely in academic circles. It is a tax which encourages savings and investment. At a low tax rate it would not be too onerous and it would catch people in the underground economy who do not pay taxes. Whenever they spent their money, they would end up paying taxes.

The political process so destroyed the basic idea of a value added tax that it is appropriate it is not called a VAT like in Europe, but that it is called the GST. It is ironic that the cause for this abomination, the GST, this caricature of a value added tax was caused by the Liberal opposition members who sat on this side of the House. I have heard it told repeatedly how it all came about.

In a heated attack by the rat pack, the Minister of Finance of the day, Michael Wilson, without thinking through what he did, gave in to the incessant demands that at least food should be exempted from the value added tax. All the experts who have studied the history of the tax have told us that from that moment on we ended up not having a good GST, not a good value added tax. We ended up with the current abomination because he opened the floodgates

on exemptions which resulted in all kinds of difficulties which now exist. It is they who made it such a hated tax.

I sat through many, many weeks of hearings. Nearly a thousand witnesses told us what an abomination this tax is. Some episodes of how terrible a tax it is stand out in my mind. These difficulties will not be eliminated by harmonization; they will be aggravated.

The most memorable event was when a gentleman came to testify before the finance committee with a shopping bag full of cancelled receipts from his store. He runs a used goods store in Toronto. His business had shrunk by over one-half. He said: "People see a price of $100 on a used refrigerator. They say that is what they want and to ring up the sale on the cash register. The sales attendant hands a bill of $107 to the individual who says that he wants it for $100. We tell the customer there is GST on it. After a long debate which really irritated and made all the customers in the store mad, the individual gave up and said to cancel the sale and take back the refrigerator".

It was a most dramatic representation. The store owner said it was not an isolated incident. The receipts he had in the bag all had been cancelled within six weeks. He said: "It has been going on like this. My business is being wiped out. Where do these people go? They go next door, to smaller stores, to entrepreneurs who are less honest than I am and they end up not paying the GST". This is just one example.

We remember the difficulties of paying GST when we buy five muffins but not if we buy six. There were representations from restaurant owners who told us they cannot stand the competition. When they sell a pizza they have to charge GST on it. However, someone can go next door to a supermarket where the pizza is all made for them and all they have to do is pop it into an oven and they do not have to pay GST. That is highly unfair.

There are other things that are not very well known. The municipal sector is given special treatment. That sector does not have to pay GST. Fine, but consider that it has been found that some functions carried out by municipal workers can be achieved more efficiently and cheaply by contracting to the private sector. Lo and behold, when municipal employees collect the garbage there is no GST but when it is contracted out, there is GST. There is a tax on privatization. Is this right? This is highly inefficient.

We heard horror stories about the way in which the GST encourages the underground economy. Many conferences have been held and papers have been written on this subject. There are stories.

We hear about people who order a wing built on their house. They are given two prices, one with GST and one without. They

can pay by cheque if they wish or alternatively, they can pay by cash which will cost 7 per cent less. As we heard again and again in the finance committee, the people who offer these dealings not only fail to pay the GST, but they probably do not report the income from their work either.

We heard horrible stories about businesses being affected by a strange ruling. Natives are not subject to the GST. A store located outside the border of a reserve used to be quite profitable selling candy to children from the native reserve. It was doing fine, thank you. Children coming home from playing baseball would buy candy. Now the store is not able to compete any more. Somebody has opened a store on the other side of the border and does not pay any GST.

To summarize my point, the government is holding out the hope that all the difficulties existing with the GST, which the people hate so much and which we heard so much about in the finance committee, can be wiped out by harmonization. That is not going to be possible because of the abomination of having so many different exemptions to the tax. It is a terrible tax that cannot be saved. That is the conviction I have reached.

I therefore move:

That the motion be amended by deleting the word "should".

[Supply, March 19th, 1996]

Mr. Speaker, this was not deliberate but just a slip of the tongue. I talk about this paper all the time. It is not in the public domain. It will be published by the Fraser Institute. It was subjected there to the scrutiny of scholars.

There members will see a calculation for the introduction of a flat tax for income earners of different categories, like single parents, seniors and so on, with all the provisions taken account of by a technical expert in the Library of Parliament using Government of Canada statistics.

According to his simulations, business income taxes would rise by about $5 billion under one of our specific proposals. This would make it possible to have practically no changes in the income taxes payable by individuals.

On the other hand, I am distrustful of these results because they cannot simulate the dynamic adjustments to which I referred-I would be happy to give a copy of this graph-in terms of simultaneously lowering the tax rate on high income earners and taking away tax loopholes.

You must remember hearing me say regularly that one of the troubles with the tax system is that the rich do not pay enough

because they have all those loopholes. If this is what you believe, then you must agree that if those loopholes are closed, they would pay more.

We then lower the tax rate. It is totally astounding how the balance of the two things over the last 25 years has resulted in the top income earners paying exactly the same share of all personal income taxes as they did before. The simplification and the dynamic benefits that one cannot quantify will make the flat tax a very good thing for Canadians.

[Supply, March 19th, 1996]

Mr. Speaker, I am now speaking about a scholarly paper that Jim Silye and I have prepared for presentation. I am sorry, the hon. member-

[Supply, March 19th, 1996]

Mr. Speaker, I stand on behalf of the Reform Party to also oppose the motion.

The motion suggests, I think almost insultingly, that experts who have been asked to write a technical report are unaware of the kinds of political concerns which dominate the thinking of professional politicians in the House. As a former economist who has written such reports, I can say that the political concerns are always constraining and they influence what the expert report comes up with. I believe it is inappropriate that members of Parliament dictate on a day to day basis what the outcome is because they have the opportunity to influence the public information about the subject.

Once the report is written it is almost certain to go for hearings to the Standing Committee on Finance of the House of Commons. At that time members of Parliament can insist on having other experts brought in. They can ask questions relating to the contents of the report. They will have input for generating information that is broadly representative and goes beyond what the technical experts are saying, even if this is necessary.

Once the report is tabled and goes to the Department of Finance, legislation may or may not come out of it. Clearly, once legislation stimulated by the report is proposed, members of Parliament have yet more input. The legislation will not only be discussed on the floor of the House but there will be opportunities for hearings and further experts being brought in when the legislation is considered before the Standing Committee on Finance.

Therefore, it is totally inappropriate at this point to try to introduce a more direct influence of professional politicians into the deliberations of the technical experts.

My own party is not totally happy with the way in which the frame of reference of this committee has been designed. We believe in this modern age as a result of developments in communications and globalization of financial markets it is time to have a more thorough examination of the entire taxation system. We should look not just at the business taxes; we should also look at personal taxes, excise taxes and customs. It is also very important to look at some of the Department of Finance publications. There should also be consideration of the practices of local governments in their taxation of individuals and corporations. These matters are all interdependent.

All of the country's taxation laws should be examined again as a cohesive single unit, an interdependent system, while keeping a very close eye on how it works in relation to foreign practices. We live in this global village which has made it very difficult for individual countries to have policies that can be carried out simply to maximize domestic objectives without taking into account the way in which foreigners are influencing the effectiveness and the workability of those domestic practices.

There are many problems with the present system of which I am very much aware from the hearings of the finance committee but also because I delved into the literature on the flat tax. The proposals for a flat tax in the United States, Canada and throughout the world are now being given a serious hearing. I believe that is the case for exactly the reasons I have mentioned. Globalization and all kinds of practices reduced the work before we had these international developments; we are not likely to do so in the future.

The biggest problem almost all tax experts agree on is that in Canada and most other industrial countries income from property is taxed three times. First, the business which earns profits from investment pays its business or corporate income tax. These dividends or profits are then entered into the income of the person who owns the business or shares in it and it is taxed again at the personal tax level. It is taxed twice, but it is worse than that. We also have taxation of capital gains. If someone then sells his business or shares in the future, if there has been an accumulation

of wealth, an accumulation in the value of that business, there is then the capital gains tax.

The capital gains tax is particularly pernicious. First, many of the gains that appear are really paper gains. If I make an investment of $100,000 and at the time I make the investment I could have bought a residence for $100,000, then we have inflation. The value of my business triples. It is now worth $300,000, but because it was general inflation I can still only buy the same residence with it. I have not become any richer as a result of the increase in the value of my investment in a business.

When the government steps in and says that 30 per cent or 50 per cent of the increase in the value of the business is due to capital gains and is taxable then it is expropriating the owner of that business. After taxation that business will be able to buy only one-half of a home rather than a full home. What is the justification for this? The asset, which is being taxed like this, has already paid income taxes, both at the business level and at the personal level.

There is fairly widespread agreement, not total agreement, among economists that this bias against the returns on investment and savings has depreciated the rate of capital accumulation in our country. It is capital that is invested in the country which raises the productivity of labour, which raises personal income, and which determines in the end our standard of living. Therefore it is detrimental to Canadians in the longer run to put such a heavy tax on income which is subject to this kind of double taxation.

I want to make one quick reference to the high progressivity in taxes. In British Columbia it is now well over 55 per cent for the highest income earned.

Someone produced a chart for me which shows that we started off in 1967 with a marginal tax rate of 80 per cent in Canada. It has now reached about 50 per cent. During this period one would have expected that the income taxes paid by the top 1 per cent of all income earners and the top 10 per cent would have decreased because after all the rates of taxation that they are subjected to have decreased so dramatically.

The graph shows that the proportion of all personal income taxes paid by the top 1 per cent of all income earners has remained absolutely constant between 1967 and 1993. There were some fluctuations, especially around the mid-1980s, when interest rates were 20 per cent and all these companies went bankrupt.

Basically the same thing is true for the top 10 per cent. It suggests that the disincentive effects which have come from these high marginal tax rates have not really been effective in getting more money out of the rich people and we might as well get rid of them.

[Borrowing Authority Act, 1996-97, March 18th, 1996]

Mr. Speaker, I am not sure how much I look forward to speaking for 10 minutes on this subject since I have been here since eight o'clock this morning and it is now the 14th hour of my rather full day. Nevertheless, Bill C-10, the borrowing authority bill is a rather important bill or it should be an important bill.

For a long time I remember in the United States there used to be the need for the government to go to Congress every year to acquire permission to increase the debt limit. This bill focused the discussion on issues about spending and deficits which were very salutary.

I wish in the parliamentary system we had an opportunity to focus our discussion on what these deficits do to our children and grandchildren who are not represented here because they cannot vote. I know this is a cynical point of view, but I believe if they really were in our minds when we voted for these kinds of increases in deficits, these appropriations to spend more and add more to the debt, we would not do it if we remembered what we are doing to our children and grandchildren.

Unfortunately we have a system here where all the conclusions are pretty well pre-ordained. What we have is a lot of talk. Let me add to this talk on a subject that is of great concern to me.

Today several members opposite spoke about an article written by my good friend and colleague, Dr. Mike Walker, an economist and director of the Fraser Institute. He published an article in the Globe and Mail last Thursday. The title is ``Budget out-Kleins Klein-Another Perspective''. In this short editorial, Dr. Walker indicated his enthusiastic support for the budget that was brought down last week and which at this moment is being debated in the context of the need for more borrowing to which it gives rise.

The editorial bases its enthusiasm for the budget on something very interesting, an index which the Fraser Institute has called the Klein index. It is alleged to be an objective assessment of the fiscal restriction imposed by a certain budget. As Mr. Walker indicates, he believes this takes subjective judgment out of the debate. I am really puzzled by this. Dr. Walker in co-authorship with Robert Richardson in the February issue of Fraser Forum , a monthly publication of the highly respected institute, with circulation in the thousands, has published a paper entitled ``How to Balance the Federal Budget and Keep Canada together''. Mr. Walker suggests cuts in program spending. This is money spent on everything other than the debt and excluding social transfers to individuals and provinces.

Dr. Walker enthusiastically endorsed the need for further cuts. He would have doubled according to these proposals the cuts to program spending of $6.9 billion enacted by the Minister of Finance last year. He would have added $6.3 billion in order to achieve the targets he thought were necessary.

I will give in a moment his summary of why he liked and why he suggested this budget. He gives here a long table on how he would find the extra $13 billion. For the department of agriculture he suggested an additional cut of $600 million out of a budget of $1.2 billion, and so on.

The second element of his budget proposal which was very important suggested an increased clawback of all social transfers to individuals and families. His emphasis was on families, social transfers in the form of UI, OAS and CPP together. He gave a schedule on how he would have done that and he suggested that another $8 billion should have been taken out of this program.

Why did Dr. Walker and his co-author suggest this would be necessary? It would bring about in two years an elimination of the deficit, and a surplus would begin.

He concludes the article with the following paragraph: "By balancing its budget within the next two years and beginning to reduce the national debt, the federal government can restore the confidence of most Canadians in the financial, economic and political viability of one Canada for all Canadians into the 21st century".

This of course has been the platform of the Reform Party since its election campaign, reinforced in the taxpayers budget published last year.

The Liberal budget did nothing Dr. Walker proposed two months earlier. There were no further cuts. There was no dealing with the problem of social program spending to high income families.

It is a very puzzling phenomenon to me. How can a man within a couple of weeks change his mind? On the one hand he would have predicted that if this budget did nothing of what he recommended, it would have been a failure. He then turns around on the basis of an objective index and would say this is a wonderful budget.

I can see only two explanations. One is that, as he said, this is an objective index. Maybe he was not objective when he wrote the first budget, when he made his budget proposal. I do not believe that. I have co-authored several books with Dr. Walker. The last one has been published in Chinese.

The only other alternative I have as an explanation is that there is a serious flaw in the design of the so-called objective index. I believe what is missing is any kind of weight given to the speed with which a fiscal restraint is enacted. I believe that is a fatal flaw.

I look forward to talking to Dr. Walker on the telephone in order to clear up this puzzle. I can assure him he has given enormous support to the Liberals, all of whom rave on all the time about how this conservative leader of the economics profession in Canada has seen the light and swung around. It is a total puzzle to me. I tried to explain it. Maybe I will have more news tomorrow.

[Employment Insurance, March 18th, 1996]

Mr. Speaker, in spite of the announced reductions and the reductions which will be coming in the next few months, the budget document indicates that the surpluses for the next two years of $10 billion have taken into account those reductions. However, the government now plans a $2 million campaign to advertise changes to the UI system.

Canadians need jobs, not UI advertisements. Will the minister stop this costly advertising campaign and simply reduce premiums to create jobs?

[Employment Insurance, March 18th, 1996]

Mr. Speaker, UI premiums are creating a $10 billion surplus. This money belongs to the UI system and therefore to Canadian workers and employers. When will the government reduce the regressive, job killing UI premiums on Canadian workers and employers?

[Supply, March 15th, 1996]

Mr. Speaker, I would like to respond to a total falsehood which was presented by the hon. member when he mentioned that the Reform taxpayers budget had planned to cut $20 billion out of social program spending. Our budget committed very firmly to a maximum reduction in transfers to provinces, the famous money going to medicare, higher education and CAP, of only about $3 billion. Whereas his government took $7 billion from this program. It is totally false.

Over three years the total reduction in program spending would have been $16 billion, and well over half of that would have come out of savings, inefficiencies, overlap between governments, outrageous programs that had been bloated over the last 30 years. This is simply an incorrect representation which is despicable because it adds to something that is simply wrong.