Madam Speaker, before I begin my comments I would like to commend my colleague from the New Democratic Party on his comments today on tax reform as opposed to tax cuts. I think that is a very important distinction that needs to be made.
The problems we face as a country are perhaps more complicated now than they have ever been. The challenges that we face change more rapidly now than we have ever seen before. We are in a rapidly changing, globally competitive environment. Within that context, Canada now, more than ever, needs significant holistic tax reform.
My colleague referred to the Carter Commission which travelled the country formulating public policy in the 1960s. I believe those tax reforms were implemented in 1971. The next tax reform that was significant was in the late 1980s, I believe 1988, when there was a significant broadening of the bases and decreasing of the number of brackets.
Of course, we will remember the GST in 1993, a significant tax reform which resulted in significant political reform, most of which, politically, was not positive. That being the case, the impact of the GST, I would argue, ultimately has been quite positive. It replaced the manufacturers sales tax, which pummelled Canadian enterprise in a global environment, and replaced it with a consumption based tax.
Increasingly that is what tax experts and productivity experts are calling for, a movement from taxes on capital, from taxes on income, to a more fairly based consumption tax, which could in fact be progressive. It need not sacrifice progressivity as an expense to a tax system that fosters competitiveness. I appreciated his comments.
These are exciting times that we live in today in Canada. It took 14 years, from 1984 to 1998, to eliminate the deficit. In fact, the leader of the Reform Party in this House said that deficit reduction in Canada really began back in 1984. At that time, when the Progressive Conservative government was first elected, the deficit as a percentage of GDP was around 9%. Over the next nine years it was reduced from 9% to around 5%. At the same time program spending growth was reduced from 15% per year to zero growth by the time that government left office rather suddenly in 1993.
Since then efforts to reduce the deficit have continued, largely abetted and aided by the policies implemented by the previous government. Those policies were free trade, the elimination of the manufacturers sales tax, the introduction of the GST, and the deregulation of financial services, transportation and energy. Those structural changes in the Canadian economy made by that government were credited by the Economist magazine in 1998 as being pivotal and important for the reduction and the ultimate elimination of the deficit in Canada.
The reason I mention this very important period of time in Canadian history in terms of fiscal policy and economic policy is because I believe that as we enter the new millennium, as we enter a period where change is going to be more rapid and the challenges facing Canadians are going to be ever more complex, we need a government that is more than a caretaker, more than a stewardship short of government, a government that basically has inherited some strong economic policies but really has not done a whole lot to create new economic policies or made the types of visionary changes that are necessary to lead Canadians proudly and prosperously into the next century.
Right now, when the challenges are so great, we need the type of government that would engage Canadians in the kind of dialogue and the type of visionary public policy creation that would produce in the long term the types of policies that will attach the hands of Canadians to the opportunities of the 21st century. Tax reform is a very important part of that. Arguably, tax reform, particularly in the early 21st century, will be very important as an economic development tool. We are seeing that around the world, whether it is in countries like Ireland which have very aggressive corporate tax strategies, the tax policies that we are seeing in the U.S., for instance, or within our own country. We are seeing provinces jockeying for position to reduce provincial taxes in order to attract industry and create increased levels of job growth and prosperity within the province.
Tax reform is going to become more and more important. In this environment it is going to take more than tinkering around the periphery of taxes. It is going to take a significant, mature and holistic approach to what are systemic problems.
This government's approach to taxation policy is anaemic. The government has refused to deal with some of the root difficulties and some of the distortions we have within the tax system.
There are some individual elements of Bill C-72 and some individual initiatives that are difficult to disagree with in terms of their general direction. For instance, the increase in the personal tax credit of $500 is positive. We agree with the general trend to increase the personal tax credit. The PC party is calling for an increase, not just to $7,000, but to $10,000. It is unconscionable that in Canada we are taxing people who make as little as $7,000 per year. We believe that the personal credit should be raised to $10,000.
The government is saying that by increasing the personal credit by $500 it is taking 400,000 Canadians off the tax rolls. What the government fails to mention is that since 1993, due to bracket creep, this government has actually dragged 1.4 million low income Canadians, kicking and screaming, on to the tax rolls for the first time. It is hardly fair for the government to say that it is taking people off the tax rolls when in fact it is putting more people on the tax rolls, and bracket creep continues to cost Canadians a lot. We are calling for the elimination of bracket creep and the re-indexing of tax brackets, particularly in the post-deficit environment.
We saw the reduction of the 3% surtax, which was a deficit reduction surtax. Seeing that it has played a role in reducing and ultimately eliminating the deficit, we would call for the government to eliminate the 3% surtax, which has been the trend, but also to eliminate the 5% surtax. The government is calling it the high income surtax. That is one of the issues we have from a competitiveness perspective because the government treats people making over $60,000 as though they were rich.
In Canada the highest marginal tax rate is hit at around $60,000. In the U.S. the highest marginal tax rate is not reached until the individual hits a threshold of about $412,000 Canadian.
Last week in Maclean's magazine there was an interesting survey of opportunities for freshly minted graduates in Canada. The average salary for a freshly minted graduate with a bachelor degree in commerce, according to Maclean's , who is entering the financial services sector in investment banking, is $72,000. In the first year out of university these bachelor of commerce graduates, or business administration graduates, are making $72,000. Immediately, in the first year out of school, with student loans and everything else, the government is taxing them at the highest marginal tax rate.
It is little wonder that we are chasing from Canada some of our best and brightest young people who are seeking opportunities, particularly south of the border, in what is frequently referred to as the brain drain.
The government sometimes says that it is not really a personal income tax issue, that that is not the biggest reason; the fact is that U.S. companies are also paying more money. The fact that U.S. companies are paying higher salaries is partially due to the fact that U.S. companies are paying lower percentages in corporate tax rates. The general compensation trends have been toward salaries combined with stock options. In that type of environment our capital gains tax plays a significant role in reducing incentives for Canadians to stay here. This is particularly pervasive within the high tech sector.
If we are to be competitive in the 21st century it is particularly important that we be competitive in the high tech sector and that we be competitive in the service sector as opposed to simply focusing on the traditional manufacturing and resource based sectors.
The challenges and the opportunities we have now are very exciting. In the post-deficit environment tax reform is a very viable and, I would argue, important initiative that the government should be pursuing more aggressively; not just tinkering with, but offering significant broad-based reform.
In a pre-deficit environment, without a fiscal surplus, tax reform is more difficult because whenever there is tax reform the government stands the risk of creating winners and of course losers. It is dealing with a zero sum issue. It is not possible to give more to one group without taking more from another.
However, in a post-deficit environment it is possible to implement significant, important and innovative tax reform without hurting any group within society. Tax relief can play an integral role in tax reform. When one group is provided with more through a simplification of the tax code, it need not mean that another group receives less. The surplus environment provides an opportunity for ameliorative tax relief that would compensate for any detrimental effects of tax reform.
Canadian workers and taxpayers have played a significant role in the elimination of the deficit. As I said earlier, it took 14 years from 1984 to 1998 to accomplish that. Canadian taxpayers have seen an increase from 1993 to 1998 from $112 billion in federal taxes to about $150 billion in federal taxes, a growth in federal taxes that far outstripped the growth in the economy.
According to Douglas Porter, senior economist and vice-president of Nesbitt Burns who was a witness before the finance committee last week, disposable income has fallen significantly in Canada primarily due to the high tax burden, particularly relative to the U.S. The fact is that in the U.S. over the past few years there has been a significant increase in personal disposable income and during the same period there has been a decrease in Canada.
Personal debt rates are at an unprecedented high in Canada. Personal bankruptcy rates are higher than they have ever been. The government may boast of being in the black, but the fact is that because of the government's high tax policies Canadians are in the red at an unprecedented rate.
During the seventies and eighties Canadian disposable income was around 80% of the U.S. level. By the end of 1998 Canadian disposable income had fallen to 50% of the U.S. level. Part of that as well is related to the lower dollar in Canada and that whenever our dollar is weakened it represents to a considerable extent a pay cut for Canadians in the global environment in terms of what we can consume. It is a corporate tax issue. It is a personal tax issue. It is a productivity issue.
Interestingly on the productivity question, which we have been studying in the finance committee, most witnesses indicated that high taxes in Canada had played a role. Some said it was a very significant role. Some said it was a smaller role. Almost all the witnesses attributed, at least in part, our low productivity growth in Canada to our high tax regime and the secular decline in productivity over the past 30 years to taxes which are simply too high and make us uncompetitive.
Another issue that comes up frequently at the finance committee productivity hearings is investment. In jurisdictions where investment is high, typically productivity is higher. The Canadian government tendency to tax capital and income on capital reduces incentives to invest. When one reduces investment one ultimately reduces productivity.
Certainly members on the government side would like to debate the whole notion of productivity and spend a lot of time trying to define productivity in a rather esoteric or arcane intellectual argument. The government does not seem to realize that productivity is one of the greatest challenges facing Canadians in the 21st century in terms of our ability to build wealth in Canada.
There is a huge number of factors. Tax policy is very important. Social policy can play a role in terms of innovative social policy. While the government claims that innovative or forward thinking tax policy or tax reduction cannot coexist with innovative social policy, the fact is that the government is wrong on that.
One witness before the finance committee was Dr. Fraser Mustard who has done an immense amount of work on innovative social policy and on investing in young people and children, particularly in preschool, and what is known as head start programs or early intervention programs aimed at children in high risk situations. Many of these studies have been done in inner city communities where the need was greatest, but they would apply almost anywhere.
One dollar invested in preschool children in high risk situations would provide a societal benefit of about $7 by the time the child reached the age of 25. It is a very innovative social policy aimed at those first three years of early childhood development, the first three years of a child's life during which 90% of the child's cognitive adaptive skills close off.
That is the one area where we do not have any real government policy. We have a post-secondary education policy which is primarily provincial but with some federal co-operation through things like the millennium scholarship program. We have a secondary and primary education system.
We have absolutely not strategy for the area during which we can have the most significant and positive impact on the lives of our young people and on the future competitiveness of our country through augmenting our human capital for those first three years.
The government will argue that we cannot have tax reduction, tax reform and innovative social policy. That is not true. This is a government that cannot walk and chew bubble gum at the same time. The fact is that we can have both.
We spend more on health care in Canada than the U.S. government does on a per capita basis. I would argue that the U.S. health care system is very inefficient due to the lack of a single tier system, the insurance industry and the litigious nature of U.S. society. By the same token, the U.S. spends more on health care than we do in Canada on a per capita basis and has a defence budget that is mammoth on a per capita basis relative to ours.
We can actually have the type of tax reform Canadians need, the type of social policy reform Canadians need, but it will take vision, leadership, courage, a depth of knowledge of global issues which Canadians have not had since the previous government, and innovative policies like free trade, reducing or eliminating the manufacturers sales tax, and deregulation of financial services, transportation and energy.
Unfortunately it seems that Canadians will have to wait until after the government has left office before they get the meaningful broad based tax reform they need to compete and succeed in a global environment.
