[Recorded by Electronic Apparatus]
Thursday, May 16, 1996
.0933 
[English]
The Chairman: Order.
The finance committee has invited the head of the special group appointed by the Minister of Finance to look into our tax situation - Jack Mintz, a Clifford Clark visiting economist from the University of Toronto, and also John Sargent - to come before us to explain the work of this expert committee and to discuss with us possible ways of collaborating with it.
We welcome you and look forward to this collaboration, Messrs. Mintz and Sargent.
Dr. Jack Mintz (Clifford Clark Visiting Economist, Technical Committee on Business Taxation, Department of Finance): Thank you, Mr. Chair.
I have a few introductory remarks. First, I would be happy to provide a general overview of the technical committee's work, and in particular discuss the potential questions that might arise should your committee decide to proceed with a general discussion of economic and compliance costs associated with the tax system.
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Let me mention that my colleague, Mr. John Sargent, is the executive director of the technical committee. He has been working closely with me on developing the basic research material we'll be assembling for what I hope will be a useful report for public consultations. Our aim is to provide a review and make recommendations on taxes related to investment and business activity.
I'm sure some of you are wondering why the government has decided to proceed with a review of the business tax system. I think there are a number of important reasons for doing that. I would like to provide you with a review of that to give you a sense of the kind of issues we are facing as a committee in trying to deal with the tax system in Canada.
First of all, in creating the committee the government decided it would be useful to look at the revenue side of the budget. In the first two years of the mandate of this government there's been considerable work on the expenditure side of the government budget as a way of pursuing deficit reduction. Not much attention has been paid to the tax side and to the revenue structure of the government.
The government now is in a position to review the revenue structure and has formed this committee as a way of providing a preliminary assessment of the tax system with a report that will allow for consultations to help prepare the way for a general review of the revenue structure.
With the substantial progress on the deficit already achieved, and given the need to continue along that deficit track, it is not the view of the government to raise tax revenues. In fact, that's not going to be the object of our committee. Instead, we'll be looking at the structure of taxation with the idea of how we can generate more employment and economic growth with the constraint of what one might call ``approximate revenue neutrality''. We don't look to raise taxes and we don't look to reduce taxes, either.
I think that's very important. In fact, the most difficult issues in the tax system often relate to structure. If one wants to change the level of taxation, by either raising it or reducing it, it's not very difficult to do that in terms of changing rates. That's a very easy thing to do.
The Chairman: It's very difficult if you're a politician, Mr. Mintz.
Dr. Mintz: I'm sure. I've appeared before this committee before, and as you know, I can sometimes become a little flamboyant in my comments.
What I'm trying to say is that it's very easy to change levels of taxes through just changing rates. However, getting the structure right is really a much more difficult problem to deal with. That will be the focus of the committee.
Another area the committee is looking at in terms of its review of the business tax system is to deal with the most significant simplification and compliance issues taxpayers might face. There have been a lot of complaints about compliance in the tax system. People are looking for ways in which at least some attempt could be made to simplify the collection of the taxes governments undertake in Canada so that it will not be a drag on business activity.
Of course, a very important aspect of simplification and compliance costs is the interaction of federal and provincial taxes. Indeed, some of the studies that have been done in the United States, for example, where there's been far less harmonization of taxes than we find in Canada.... That's one of the major complaints of compliance costs in the United States. Those same issues arise in the Canadian context. Of course, our committee will be considering what some of those interactions between federal and provincial taxes might imply for compliance costs for businesses.
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Finally, another important issue the committee has to deal with in its review of business taxes is the impact of globalization on the influence of the tax system in Canada. When we start thinking about it, the world has become much more integrated in an economic sense in the 1990s compared to even just 10 years ago, never mind 20 years ago. An OECD study last year traced the number of financial transactions as a percentage of GDP in the OECD countries, and there has been a tremendous increase in the number of financial transactions relative to GDP that are now going across national borders. This is very much an indication of how much more global the economies have become throughout the world.
One issue the government would certainly like to think about is how the impact of globalization and international trends will affect the tax structure in Canada, and what that means in terms of the location of business activities and where profits are booked for tax purposes.
In some sense it's probably a good time to look at business taxation per se. Of all the areas of the tax system, it is probably the most complex and difficult to deal with. I remember that a student of mine once told me that anyone who teaches anything about taxes must have a warped mind in the first place to try to understand what's going on with the system. Most level-headed individuals would never get involved in trying to understand what the tax system means. Of course, that made me feel rather good as a professor of the class, but I did understand what he was trying to say. It is a very complex area, and trying to understand the principles of business taxation, I think, is absolutely critical.
The last general review of the tax system occurred before the 1987 tax reform in Canada, and there was a significant effort in Canada back in the 1960s, beginning with the Carter commission. What's interesting is that we really have not had a review of issues related to international business income flows since the Carter commission. The 1987 reform largely dealt with domestic tax issues and did not deal much with the international side of taxation. In fact, for a number of OECD countries throughout the world, it is becoming an increasing focus to try to understand what they should do with their business tax systems.
Concerning the terms of reference of the technical committee, which I'm sure you've seen before, I thought it would be useful to review the three major objectives of what we're trying to do.
The first and most important objective is to look at the tax system as a way of promoting job creation and economic growth in an open economy. This is a critical issue, as I'm sure all of us around this table feel, as the world has undergone significant restructuring. There have been major shifts of production facilities to Asian countries in particular, and as a result Canadians, as well as many citizens of other OECD countries, are concerned about their futures and about the ability to create jobs in the economy. This is very much related to the open economy issue. One has to recognize the international influences that can affect the tax structure and the business activity in Canada.
The second objective is to look at simplifying the taxation of business income to facilitate compliance by taxpayers and administration by Revenue Canada. This is a very difficult issue because the world is not simple; it's pretty complex. But one can always try to do things in a way that simplifies the tax system as much as possible.
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The third is to enhance fairness in the tax system by ensuring that all businesses share the cost of providing government services. An important thing to look at is the burden of taxes that falls on different industries and different businesses, to ensure that all firms contribute to the fiscal revenues required by the government for the expenditure system.
The mandate of the committee is actually very broad. It is looking at not only corporate income tax but also capital and payroll taxes, and also those taxes paid by individuals on income derived from investments. That's particularly the personal income tax and the treatment of dividends and capital gains. The mandate of the committee does not include the personal income tax system in a broad way. In other words, we are not looking at the structure of personal income tax rates nor at credits, allowances and all those important issues vis-à-vis the personal income tax structure. Our main focus is on income derived from investments.
In terms of constraints, I've already mentioned a few. One important constraint the committee will be dealing with is the fiscal constraint faced by the federal government. The deficit track has been on a positive trend, but the deficit issue has not been fully dealt with. Therefore one would not be looking at tax cuts in this sort of exercise. Nor are we, as I said earlier on, looking for revenue increases. We'll be very much looking at the structure of taxes vis-à-vis revenue neutrality.
The other constraint, of course, is the need to coordinate federal and provincial taxes. The income tax system is harmonized under the personal income tax with nine provinces, with Quebec collecting its own personal income tax. The corporate income tax is harmonized with seven provinces, with Quebec, Ontario and Alberta collecting their own corporate income tax.
Even in those cases where there is not harmonization, where the provinces collect their own taxes, a lot of interaction goes on in policy. When one government changes policy, it can impact on the policy of the other government. The fact is that often governments learn from each other and follow similar policies. Under corporate income tax, you'll find that even in the provinces that collect their own corporate income tax, by and large their tax base is very similar to the base under the federal and provincial harmonized corporate income tax systems.
With respect to payroll taxes, this is a base that is not harmonized but that governments share. There are both federal payroll taxes, mainly contributory taxes to the unemployment insurance program and the Canada pension plan, and also provincial taxes on payroll in several provinces, including workers' compensation.
Of course, when one government changes its tax base, one wants to know how other governments are going to react. Any recommendations to be made will have to take into account how provinces will be impacted by any changes at the federal level.
What is the approach of the technical committee? First of all, the technical committee is composed of tax experts from accounting, legal and economics professions. There is no member of the committee who is representing the interests of a particular group. One might think of this as basically a group of individuals with a deep knowledge of tax issues who, in a relatively short period of time, will be able to put together a report that will be helpful for the consultative stage following thereafter.
There's a small supporting secretariat from the Department of Finance and Revenue Canada, of which Mr. John Sargent is the executive director. However, we also draw some assistance for analytical work from both the Department of Finance and Revenue Canada. We have also engaged a number of individuals to assist us with external analytical work, which provides us with some very useful material that will later be of great assistance to the consultative process.
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We expect to report by mid-autumn, with the idea that consultations with the public will follow with the release of the report.
I'd like to give you a little bit more of a sense of some of the particular issues we're going to deal with as a committee.
The Chairman: Excuse me, Jack. Do you have a list of these issues?
Dr. Mintz: It's on the third-to-last page of the handout.
The Chairman: Thank you.
Dr. Mintz: These are areas of special interest that have been identified by the committee thus far.
The Chairman: Do you have anything more detailed than this, or is this the extent of it?
Dr. Mintz: I'll give you a bit more detail in a moment. These are areas we particularly feel there's some importance to look at, but of course a lot more detail will follow later on as the committee goes through the exercise of reviewing these areas. These are the broad areas that have been identified by the committee.
First of all, the committee will be looking at the structure of rates and tax base for both the corporate income tax and the capital tax. To give you an example of that, a number of businesses have pointed out - in fact it's not just businesses but government agencies as well as international organizations - that Canada's corporate income tax rate for non-manufacturing large corporations is still relatively high compared to international trends.
Does that matter, and to what extent does Canada get hurt by that? Tax experts will often talk about the pressures on the tax system in a country when corporate income tax rates are higher than in other countries. For example, businesses would like to take costs in those countries with high rates and try to shift income to those countries with low rates.
The trick, of course, is we want to maintain revenue neutrality. So if we do look at this particular problem with respect to high non-manufacturing corporate income tax rates and if the committee feels it is a problem that should be addressed, then the question becomes can we develop a tax structure that would result in perhaps a more even distribution of tax burdens in Canada while at the same time maintaining the health and integrity of the corporate tax system in Canada? That's an example of the kind of issue that has come up before the committee.
There's also a look at the tax treatment of inbound and outbound investment. I've emphasized enough already the importance of this issue in today's global economy. We want to get a sense as a committee about how important cross-border flows of investment are and how sensitive those cross-border flows of investment are to tax rates across countries. And of course we want to figure out, from the perspective of a country like Canada, which is heavily dependent on exports for its economic growth, the best policy for how such cross-border flows of investment, whether it's inbound investment or outbound investment, should be treated under the tax system.
A third area we will be looking at is the integration of corporate and personal income taxes and how they operate in Canada; we'll compare that to approaches used elsewhere. First of all, as you know, in Canada we have had, as a hallmark of the Canadian tax system, methods in which we have tried to integrate corporate and personal taxes. This has been done through the dividend tax credit and also the partial exclusion of capital gains.
This approach was adopted in 1972 and has continued in Canada, where it has given at least some approximate integration of corporate and personal taxes. Why do I say ``approximate''? Well, as we know, the dividend tax credit actually is set in order to integrate corporate and personal taxes on dividends for small businesses, the Canadian-controlled private corporations. That dividend tax credit is less than what the large corporate income tax rate would suggest it should be for a dividend tax credit if one had full integration.
.0955
However, we also know that at times companies might have either significant write-offs under the corporate income tax system or accumulated losses over time such that the dividend tax credit given to individuals may be more than the actual corporate income tax paid at that point in time.
Countries have used various approaches to integration throughout the world. For example, in the United States, even though it's a classical system where for public corporations there's no integration between corporate and personal taxes, the United States, similar to Canada, has found that for small firms it's important to integrate corporate and personal taxes. So they've done it through what's called the S-corporation, which is a way of redefining what a corporation is and basically taxing it as if it's owned by the individual on a personal basis.
Australia has followed a different system of integrating corporate and personal taxes, for example by ensuring that the dividend tax credit given to individuals matches the corporate income tax that's actually paid by the corporation. They actually recalculate the dividend tax credit at each point in time to match the corporate income tax that's paid by the corporation.
European systems have followed a different approach. They've put on what Britain calls the advance corporate tax and what France calls the précompté, and you'll find this in Germany, Italy and a number of countries. They impose a tax on dividend distributions that's really a minimum tax that's credible against the corporate income tax of those countries, and they set the dividend tax credit to match this distribution tax to be paid on dividends as they are paid out. That's a different approach.
If you go to Latin America, Mexico, for example, taxes all corporate profits, but then they don't tax dividends paid out to individuals unless the dividends are paid out of an account that no corporate income tax paid has been levied. Then those dividends will be subject to a 35% withholding tax, which is about equivalent to the Mexican corporate income tax rate. So again it's a very different approach to integration.
One of the fundamental questions that underlies all this - and this is an issue that the Carter royal commission addressed in great detail in the 1960s - is why do we have integration and what are the economic impacts if one did or did not have the integration system?
Another area we'll be looking at is with respect to federal-provincial interactions. Part of this will be with respect to implications for compliance in the tax system, where there have often been a number of complaints made regarding the number of taxes and the number of audits that individual firms must go through.
Another aspect is the ability to achieve objectives. All governments in Canada are interested in job creation and economic growth, and certainly, with those two objectives in mind, would like to have a tax system that facilitates the accomplishment of those two objectives.
Another area we'll be considering is how the tax system can be used to either inhibit or encourage employment. We've had experience in Canada in the past with respect to schemes such as the employment tax credit and the payroll tax holiday at the federal level, and Quebec has had a number of interesting policies with respect to job training credits.
All of these have been ways of trying to encourage the creation of jobs in the economy. Clearly those kinds of issues are important for governments today, as they are worried about the job creation issue.
Then our committee will try to look at ways one can encourage a reduction in the cost of compliance for businesses in general.
Those are the broad areas of what the technical committee will be doing.
.1000
The Minister of Finance sent a letter to this committee requesting that you conduct hearings to help identify major economic and compliance costs. I can tell you from the point of view of the members of the technical committee that if you do decide to go ahead with these hearings, it would be of tremendous help to us.
First of all, in terms of economic cost, it might be useful to be very clear in what we mean by that. Economic cost arises when taxpayers change their economic behaviour in order to reduce tax burdens rather than pursue the most economically valuable opportunities. I think we know what some of these things mean.
If you have, for example, a payroll tax system that, say, exempts casual labour, then you will have businesses that will arrange their affairs to perhaps use more casual labour than other types of labour that might mean a payroll tax. What we need to do is get a sense of which parts of the business tax system people would like to identify as those that have the greatest economic cost in terms of how the tax system operates.
We also want to get a sense of compliance costs. Compliance costs are resources that are spent on tax planning, reporting, record keeping, dealing with audits, appeals and litigation. Again, we would like to hear from various individuals identifying those areas that are most problematic in terms of compliance costs.
Should your committee decide to go ahead with these hearings, this will be very useful input into the process in which our committee will be developing its report. We would very much welcome that opportunity.
Finally, I should mention that in the letter sent to the chair with respect to these hearings, three broad questions were laid out that you may or may not want to use. Certainly they were the ones we had thought might be useful from our perspective.
First of all, we'd like to know what features of the federal and provincial taxes in Canada most affect economic and compliance costs faced by businesses, which is already a point I've made.
Second, how does the current interaction of federal and provincial taxes, both in terms of the way they administer joint collection in some cases and separate collection in others, and their structures, affect these economic and compliance costs?
Third, what aspects of the tax system affect the cost of international investment and export activity?
I can assure you our committee will very much take into account the kind of comments you might receive on these questions. They will be very helpful to our own deliberations. I as committee chair would be very happy to come back to you and report on anything you would like to hear vis-à-vis the committee's report. The best time, of course, would be when we release our report. I then would have an opportunity to discuss in detail our recommendations, which will be up for consultation after the release of the report.
Thank you.
The Chairman: Thank you very much, Jack Mintz.
[Translation]
I would now like to come back to Mr. Loubier who, for some time now, has been suggesting that our committee do a parallel analysis of the taxation system.
[English]
I take it you will not be looking at personal income taxes except under the heading of ``integration''.
Dr. Mintz: Yes. It's going to be on not just integration but specifically personal income taxes as they apply to income from investments. Part of that, of course, is integration, but it's taxation at the personal level that applies to things like dividends and capital gains - income derived from investments.
The Chairman: Okay. This excludes a look at the personal income tax system in terms of its complexity and compliance costs for the ordinary taxpayer as opposed to the corporate taxpayer. The main emphasis is on corporations.
Dr. Mintz: Yes - well, businesses broadly defined, which could include unincorporated business income.
.1005
The Chairman: Thank you very much.
[Translation]
Please proceed, Mr. Loubier.
Mr. Loubier (Saint-Hyacinthe - Bagot): Dr. Mintz, Mr. Sargent, this morning, you outlined very clearly the committee's terms of reference. I found it most interesting.
However, it proved to be a major disappointment for me, because, when the terms of reference of the committee where announced at the same time the budget was tabled, the Minister of Finance appeared to indicate that the focus would be more on analyzing the taxation system to ensure fairness. I would like to quote several excerpts from Minister Martin's news release issued at the same time as his budget. The minister stated the following:
- Canadians want a tax system that is both as fair and as simple as possible.
The minister also said something else that was interesting. He stated:
- The Technical Committee will consider ways of improving the tax system to promote job
creation and economic growth, simplifying the taxation of businesses to facilitate compliance
and administration,...
- You included this objective in your terms of reference, although the Minister also stated:
- ...and enhancing fairness to ensure that all businesses share the cost of providing government
services.
Firstly, your committee should analyze the corporate tax base. For the past 40 years or so, the tax base has been shrinking. It would be interesting for the committee and for the public in general to know why this has been happening.
Secondly, there have been two scandals recently . Firstly, the Department of Revenue agreed in 1991, under pressure from the Department of Finance, to allow the transfer of assets totalling $2 billion to the United States. The capital gains in question were not taxed. I would have liked to see the committee examine this decision and consider what steps could be taken to prevent in future - most likely this has already happened in recent years - another situation where substantial sums of money are transferred out of the country without first being taxed, even at the minimum rate.
I would like this panel of experts, in the name of tax equity and fairness, to examine the taxation of capital gains in general, the partial inclusion of capital gains, because not all capital gains are taxed in Canada, all investment tax credits for scientific research and experimental development, all tax expenditures relating to accelerated depreciation, the $500,000 capital gains exemption, and lower tax rates on manufacturing and processing profits.
With respect to tax deferral, what is referred to as accelerated depreciation, it would be interesting to see how this provision works, what impact it has on taxpayers in general and what the associated costs are.
I would like the committee to analyze all resource allowances, another area that has been criticized.
The committee should focus its attention on loss carryover, another tax expenditure, as well as on tax treaties which create opportunities for tax avoidance. This would tie in somewhat with the assessment of the tax systems for businesses and individuals, but you would be approaching these issues from a different angle.
It would also be a good idea to update the list of tax expenditures produced by the Department of Finance, because no such update has yet been done.
The Auditor General spoke of the use of an anti-avoidance clause by the Minister of Finance. It would be interesting to see how the Minister of Finance could use these anti-avoidance clauses more often to prevent situations such as we witnessed in 1991 with the transfer of family trusts. According to the analysis conducted by the Department of Revenue in 1991, approximately $60 billion in capital was transferred to various locations around the world without anyone's knowledge.
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You're right, Mr. Chairman. We have been making the same request for two and half years. When he tabled his budget, the Minister of Finance told us: ``We are meeting your demands. Are you satisfied now?'' My concern was for greater equity. I would like someone to explain to the public the structure of the Canadian taxation system. For example, how is it that businesses, which have a posted tax rate of approximately 30% or 35%, manage to enjoy a real rate, after taking advantage of the various tax expenditures, which is often nearer to 0%? The public wants to know these things.
As you stated earlier, the first thing your panel of experts must do is educate the public about tax expenditures, explain to them how they work and the associated cost to the federal government and therefore to all taxpayers, all the while suggesting ways of simplifying the tax system by making it fairer. I don't know if your committee can do these things, but these are the terms of reference I would like it to have.
[English]
The Chairman: Mr. Mintz.
Dr. Mintz: First of all, I apologize for perhaps conveying the impression that we're not looking at fairness. Let me reiterate that fairness is definitely part of what we're going to be doing. That's why I mentioned in my presentation the importance of looking at tax burdens across different industries and firms, and of asking the question of whether that current distribution is appropriate or whether one should try to make things fairer in terms of the business tax load on various types of firms and businesses in the country.
Let me go to another issue of fairness that I think is very important. When we think of fairness it's usually fairness in terms of individuals, because individuals are a primary focus in any country. It's individuals who work for businesses. It's individuals who can own businesses. It's individuals who buy goods and services from businesses.
This raises the whole question of the role of a business tax in a country as part of the whole tax structure that countries use to try to tax ultimately individuals in society. Of course, in terms of fairness one wants to make sure that individuals in general bear an amount of tax that recognizes that individuals in similar circumstances should pay the same amount of tax, what economists like to call horizontal equity. One also wants to ensure that those who are better off will pay more tax than those who are worse off, a notion that economists like to call vertical equity.
The business tax that we're looking at is really only one part of the whole tax structure. So clearly we cannot look at the whole issue of fairness, which to a large extent is part of how the whole tax system operates, not just one part of the tax system, the business tax system.
In terms of business taxes, when one talks about fairness one is very concerned about the issue of horizontal equity. People derive income from businesses or they might buy goods and services from businesses, and if businesses bear the same amount of tax and the tax burden is fairly distributed across businesses, then all individuals, whether they're buying goods and services from businesses, working for businesses or owning businesses, will also bear a similar amount of tax on that kind of income. It's up to the progressivity of the rate structure under personal income tax to determine how those vertical equity concerns can be best achieved in society. That has been the approach that many countries use in their tax system.
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So fairness is definitely part of our mandate. We will be looking at it. We'll be doing the kinds of studies you're suggesting. In fact, we will be undertaking the kind of work you will be very interested in, such as the analysis of the tax base and the amount of tax paid by corporations, how that has changed historically, why it has changed historically, and what it means today in terms of the economy and the objectives we set out, which include fairness as well as simplification and job creation measures.
I've listed all the items that you've mentioned. They are very important questions and I'm not going to try to answer every one of them. But I will say that a lot of these are on the table. They are all part of the mandate of this committee.
The one issue you did mention that I want to flag is with respect to the Auditor General's report and the issue of Canadian taxable property. I believe that the Deputy Minister of Finance is speaking to the public accounts committee this morning on that issue -
The Chairman: He'll be appearing before us next Tuesday.
Dr. Mintz: - and I understand he'll be appearing here at this committee. So you'll have an opportunity to go into the details of this particular issue, which is a fairly complicated issue and one I wouldn't want to spend time going through right now.
[Translation]
Mr. Loubier: I want your assurances that as you carry out your analysis, fairness will be an important issue for you, fairness in terms of the federal taxes paid by certain businesses versus other businesses and those paid by businesses versus individuals.
Will you be critically evaluating each tax expenditure and recommending ways of simplifying taxation or imposing a minimum corporate tax?
[English]
Dr. Mintz: We will certainly be looking at all those issues with respect to fairness because that's really part of the mandate of this committee. I can't add anything more but to say that we do look at them.
One of the important questions, and this is why I made the comment earlier, is understanding what we mean by fairness and how the tax system can accomplish fairness. I hope our committee report will provide a good discussion of that issue, one that will give an opportunity later for people to discuss that specific issue.
[Translation]
Mr. Loubier: Would it be possible for one of the witnesses or for a member of your group to come back again before the Standing Committee on Finance at the mid point in your work to give us a status report, as most working groups do?
[English]
Dr. Mintz: I'm not quite sure of the appropriate date. As our work continues and we can provide even more background material than we can at this point, we would certainly be happy to come back to the committee. When the report is completed - and you can imagine that the recommendations will only come towards the end when you write the report - I'd be very happy to discuss the details of those recommendations and why we made them. We'd welcome any opportunity that would help you in your deliberations.
[Translation]
Mr. Loubier: Perhaps toward the end of June? What about July?
Mr. Campbell (St. Paul's): During the summer?
Mr. Loubier: In July perhaps?
[English]
An hon. member: By the end of June?
Dr. Mintz: Perhaps.
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[Translation]
Mr. Loubier: Kindly take note of this, Mr. Chairman. We will recall the group of experts at the midpoint in the work and ask them to update us on their progress.
The Chairman: The decision will be up to us. We have already worked with them and they to have made some requests of us.
Mr. Benoit.
[English]
Mr. Benoit (Vegreville): Thank you, Mr. Chairman.
Welcome, Mr. Mintz and Mr. Sargent. I guess I'll start by just making a comment that in the past I've never seen a review done by government that doesn't lead to more taxation. So I'm a little skeptical in regard to the statement you made, that the idea isn't to collect more tax.
You said the idea is to come out with ``approximate'' revenue neutrality. What is approximate? Is that within $1 billion, $10 billion, a year? What is approximate revenue neutrality?
Dr. Mintz: I think ``approximate'' means you're pretty close to revenue neutrality.
Mr. Benoit: What - $10 billion a year, $1 billion a year?
Dr. Mintz: Given the amount of business taxes collected, at least under corporate income tax at the federal level, we're talking around $13 billion. About five years ago I used to say $5 billion; now it's $13 billion.
In terms of the $13 billion under corporate income tax, there are, of course, payroll taxes and capital taxes, which generate another billion. So certainly there's a certain amount of taxes raised on businesses at the corporate level. For unincorporated businesses there are more taxes levied under personal income tax, including the taxation of capital gains and dividends.
With respect to why we say approximate revenue neutrality, I think it's to give us a little leeway. We're only looking at one part of the structure of the tax system. It may be important to keep in mind how that part of the tax system interacts with other parts of the tax system. In order to talk about revenue neutrality, one has to remember that you might try to keep revenue neutrality within the business tax structure, but because of the kind of changes you do, you might actually impact on some of the other taxes being levied. So that's one of the reasons why we use the approximate revenue neutrality term.
Mr. Benoit: You understand why I might be a little bit skeptical. The last tax review brought us the GST. It was supposed to be absolutely revenue neutral, and of course it raised tax from roughly $10 billion a year to $17 billion, from one year to the next.
Dr. Mintz: I don't think that's quite correct.
Mr. Benoit: That's about right. The last full year the MST was in place, about $10 billion was raised. The first year of the GST it was $17.5 billion. It dropped after that. So I get a little concerned when I see ``approximate'' when that was supposed to be ``absolute''.
The Chairman: I can't stand this Tory-bashing.
Mr. Benoit: Well, don't worry about it, it can soon turn to Liberal-bashing.
You answered part of the next question when you said you are looking at the issue of non-compliance and resistance to paying tax. That's of course a great concern under this GST harmonization scheme, that you all have a double-digit tax rate. In other countries it's been shown there is public resistance to paying tax once you get into that double-digit level. There 's going to be a lot more of an underground economy created because of that.
What is your mandate in regard to looking at that?
Dr. Mintz: Sales taxation, specifically?
Mr. Benoit: You wouldn't be getting into that - or I guess you probably would get into the GST harmonization.
Dr. Mintz: No.
Mr. Benoit: Not at all?
Dr. Mintz: That's on a different track in the sense that negotiations are continuing between the federal and provincial governments.
Mr. Benoit: So that's going to be completely left out of this.
Dr. Mintz: Yes.
Your question was dealing with something that had to do with tax avoidance and resistance to taxes when rates become high. Certainly the rate structure is important. When you're carrying out a revenue neutrality exercise, of course, one's not looking at huge reductions in rates for all levels of taxes. We'll certainly have difficulty trying to meet a revenue neutral constraint in that way.
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However, that does not mean one doesn't look at the structure of rates. Where those tax rates are particularly high, if they are determined to result in significant economic issues and problems for the government, and for the Canadian tax system in general, then we might try to see how the distribution of taxes could be changed in such a way that those tax burdens that are particularly high in some areas can be alleviated by increasing tax burdens in other areas.
That's why I made that comment about the corporate income tax rate as an example of the kind of rate issue one gets into because non-manufacturing tax rates by international standards are relatively high. It particularly affects those sectors of the economy one might now start thinking of as the new economy, the service sector, etc.
Mr. Benoit: You made a statement in there that I think is debatable. You said you can't have an overall reduction in tax rate and still maintain revenue neutrality. Well, an awful lot of economists think in fact you can lower tax rates substantially and have an increase in revenue due to growth or stimulation of the economy. So that is a debatable point.
Are you going to be looking at that in any way?
The Chairman: What we hope to recommend is that we will reduce the tax rates to zero, which will give us infinite revenue.
Mr. Benoit: That's typical Liberal thinking.
Dr. Mintz: I'm not going to get into a debate about whether -
Mr. Benoit: But are you looking at that at all, the possible effect of a reduction in business tax overall and how that could actually stimulate the economy and lead to increased revenue overall, even though tax has been reduced? Are you looking at that?
Dr. Mintz: When talking about revenue neutrality, one of the questions one gets into is the fact that when you do change tax rates and tax structures you will cause behavioural effects in the economy, where tax revenues will be affected in general. Therefore, in doing the kind of estimates one wants to look at, I think we will want to consider those behavioural effects.
Whether the behavioural effects are such that if you say, cut rates by a certain proportion and you get so much economic activity coming back that revenues stay the same.... Let me put it this way...and I'm giving you my professional view as an academic now, as opposed to the chair of the committee. The debate on that in economics literature tends to be, I'm afraid, a little more one-sided than what you're indicating. You'll find that most economists will argue that cutting rates can generate more tax revenue but you don't make up for the full effect.
Mr. Benoit: Reality has shown it could be quite different in some situations.
Just pursuing this idea, in the past the tax system has been used to encourage development in certain industries, for example the film industry and MURBs. It's been used in the past through different accelerated capital cost allowance rates, that type of thing. Are you going to be looking at the possibility of using this type of thing to, again, encourage employment? I notice you're looking here at trying to stimulate employment.
Dr. Mintz: We are going to evaluate whether or not these kinds of measures work. I think that's the question, or whether there are other ways of doing it that might achieve the same impact. That's a kind of general question we'll be dealing with.
We have no idea at this point whether or not we would want to recommend specific schemes. Those are things we will look at. We're going to look at the history of some of these changes that not only have we had in Canada but also various schemes that have been tried in the rest of the world, to try to determine whether or not those kinds of programs actually work.
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Mr. Benoit: So it is within the terms of reference given to you to look at the possibility of using tax credits to stimulate employment in particular provinces, in particular high employment areas, for example, or in particular industries.
Dr. Mintz: I'm not sure whether it would be in particular industries and particular provinces, or whether it would be a general credit that one would want to look at, or whether one would not want anything like that, or whether one would prefer looking at how the change in the mix of taxes and the structure of the tax system can accomplish the same effect.
Mr. Benoit: But you must have been given some guidelines, some terms of reference, on what different possibilities you're looking at.
Dr. Mintz: Oh, yes. I'm saying that we're looking at a whole range of things to see which ones work most effectively and with the least economic and compliance costs faced by taxpayers.
Mr. Benoit: Most effectively looking at the country as a whole or looking at, say, a particular part of the country, for example a high unemployment area like Atlantic Canada...?
Dr. Mintz: At this point we have not gotten into that kind of detail. We have been looking at the general areas. How one wants to condition various credits and other things becomes an issue you look at down the road, once you decide whether or not you want to move in that direction.
Mr. Benoit: So you are really at the very beginning on this.
Dr. Mintz: Right.
Mr. Benoit: Are you going to look at some different flat-tax systems?
Dr. Mintz: That's an important question, certainly one that has been widely discussed in the media. First of all, you have to remember that the mandate of this committee is with respect to business taxation. It does not deal with the overall tax system, which would include personal income tax, the major revenue generator.
Mr. Benoit: But you did say you're looking at the interaction between business and personal tax.
Dr. Mintz: Right, but you have to remember what a tax flat is. Sometimes it's not even clear what a flat tax is when you read all the proposals.
Mr. Benoit: There are different models, yes.
Dr. Mintz: Generally the proposals are to have a single rate of tax that would apply to individuals and businesses, so one is looking at the whole tax structure and not just a part of it.
Mr. Benoit: So you're not looking at the interaction between the two to that extent.
Dr. Mintz: Let me just finish. I'm trying to say that this is one part of the flat tax.
Another part of the flat tax is the deductions and credits allowed under the personal income tax and also under the corporate or business tax system. Clearly, we'll be dealing with the business tax system.
The third aspect of flat-tax proposals is whether you want to have an annual income tax, or whether you want to model the base on what's called an expenditure tax or some equivalent variation of the expenditure tax treatment. For now, I would not want to go into all the details about that.
Clearly, from the business tax structure, looking at flat taxes is one set of proposals we could consider.
Mr. Benoit: Okay. I'm not sure whether that's a yes or a no, whether you are really looking at it. I didn't seem to get an answer.
Dr. Mintz: We're looking at flat taxes but vis-à-vis the business tax structure.
Mr. Benoit: You talked about horizontal equity and vertical equity. When it comes to vertical equity, how you define it depends on a political or philosophic view of things. A socialist will define vertical equity completely differently than a capitalist will. I want to know what your political or philosophic bent is. Are you one of these raving socialists like we have over here, or do you lean more towards the capitalist...? It's important to know if you're looking at that aspect.
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Dr. Mintz: My publications are always open for you to read and you can see exactly the views I have on tax policy.
When I speak of horizontal and vertical equity, it reflects my academic background. These are very common terms used in public finance literature, and I think if you open any textbook on public finance you'll find reference to horizontal and vertical equity. Whether these are written by experts such as Tony Atkinson in Britain, who is a supporter of the Labour Party, which gives you an idea of his bent, or by David Bradford, who has worked quite closely with the Republican Party in the United States, you will find that both use the terms ``vertical equity'' and ``horizontal equity''. Those are really meant to talk about a particular way of viewing fairness in the system.
Mr. Benoit: They use the terms, but they look at it much differently one from the other.
Dr. Mintz: I think that's a fascinating thing in itself. You'll find that even people like Nicholas Kaldor, who was a strong Labour Party supporter and was really the father of the expenditure tax system.... Today's flat-tax proposals that are being discussed in the United States and Canada, such as the Hall-Rabushka plan in the United States, really came from Nicholas Kaldor.
The Chairman: Thanks, Mr. Benoit. Mr. Campbell, please.
Mr. Campbell: On Mr. Benoit's musings about lower taxes and higher revenue, I always think about economists as trying to prove that what works in reality works in theory. The odd thing about this theory of lowering taxes leading to higher revenue is that the most notorious example of it in reality didn't work. That, of course, was under President Reagan in the United States.
The second comment is with respect to GST and his questioning of whether you're going to look at that. I would hasten to add that with respect to business and the underground economy, which is what he was referring to, the theory goes that a harmonized system with input tax credits should clean up some of the underground business. There's an incentive for business now to be in the system to get input tax credits.
Coming specifically to what you're here to talk to us about this morning, I very much welcome this initiative. It's something the members of the committee have talked about on numerous occasions, and we're all very pleased that the minister has taken this initiative in the last budget and that you've come here to request our assistance.
Most of my questions were asked already by Mr. Loubier, and I'm satisfied with your answers.
As a member of this committee, I welcome the collaboration you've asked for and the complementary activity you've asked us to engage in. I wonder, Mr. Chairman, if we can ask Mr. Mintz and Mr. Sargent to provide us with a list of suggested witnesses we might hear from on the issue of compliance cost and the other aspects of it that he asked us to look at. No doubt you have a pretty good idea, and people may well have contacted you already. We tend to invite the usual suspects, as they say. I don't know how we'll go about generating witnesses for this part of our work, but I think we'd appreciate, as a starting point, hearing from Mr. Sargent and Mr. Mintz their ideas of people to hear from.
I want to ensure, Mr. Chairman, that we hear from individual Canadians and small business people in particular, to speak to some of these issues as well. But it cuts across. It affects all types of businesses, small and large, and individuals with respect to their investments and involvement in business. So if they could give us that help, I know we're eager to get going.
The Chairman: That's a good idea, Mr. Campbell. Thank you.
Mr. Campbell: I'm hoping Mr. Mintz and Mr. Sargent will agree.
The last thing I want to say on behalf of the government is that it's quite true, as Mr. Mintz indicates, that this committee has been invited by the minister to look at the issue of taxable Canadian property and questions of policy flowing from what the Auditor General had to say about that matter. We look forward to the committee's deliberations on that matter.
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I note that the matter is before the public accounts committee, primarily with respect to process. Policy will be looked at in this committee, according to the mandate the minister has given us.
Thank you, Mr. Chair.
The Chairman: Thanks, Mr. Campbell.
Mr. Campbell: Do we want to give Mr. Mintz and Mr. Sargent a chance to say yes, they will help us with a suggestion for appropriate witnesses?
Dr. Mintz: Just on the invitation list we'll be -
The Chairman: You can help us.
Dr. Mintz: We'll provide any assistance you would like to have.
The Chairman: Thanks.
Ms Brushett.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.
I too would like to acknowledge my gratitude and that of the minister to your committee that you're proceeding very forthrightly to look at these areas.
Your parameters are very interesting - the effect of business in the realm of taxation on our economy and jobs, which comes down to the individual. Is this the first time you've looked that broadly at the tight interlink between taxation and what it really does in the economy's job creation, or has this been done in previous reviews of taxation matters?
Dr. Mintz: That's a very interesting question, actually, from the following perspective. Generally past studies on the tax system, whether they've been done in Canada or in other countries, have focused on very broad issues, such as how taxes affect the allocation of resources in society - which economists like to call economic efficiency - and simplification and fairness. Certainly when you look at the objectives, they're somewhat consistent with the usual way people look at tax policy in general.
However, the particular stress in job creation is really a fascinating part of what we're doing, which in some ways is different from the usual tax study that's undertaken. In particular, trying to understand how taxes affect the demand for labour is an area that is really largely neglected right now in analytical work that's going on throughout the world.
Recently an OECD job study was done, and it very much reflected the state of economic knowledge about these issues. There was excellent, detailed work on how taxes affect the supply of labour - in other words, actual work effort by individuals. When looking at how firms hire labour, some good work was cited with respect to aggregate employment effects of payroll taxes and those kinds of issues.
But as to how the tax system actually impacts on things like the choice between part-time and full-time labour, contractual versus employee-type relationships and those sorts of things, the state of economic knowledge across the world is really very limited in this area. Certainly it's an area that does deserve some attention.
Hopefully in the short time available to us we will provide at least some interesting analysis that might be very useful for the public to look at and debate. Whether we'll be able to go much further beyond the current state of economic knowledge I can't judge yet, because the work is just being undertaken now and one doesn't know how successful it will be, but it's a very important area and one that government should be addressing.
Mrs. Brushett: I suspect your outcome will be very successful in the sense that so many dimensions and potential models might be redeveloped, because so many of the old models just aren't applicable in the new global economy. I suspect you will have this out-spin.
As the hon. member from the Reform has indicated, you are looking at flat tax, at underground economies and things, but probably a lot of your work on taxation of business and treatment of business will come down to the individual treatment of some of these areas. That would be useful information in the future.
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You've indicated here that you'll be looking at the tax treatment of investment inbound and outbound. I read something recently that indicated - and I don't know whether it's factual or not - that one in five manufacturing firms that export probably are missed in the treatment of taxation in this country. If that is accurate, would this somehow be picked up in terms of manufacturing, where you refer only to investment flowing in and out of the country?
Dr. Mintz: I'm sorry, what was that result again?
Mrs. Brushett: One in five manufacturing exporting firms in Canada - perhaps not only manufacturing, but also distributing, etc., but exporting firms - miss the taxation system.
The Chairman: They pay no tax.
Mrs. Brushett: Yes, they get missed. They get through the system. In the sense of fairness, again, we're losing one in five from paying taxes in this country. But that's in the exporting business rather than in investment. I'm wondering if this falls into any of your categories.
Dr. Mintz: I'm not exactly sure if you're thinking that these are exporting firms not paying corporate income taxes temporarily or whatever.
Mrs. Brushett: This is what the article would have suggested.
Dr. Mintz: Right.
How much tax corporations actually pay is not a new question. It's actually a pretty old question. Considerable work has been done in Canada on that issue over the past ten years, largely as a result of the tax reform exercise of 1987.
In fact prior to 1987 there was a huge build-up of tax losses, where companies that were profitable were having tax losses. One of the reasons for that - and there were a number of reasons, and I'll talk about them in a second - was the structure of the corporate income tax system at that time. A large number of write-offs were given, and firms were given those fast write-offs for things such as accelerated depreciation, investment tax credits and other things that put them in the position of not paying taxes, at least for a temporary period of time.
As a result of the 1987 reform there was a widening of the tax base by eliminating a large number of preferences, and that of course has had some impact on the build-up of losses.
But why firms aren't paying taxes actually has to do with the way the tax structure operates right now under the corporate income tax. The corporate income tax basically operates in the following way. If you earn taxable income, you pay tax on it, and that will be determined by the rate of tax that's applied. However, if your taxable income is negative, in other words a loss, the government is not there to give a refund at that point in time. It doesn't send a cheque back to the company and say ``Here's our share of the loss, which is the tax rate times the loss''.
Instead the government says you can carry back your losses up to three years and charge those losses against past taxable income, and therefore, in a sense, get a credit at that point, or you can carry them forward up to seven years. Indeed, Canada also allows that companies don't have to take all their deductions at a certain point in time if they don't wish to. We have a discretionary deduction system for certain things, such as exploration and development and capital cost allowances. So there are ways that companies can, in a sense, try to ensure that any temporary losses they have now can be used in the future in a more effective way.
As a result, you can get a build-up of losses really for two reasons. One reason is the fast write-offs that were once under the system prior to 1987, and a few still remain. Or, more importantly these days, you can also have losses due to just bad economic times. We went through a difficult recession in the early 1990s. As a result, losses have built up again. So many companies today who are, let's say, not paying taxes are not paying taxes in part because the losses that were built up back in the early 1990s are now being used up today and charged against profits, and therefore they're not paying taxes.
So one has to be very careful, in looking at these kinds of questions, to understand how the system actually operates.
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The Chairman: Thank you, Mrs. Brushett.
We have less than ten minutes now, Mr. Pillitteri.
Mr. Pillitteri (Niagara Falls): Thank you very much, Mr. Chairman.
Actually, I really welcome the tax system in place right now. Some of us possibly would not have been able to survive if those avenues hadn't been in place.
Let me ask you my question about flat tax and revenue neutrality. I hope this does not in any way imply the same thing as in some parts of Ontario, where we have a market value assessment in which you don't know who is receiving or who is giving, in the end, or which way you end up being in a corporate tax later on. I hope this won't have that much distortion.
I'd like to know if you've been looking into something. Since our largest trading partner is the United States - they account for over 37% of our total exports - will you be giving any emphasis as to how their tax system works and whether it would be more competitive in the corporate tax system wherein we would have some kind of an advantage, possibly, over our largest trading partner - if that's possible? Will you look at their taxes in order that we would be more competitive?
Dr. Mintz: That's partly related to the inbound investment issue, but it's also related to exports. We have to remember that when businesses export, there's a cost to doing business. The cost to doing business includes all sorts of factors, including the wages paid to workers, the cost of capital, such as interest rates, which is also important, and the tax system.
The competitiveness of the Canadian economy actually has increased significantly over the past ten years, or five years, particularly, largely as a result of the number of policy initiatives by governments - getting down our rate of inflation and dealing with our deficits, which leads to lower interest rates and as a result helps make businesses more competitive.
As well, even the changes in the way in which we do economic relations abroad, including the kind of agreements we've had, such as NAFTA and those types of things, help keep doors open for Canadian exports. As a result, Canada has actually done relatively well.
The tax system, of course, is also an important dimension, and as part of our assessment we're going to be looking at how competitive our tax rates are with respect to businesses relative to the rest of the world.
The Chairman: Thanks, Mr. Pillitteri.
Monsieur Pomerleau.
[Translation]
Mr. Pomerleau (Anjou - Rivière-des-Prairies): I have one brief comment and two questions, before we conclude. First of all, I have to say that I am extremely disappointed with the committee of experts; not with the technical ability of the committee members, but rather with the committee's terms of reference. I am disappointed with the way the committee works and with its make-up in general.
To my mind, one of the basic problems in Canada today is widespread tax evasion. Three or four years ago, the Auditor General commented on tax havens. Today, the talk is about family trusts. Both the Globe and Mail and the Financial Post quote Mr. Bronfman:
[English]
- Ottawa estimates that one out of five international transactions is not reported to Revenue
Canada. Banks may be among the worst offenders.
There talking about our taxation system.
You say that your mandate is not to increase net revenues. In other words, that is not an area that you will be examining. The public was expecting a serious analysis of the tax evasion problem to be carried out, but that is not what you're going to do. You have another objective in mind.
I am very disappointed, firstly with your committee's terms of reference. I am equally disappointed with your committee's credibility. I don't know where your committee is going to get its credibility. It will be composed of persons who are the biggest users of tax havens, of persons who teach others how to avoid paying tax. You're going to get together in a small apartment and look over everything together. There won't even be an elected representative on hand to monitor your activities. I am deeply disappointed and I wonder how you are going to establish any credibility with the public. That is my first question.
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[English]
Dr. Mintz: I'm sure you don't want to question the integrity of individual members on the committee, and I appreciate your comments. The individual members, and I know each of them very well, have quite different backgrounds. They're not all lawyers or accountants. Three of them are economists, including me, and are academics. Academics tend to look at the world in very broad terms.
So I do appreciate your comments, but I think we have to remember that there's a very important process involved here once the report is written, and that's the consultative stage. Sometimes it's very useful in an area like tax, which is so technical, to get a group of individuals who can provide an assessment, which you might think of as a preliminary assessment, which really is a report to be given to the minister and to the government, for public consultation at a later time. It will provide a kind of useful dialogue on the issues.
I've had experience sitting in groups where there have been representative interest groups. It's a very different process. It's a process that takes a lot of time and effort, but one that in my view probably would not lead to a much different outcome than this particular process. In the end, you have to rely on a group of experts to provide some analysis and assessment to help individuals look at the broad questions to be debated.
As far as tax avoidance goes, I hope we won't disappoint you in our report, but I certainly don't want to convey the view that issues affecting tax avoidance will not be looked at by our committee. When one deals with the tax system, one has to think about how the tax structure encourages or discourages tax avoidance, and what the best ways are of making sure the system is fair. Our committee will not be ignoring that question.
The Chairman: Thanks.
[Translation]
Mr. Pomerleau: I have one brief comment in closing.
The Chairman: Very brief, please.
Mr. Pomerleau: I'm not calling into question the personal credibility of any one member of the committee. However, I would like to point out that as long as this analysis is conducted by a small committee, without any elected representatives on hand, there will be an apparent conflict of interest because those who will be doing the analysis are already the ones who either resort to or promote tax evasion.
You say that this is a highly complex issues. That is always the reason given to the members of the public, namely that the issue is complex and that they won't understand anything. Taxation is a government's biggest concern. When people fail to take responsibility for taxation, there are always others willing to step in. I think that we have people who would be quite willing to examine the issue and understand what is going on.
Secondly, I want some assurances that as far as the public consultation process is concerned, it will indeed be the Standing Committee on Finance that will organize...
The Chairman: We'll see.
Mr. Loubier: That won't do, Mr. Chairman. The Minister of Finance assured us that the Standing Committee on Finance would oversee the consultation process. That's a far cry from ``we'll see''.
The Chairman: I'm sorry, Mr. Loubier, but that decision is up to the committee. It is neither the minister's nor yours to make.
Mr. Loubier: The minister assured us that the consultation process would be handled by the Standing Committee on Finance, and if that isn't the case, then we will have a major problem on our hands.
The Chairman: I'm sorry, but the decision is up to us and to the steering committee. We'll see.
[English]
Mr. Campbell.
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Mr. Campbell: With respect to Mr. Pomerleau's comments, I'm glad Mr. Mintz answered as he did. The avoidance issue is one we're all concerned about.
I'm concerned to know the behaviour that leads to avoidance. That's what you're going to get at through this study - whether our system promotes people leaving the system or creates a system whereby people want to be in Canada as taxpayers. People make decisions based on their understanding of relative advantages of Canada as a place to do business rather than somewhere else.
That brings me to my second point -
The Chairman: Mr. Campbell, I'm sorry, but we have now run out of time, and another committee is coming in.
Mr. Campbell: Oh, okay.
The Chairman: Could we talk to you in the hall? I have three questions I'd like to ask you, too. I apologize.
Mr. Loubier, we will discuss outside at steering committee exactly what you want to do for hearings, and then the committee will have to make its own motion as to what we do.
Thank you very much, Mr. Mintz and Mr. Sargent. We look forward to working with you.
This meeting is adjourned.