FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, May 15, 2000

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon.

This afternoon, as everyone knows, the order of the day is Bill C-32, An Act to implement certain provisions of the budget tabled in Parliament on February 28, 2000. We have representatives from two organizations: from the Fraser Institute, Mr. Jason Clemens, director of fiscal and non-profit studies; and from REAL Women of Canada, Diane Watts, researcher.

Welcome. As you probably know, you have five to ten minutes to make your introductory remarks, and thereafter we'll engage in questions and answers.

We'll begin with the Fraser Institute.

Mr. Clemens, welcome.

Mr. Jason Clemens (Director, Fiscal and Non-Profit Studies, Fraser Institute): Thank you. I'll open by thanking the committee for this opportunity to address you on the recent budget.

Just as a background, I would apologize for the quickness of our summation, but it was done over the course of only a couple of days. What we tried to do was expand on the budget backgrounder and the budget response we had put out.

When we analysed the budget we analysed it in the context of what economic challenges are facing the country right now. In our particular view, there are three economic challenges facing the country. The first is stagnating incomes, whether or not you're measuring it as GDP per capita or disposable income per capita. The second is productivity problems, with regard to how well we are gaining in productivity levels relative to our competitors, in particular the United States. Lastly, there's the brain drain.

The comments we have and the analysis we did on the budget are really drawn from our concerns in those three areas—the brain drain, income levels, and productivity levels.

Now, in terms of the budget the first thing I would do is congratulate the government on several areas. One is indexation. I think most analysts were surprised. I think it's an important move. I would overwhelmingly congratulate the government. In terms of economic efficiency and fairness, it was the right move.

I would like to see that extended to the Canada pension plan. I have concerns about the fact that the largest source of savings in the Canada pension plan is in fact the freezing of the exemption. In 1997 we de-indexed the Canada pension plan, which I think was an inappropriate move, but I would congratulate the government on re-indexing the personal income tax system.

Additionally, I think the tone of the tax reductions—in particular, the corporate tax reductions, the elimination of the deficit reduction tax, and the reduction on the middle income, both changing the thresholds and indeed changing the rates—is a welcome move, and it sends a strong signal. I would congratulate the government on at least indicating that we're moving on the right path.

That said, I think there is a major concern... I would echo the comments of Bill Robson of the C.D. Howe Institute, who did a five-year view of the budget process. Our particular view in the summation is a three-year focus. One of the concerns is the back-end funding—that is, at the end of fiscal years, spending basically all of the unbudgeted revenue and the savings and interests costs.

One of the things we did look at when we did the summation was the fact that the tax cuts for middle-income earners could have been fully implemented three years ago had the budget surplus been used for tax cuts as opposed to spending initiatives.

So although the tone of the budget is definitely one emphasizing tax reduction and talking about the need for tax reduction, in fact the history of the last three budgets, from 1997-98 to current, is that at the end of the year, when there are fiscal resources available for tax cuts, they have been used by and large for spending initiatives. I would note that in 1997-98 a portion of that, about 56%, was used for debt reduction, which we would support.

In terms of where we should be going or the basis of our criticism, again, based on the economic problems we see, our view and our focus is on tax cuts. In our view, tax cuts are the one way to deal with all three economic challenges facing the country. Although we think debt reduction is important, and I would emphasize debt reduction in that it needs to become a more important public policy priority, I would say that it doesn't immediately tackle those three issues, while tax cuts do.

I therefore would echo the comments of a number of groups on the need to accelerate the reduction in corporate income tax, echoing in particular Jack Mintz of C.D. Howe as well as others who have commented on accelerating the reduction in personal income taxes.

I am heartened, though, to say the least, that Mr. Martin was I think quite clear and his government was quite clear that additional revenue sources will be used for tax reduction—or at least that was the indication. Again, though, to echo Mr. Robson's comments, over the last three years what we have seen is increased spending at the end of the year as opposed to implementing greater tax reduction.

I've quickly listed a number of policy priorities that we would say should be placed front and centre in terms of the tax issue with regard to taxes that we need to reduce, restructure, or eliminate altogether.

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Additionally, with the final two moments, I would say that Canada is in a unique position, I think, to reform the tax system. By that I mean moving toward what professors Hall and Rabushka have done in the United States, and Stein has commented on, in terms of a broad-based comprehensive flat tax.

I'm not talking specifically about a single-rate tax, which has been implemented in Alberta, but rather a true flat tax that is comprehensive of all types of incomes.

Now, I think Alberta has indicated a path along which you can move in terms of an incremental approach to broad-based flat tax reform, but given Canada's fiscal position, I think we are now in a position to really look at and investigate reforming the way we raise revenues, in particular looking at raising revenues necessary to finance programs.

Just quickly, one of the things in particular that I find in British Columbia at the provincial level is that we tend to talk about things backwards. We tend to talk about how much tax revenue we will have and then how we spend it as opposed to what are the programs and services that we need the government—federal, municipal, or provincial—to provide, and then how do we best raise that revenue in the least distortionary manner.

I think most economists would agree that the Hall-Rabushka reform platform is the cleanest tax reform proposal in terms of efficiencies and in terms of achieving the goals of tax generation, such as vertical equity, horizontal equity, simplicity, neutrality, etc.

With that, I would welcome any questions. Again, I thank you for the opportunity to address you today.

The Chair: Thank you very much, Mr. Clemens.

We will now hear from Ms. Watts.

Welcome.

Ms. Diane Watts (Researcher, REAL Women of Canada): Thank you very much for inviting us to give our views before this committee today.

REAL Women of Canada is a non-partisan organization of independent women, incorporated in the fall of 1983. We come from all walks of life, occupations, and social and economic backgrounds. Some members are employed full time outside the home, some are employed in the home, some both. We represent a broad spectrum of Canadian women who, until our formation, really had no public forum in which to express their views.

One of our organization's objectives is to reaffirm that the family is society's most important unit since the nurturing of its members is best accomplished in the family unit; to promote equality, advancement, and well-being of women, recognizing them as interdependent members of society whether in the family, workplace, or community; and to support government and social policies to make homemaking possible for women who out of necessity would otherwise have to take employment outside the home. So we want greater choice for women to put their family first and to take care of them.

We have made presentations before on the budget, and our particular focus is the family. Since the advent of the charter, there has been an unfortunate distortion of the term “equality”. There has been an effort to impose a system whereby men and women within the family unit, according to the government, should be equal in their earning capacity. So the optimal is for the family that makes that choice. The family that does not make that choice—for example, a family that chooses a one-earner system—is punished for making that choice.

This is often linked to UN conventions, such as the Convention on the Elimination of All Forms of Discrimination against Women, and the charter's section 15. We have noted that this is a false notion of equality—you have a copy of our brief—and that families are suffering as a result of this.

As concerns Bill C-32, I'll just go through our brief with you. We support the proposal to amend the Employment Insurance Act to increase the number of weeks of parental leave to 35 weeks. We support the proposal to increase combined maternity and parental leave benefits to 50 weeks. We value the time that parents spend with the child, since we value the family, and we view this as the best in terms of early childhood development.

We value the home in relation to children, and we don't necessarily view professional substitute care of children as superior to the family, as one would expect from the people who support what they call “early childhood development” but what is in fact substitute day care.

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As well, we note there will be a reduction in the entrance requirements to access the special benefits from 700 to 600 of insurable employment hours. We believe this is a slight improvement, but we'd also like to note that several years ago the eligibility requirement was 300 hours, so that's quite a difference for parents.

Since its inception in 1983, REAL Women of Canada has held the position that employment benefits should be available to part-time workers. Many women work part time to offset the heavy taxation that the family suffers, so it's very often upon women that this applies. Many women choose part-time employment because it allows them more time with their family and at the same time provides income to help them pay the bills, including our heavy tax bill.

Now, some women would say that this demeans women, that they should be equal to men, earning the same amount of money, but this is a choice that women make. There is a discrepancy between the earnings of men and women, but that's not, as someone claimed, based on discrimination. It's based on the choice that women make, especially when their children are young, to take care of their families, to take care of their young children. Even as the children get older, as teenagers, families make this choice to have some differentiation within the family rather than a strictly imposed equality, something that some government agencies would like to impose on men and women. We don't agree with this, so we would like some consideration for part-time workers.

Another concern is the $413 per week maximum benefit for the combined maternity/parental leave. This is a low amount, and we believe it's not sufficient for families who rely on the mother's income to survive.

The 1999 report of the finance subcommittee on tax equity for families recommended that the combined maternity and parental leave benefits be increased to 70% of gross earnings. REAL Women also recommends that this provision to increase benefits to 70% of gross earnings be implemented.

The long-term results of this amendment to the Employment Insurance Act may not always be beneficial. We believe it's a piecemeal approach, helpful to some families while leaving other families outside of the program. The $413 per week maximum benefit will mean that some women simply won't be able to afford to take the full 50 weeks' leave due to financial pressures on the family. The 600-hour requirement will mean that many women in the paid workforce will not have enough hours to qualify for benefits.

As well, it's our understanding that this proposal will not apply to single-income families, which is our great concern, self-employed parents who are Canadian citizens, and students.

I'll skip to our conclusion, because it applies to these segments. The overall budget and tax policies of the Liberal government continue, we feel, to discriminate against the single-income family, as has been the case for many years now.

For example, a typical two-earner family of four with a total income of $50,000 will pay $2,836 in federal taxes in 2001. A typical one-earner family of four, with the same total income of $50,000, will pay twice as much in federal taxes, at $5,685. We feel this type of discrimination in tax policy must end. Fairness must be restored to the tax system when it comes to families.

I'd like to remind you that in some of our literature we point out that in 1952, a married man could deduct, on average, a full third, or 33%, of his income, to support his wife raising the children at home. This deduction was given as society's recognition to the husband and wife's contribution in nurturing, socializing, and educating the next generation.

More than 50 years later, in 1987, for a married man earning $35,000, the deduction had dropped to about 11%. In 1991 only about 9% of a man's income could be deducted for his spouse at home. So there's been a tremendous revolution in the approach of the state to family income and to the choices that Canadians make in determining how they will organize their families in terms of income.

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I'd like to reiterate, then, that a fair family tax policy would implement the following proposals, according to our view. First, remove the discriminatory individual assessment of single-income families by taxing them on a joint filing basis. We feel it's discrimination to tax without consideration of the family unit.

This is taken into consideration with the GST rebate and the Canada pension plan. We'd like to have this approach to the whole family unit in its taxation as well.

Second, remove the commercial child care expense deduction, which subsidizes the two-income families, usually high-income, who use commercial care, and replace that with an across-the-board child care tax credit for all children, regardless of parental income level or employment situation.

When we presented a brief on May 12, 1999, to the finance subcommittee examining tax equity for families with dependent children, we encouraged the government to protect stable family life. We felt that the state should be guided by a number of principles.

One, every child in Canada is of equal value and should be so treated by our laws and policies.

Two, public policy should remain neutral and should not, by way of tax laws and legislation, discriminate against parental choices in the care of children. This is where the child care tax credit for children, regardless of parental choices and parental income levels, comes in.

Third, there should be a reward through tax policies for spouses who stay at home to raise their children on at least an equal basis to that of the personal deduction. Women who choose the full-time career of homemaking deserve fair and equal treatment. So that would equal the spousal exemption to the personal deduction.

We believe the future of the country depends on the strength of the family, which is the basic unit of society, and the family, the foundation of the nation, should be central to the formation of public policy, including taxation.

Going back to the other features of the bill, in terms of the Canada student financial assistance plan, part 3, one recommendation we would make would be to delay calculating interest on a loan for a period of one year to help students establish themselves in the paid workforce after graduation.

In part 5, concerning the instruction to the department to exercise due care and diligence in the collection of tax revenue, we'd like to point out the case of the 1994 suicide of Debora Starr Stephan of Cardston, Alberta. She committed suicide so that her husband could use the proceeds of her life insurance to pay a revenue tax assessment.

We feel that no Canadian taxpayer should suffer undue harassment or abuse at the hands of Revenue Canada. The federal government should appoint an independent ombudsman and establish an appeals process to protect the taxpayer.

The story of this family is very sad. They have, I believe, 10 children, and it appears there was undue pressure on this family, which resulted in this suicide. So we'd like to point that out.

With regard to part 6, the proposal to reinstate full indexation of the personal income tax system and the proposal to increase the Canada child tax benefit are measures that we believe will benefit all Canadians. We'd like to thank the government and congratulate the government on this. We believe any tax policy that leaves earned income in the pockets of the taxpayer is a good policy. Taxation that the government takes from its citizens is originally earned income, and we feel it's important to realize that. Leaving money in the hands of the taxpayer is a true government investment in the economy of the nation.

Generally, that's our view from the position of the family—benefits to the family and greater choice for men and women to decide how they will arrange their own lives, without having undue pressure from the government, to formulate their family the way... depending on the ideological pressures that may be applied to families from government.

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Thank you very much.

The Chair: Thank you, Ms. Watts.

We'll now proceed to questions and answers. It will be a ten-minute round.

Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you, Mr. Chairman.

I'd like to thank you both for being here today. I have a few questions first of all for Mr. Clemens.

You indicated that you supported this indexation. Ms. Watts just indicated the same. Does it concern you at all that in the last eight to ten years, during the time when this indexation was removed, the tax or the exemption level basically dropped? To put it another way, the income tax payable as a proportion of total income went up, up, up. It's really been ratcheted up to that new level, and now it's going to carry on at that level, presumably.

You didn't say anything about a need or a desire to have that indexation actually be computed retroactively to the time when it was ceased. No concerns about that, or is that an oversight, or...

Mr. Jason Clemens: No, it wouldn't have been an oversight. I mean, we actually note in our response that the indexation wasn't retroactive to when the system was de-indexed. One of the concerns...

If it was a trade-off relationship, in my mind, between fundamentally reforming the system and getting the exemption up under the guise of a flat tax, where you can get an exemption up to about $11,000 or $12,000 per individual, I would take that system, where we're fundamentally reforming the tax system with a much larger exemption for individuals, and thus for the family, because the flat tax wouldn't discriminate between single and dual families. I would predicate that. I would take that over simply continuing to fidget at the margins.

One of the concerns I do have on the exemption is the basis of the exemption. For instance, one of the discussions is always, “What's the rationale for having $7,131?”

Now, one of the things I think we should begin to discuss is why not tie a comprehensive exemption for both the Canada pension plan and for the personal income tax system on the Sarlo basic needs index, whereby what we are saying is that for economic fairness reasons, we will exempt a certain level of income such that individuals are able to purchase basic housing, food and clothing, etc. That level of income is what we're going to deem to be the exemption.

I think that should be the starting point for the basis of the exemption, but I would agree with you in terms of the importance of understanding that the basic exemption has been eroded over time since 1986, if memory serves correctly, when it was partially de-indexed.

So I would agree with you on that, but I would say that the priorities in terms of tax reform and tax reduction would include that. I would go much farther in terms of a broad-based flat tax reform proposal.

Mr. Ken Epp: Okay.

Do you have any comments on that, Ms. Watts?

Ms. Diane Watts: There are tremendous pressures on the family today, which adds stress to the family. Part of that is the high taxation and the resentment of Canadians—that is, every time you turn around, you're paying some sort of tax, but where is this tax money going?

The type of policies we see very often ignore the needs of the family, ignore the family unit altogether, and treat people as if they're just independent units living on their own. What we see, and our experience, is that people live as families, and there's a tremendous amount of suffering that results from what we believe is excessive taxation.

There is a tremendous need for broad-based reform. Right now we're addressing this particular bill, but it's been our contention that the pressure has been mounting, the excessive taxation in many areas has been increasing, and we see that as fallout on families and in society.

Mr. Ken Epp: In view of the answers from both of you, I'm really surprised that you would not have suggested to this committee that this indexation should have, in fact, been retroactive, because it would have simply brought back proportionally the amount of money you could earn before you pay taxes to an indexed level equivalent to that of ten to twelve years ago.

I'm rather surprised at that, but I accept your answer. I'm not here to badger the witnesses.

Mr. Jason Clemens: Perhaps I could just add something very quickly.

If we were to, say, prioritize, given that we have a certain amount of fiscal surplus available to fund tax cuts, one of the things on I would completely agree with Professor Mintz of the University of Toronto is that reforming and reducing corporate income will give you the biggest bang for the buck, so to speak, for what we have. So I think that was part of the rationale going into that.

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In terms of having a limited amount of resources to fund, my preference would be to cut spending and take the surplus and the cut in spending and finance further tax cuts. But again, in terms of a priority list, corporate income tax, I think, has to be number one, followed by personal income tax reduction.

As you've said, there's a variety of ways to do that, and I would not be opposed to re-indexing the system up to the values that would have been in place had it not been de-indexed. I think it was just a case of priorities.

Mr. Ken Epp: Okay.

My next question has to do with a term you mentioned, “back-end funding”, with regard to the budgetary thing. I'd like you to enlarge a little on that. What is your concern about it, and what should be done to fix that?

Mr. Jason Clemens: Sure.

As I think page 4 shows, Joel Emes, a senior research economist at the institute in the fiscal studies department, did an analysis showing the difference between the 1997-98 budget going up to the current budget. What we find is that in 1997-98, 44% of the unexpected surplus, which is the amount of revenues beyond expectations plus savings in debt costs because of lower-than-expected interest rates, was spent. In the following year, 1998-99, all of it was spent, as was the case in the past budget.

Our concern would be that if in fact we're saying that tax cuts are the priority, then we could have done three years ago much of the tax reform introduced in this current budget. Our example is introducing the full measures of the middle-income-tax cut three years ago. Canada would have been well into a tax reduction phase in terms of fiscal policy.

So the concern going forward is that, right now, when you look at the budget projections, tax initiatives outweigh spending initiatives. However, as Bill Robson from the C.D. Howe Institute has pointed out, if we continue to see revenues beyond expectations, coupled with savings on the interest side, and those funds spent, then the tax situation being projected—that is, that tax initiatives outweigh spend initiatives—will in fact not be the case. In fact, we will have greater program spending than is currently in the budget.

I think the second thing that should be held as a priority is that at the beginning of the year the government is laying out a spending initiative. At the end of the year, with unexpected surpluses, our view is that those funds should be allocated to debt reduction. That seems to be the fairest way, really, because what we're talking about is unexpected revenues due to prudent budgeting, which I think is important. Again, I applaud the government for instituting a conservative, prudent approach to budgeting. However, those revenues should be viewed as unexpected, and thus applied to debt reduction.

Mr. Ken Epp: So when the government has a $3 billion contingency fund, and this year a $1.5 billion... What did they call it? There's a term for it.

Mr. Jason Clemens: The economic prudence account.

Mr. Ken Epp: Yes, economic “prudence”. I mean, it's just another word for a contingency fund; “contingency fund B” is really what it is.

Would you like to see that actually earmarked specifically for debt reduction?

Mr. Jason Clemens: I would say that Mr. Martin has done that verbally. I wouldn't have a problem if you moved towards an Alberta-type model, where you're saying that specifically any funds in there will be allocated to debt reduction.

One of the interesting papers done by Dr. Walker, the executive director of the Fraser Institute, is on a system of cash rebates whereby in order to ensure that, in year two, you will generate enough revenue, you're backdating the rebate. So at the end of a fiscal period, if you haven't spent what you said you were going to spend, and/or you have unexpected revenues, you can rebate those in the form of a cash rebate.

Now, the Ontario government has taken a very loose acceptance of that paper, but that is another way to rebate surplus funds. I think the one thing that you don't want to see is them spent. I would say the contingency fund should be earmarked specifically for debt reduction and/or any unexpected revenues.

Mr. Ken Epp: My time is almost up, and I need to ask Ms. Watts one more question.

With respect to the EI changes, they've changed it so that now, instead of 26 weeks of eligibility for mothers, it's 51 weeks of eligibility. The question has been raised to me that this is applicable only to a mother when she has her first child after a period of employment. If she has another one after that, maybe she will not have gone back sufficiently to have enough credit, which means that is a very, very limited assistance to families.

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Have you thought at all about a better model or a better way in which assistance to families and mothers, particularly via EI, could be implemented? Because it's my view, from some of the people I've talked to, that this is of very limited benefit.

Ms. Diane Watts: Yes, and I'm afraid about the fallout that's going to result from that. It is limited, as you say. Unfortunately, we have a system that puts a lot of pressure on mothers and the unique role of motherhood. There are a lot of pressures on the family, and a lot of people are in very difficult situations.

It all goes back to tremendously high levels of taxation that force people to leave their children in the hands of strangers. They don't really have the choices that, in a civilized society, parents should have in order to care for their children if they want to. That really falls on mothers.

As you say, it's not adequate if the mother... We have a difficult situation as it is with the working mother who wants to take care of her children.

Mr. Ken Epp: Okay, but I—

Ms. Diane Watts: This goes back to not seeing the family as a unit.

Mr. Ken Epp: Yes. You don't have any specific recommendations, though. You're just saying, in general, this is better than what it was, but it's still not good enough. You don't have any specific alternate suggestions other than to reduce the tax levels.

Ms. Diane Watts: Our recommendations over the years have been to take the family, the entire family, into consideration in tax policy.

Mr. Ken Epp: Yes.

My time is up, Mr. Chairman. Perhaps after some of the others have a round, if there's time, I could come back and ask some more.

The Chair: Sure. Thank you.

Mr. Limoges, followed by Mr. Cullen.

Mr. Rick Limoges (Windsor—St. Clair, Lib.): Thank you.

First off, Mr. Clemens, I'm intrigued by your reference to, first of all, reforming the tax system and going towards a broad-based flat tax. Everything I've heard about flat tax—and there's been a lot in the media and so on recently—points to the fact that its seems to unfairly benefit those at the higher tax brackets.

I mean, it's been kind of a tradition here in Canada that a user-pay mentality, if you will... or not user-pay but ability-to-pay... comes into account, that those who make the most should pay more. Naturally, they would pay more with a flat tax, but they wouldn't pay proportionately more as well.

I'm just wondering, with that in mind, how can we justify going to something like a flat tax when in fact governments would like to do what benefits all taxpayers to the best of our ability?

I'd like you to also expound on the issue of how it helps families; through a higher exemption, I suppose, but if you have a one-income-earner family, that exemption on the spouse with no income has little meaning. How would that help a family in the same way as, for example, combining incomes in a family income, as has been suggested by Ms. Watts?

Mr. Jason Clemens: Sure.

First, it's nice to see a fellow Windsorite in Ottawa.

Your question is quite poignant and important. There are several things to recognize. One of the problems in the Canadian system particularly is marginal taxes, that we have spikes throughout the system at both the low end and the high end. There's a plethora of economic data showing the negative effects of marginal taxes.

Now, what a flat tax can mean with a healthy exemption—let's say, for argument's sake, $11,000—is progressivity. The proportion of your income paid in taxes increases as you make more money. But there's only one point of a marginal tax, and that is where you go from zero to some positive rate. I think the CA's rate is 17%. The data we're looking at, in different models and simulations, run anywhere from 16% to 22%.

So you can achieve what you've said is vertical equity—that is, those who are earning more are paying more—at the same time that you've eliminated the negative effects of marginal taxes. You really do, in my mind, get a win-win in that you can get rid of the negative effects of a marginal tax when at the same time you're ensuring that, as you've said, those who earn more are paying more.

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I think it's also quite critical to understand what economists refer to as income mobility, or income dynamics. We're doing some work on that, and we'll be releasing a study within the next month that I'd be more than happy to send you.

Effectively, what income dynamics and mobility talk about is that it's not the same people earning in, say, the lowest decile relative to the highest decile, that there is a fluidity, a movement of individuals in and out.

The easiest example of that is the university student. When the student is in school, if they are earning money, they would come in at the lowest income decile. When they graduate, depending on their faculty, they will move up the income stream quite quickly.

Mr. Rick Limoges: Their attitudes on taxation change during that period as well.

Mr. Jason Clemens: That's right.

In terms of U.S. data that is readily available, between 1995 and 1996, 14% of individuals in a panel study moved one quintile. So taking the total income population into five sections, 14% moved up.

When you go into longer time periods, the numbers are quite dramatic. For instance, over a five-year period, you have 21% of people moving up at least one quintile. Further data in the United States shows that over a 10- to 12-year period you have about 40% moving up at least one quintile. It indicates quite a bit of fluidity.

What I would also acknowledge, however, is that more work needs to be done in both Canada and the United States using panel data to see what we would refer to as “permanently” low-income—that is, when we look at the income dynamics and the fluidity, who is not moving up the income bracket. Once we've isolated that, then let us look at causal responses.

Mr. Rick Limoges: Presumably you'd have to use some type of exemption that recognizes the poverty level. Perhaps people below it wouldn't pay at all.

Mr. Jason Clemens: Yes.

Mr. Rick Limoges: That level of a flat tax would have to be set... unless you're also doing something, which I know you're recommending, like reducing the spending as well. But we do have many competing priorities. I mean, the conga line goes on and on.

Many of these things are very valid social policies that are required, some of which, in fact, define us as Canadians. It becomes very difficult, then, to have a flat tax if the flat tax is going to be so high as to still be onerous. That's the first thing.

The other thing is, with broad-based flat tax, are you also assuming that all different kinds of income would be treated the same? How do you approach that issue?

Mr. Jason Clemens: First, Hall-Rabushka do attempt to achieve horizontal equity, where all sources of income are taxed once, at one rate. I would say that is, in fact, the way to go. That's the tax reform movement we should move towards. Unfortunately, we don't have the type of corporate income tax data in Canada that they do in the United States, so our study is viewing on the personal income tax side exclusively.

Mr. Rick Limoges: So you would in fact then be increasing dividend income and capital gains income. You'd be increasing the relative taxation on those types versus income from your own personal productivity.

Mr. Jason Clemens: From labour, yes. In our study on the single-rate income tax, what we're doing is looking only, or in particular, at labour income. I agree with you fully that you'd have to look at the effect on capital gains taxation and dividend taxation, because in a broad-based flat tax reform, Hall-Rabushka, those aren't taxed at the individual level; they're taxed at the business level.

I would concur with you that you have to differentiate between a broad-based or comprehensive flat tax reform and a single-rate tax reform such as has been implemented, or is being implemented, in Alberta.

I'm sorry, what was the first part of the question? I apologize.

Mr. Rick Limoges: Maybe we can move on to another issue. I guess I just want to get clarification on what it is you're recommending with regard to this tax reform. I assume what you're saying is that you don't see the role of government as being an important one in terms of using tax policy in order to try to encourage certain issues or encourage certain developments within the economy to encourage certain behaviours within either corporate or the personal workforce and so on.

Are you just saying that with a broad-based flat tax we'd basically be stepping back, and let the market take care of it?

Mr. Jason Clemens: Well, on the tax side, I would agree with you. I think the role of the tax system should be to generate the necessary amount of revenues to provide for programs and services in the least distortionary manner.

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I would suggest that the record of all governments has not been positive.

Mr. Rick Limoges: At best, it's hard to measure.

Mr. Jason Clemens: Well, it's not been positive in choosing winners and losers. In my view, the market does a much better job of choosing winners and losers in the business sector.

Mr. Rick Limoges: You're starting to sound a little Darwinian.

Mr. Jason Clemens: One of the things I didn't put into this submission but is a key concern for me, an ongoing concern, is the amount of business subsidies, the so-called corporate welfare. I would say that is one area, which 99% of Canadians would agree on, that can be cut.

Now, our view would be to cut corporate subsidies and crown corporation subsidies, and that money should be allocated to tax cuts. I think there are other organizations, other economists, who would say—

Mr. Rick Limoges: I don't know how much time I have left.

How then would you, for example, encourage R and D?

Mr. Jason Clemens: I think the record of R and D is that we have quite a healthy tax credit system for R and D, which is, again, using the tax system proactively to encourage R and D, and yet our performance in R and D has been quite poor. I would say a major cause of that is the return side.

Yes, we're lessening the cost of it, but on the return side, when we have, I would say, a quite uncompetitive corporate tax structure, that is really the fundamental reason we're not getting the level of R and D. Again, my view—

Mr. Rick Limoges: But in R and D any research they do here they can use worldwide. That doesn't really fully explain it, does it?

Mr. Jason Clemens: No, but what I'm saying, though, is that when we try to explain why we don't see large levels of R and D in Canada when we have such a healthy tax credit system, I would go back to the tax credits. I guess I would argue that there are better ways to generate R and D, making the corporate system more healthy in Canada—nurturing, for instance, corporate Canada.

Mr. Rick Limoges: So if the corporate sector is healthy, then they will, just by their very nature, do the R and D?

Mr. Jason Clemens: No... well, I think if it's in their best interests to locate in Canada, to develop corporations in Canada, and to make Canada their centre for access to the U.S. market.

One of the interesting things that comes up often in Vancouver is how poorly Vancouver is doing relative to Calgary in terms of a corporate headquarters. If you go through natural location, aesthetics, etc., then Vancouver—with all due respect to my friends in Calgary—is a better-located centre.

Mr. Rick Limoges: Maybe the CEOs just don't like rain.

Mr. Jason Clemens: They must like snow much better. I think they like to golf, so if they like to golf, they definitely prefer Vancouver.

On the tax side, if we move towards a system of less distortions—and again, when you go to less distortions what we're talking about is eliminating loopholes and tax credits so that you're getting the rate down on a broad base—I would say that is the way to go. Now, equally as important is to allow legislators and parliamentarians to initiate spending programs. Doing that on the tax side—you know, eliminating distortions and really creating an efficient tax system—doesn't preclude that.

Mr. Rick Limoges: On a different note, with regard to your comment on rebates, I think I heard you say that they're better than spending. Are you advocating that as something that is positive?

I look at a rebate and say, frankly, all that means is that you didn't lower the income taxes, you just took what you've already got and maybe sent some of that back. It's a political move. It doesn't really address the issue of taxation being too high.

Mr. Jason Clemens: Where this initiative came up on cash rebates is a concern in the Department of Finance. If we cut rates this year—year one, say—then we won't be able to raise enough revenue in year two. So the system was brought in where you can basically backdate the tax cut over a period of time. What would happen is that you would rebate in year one and reduce the rate effective for year two as opposed to reducing the rate for year one.

Mr. Rick Limoges: Okay. Are you then advocating a rebate as being better than debt reduction?

Mr. Jason Clemens: Again, the rebate paper was done in specific response, I think, to, “If that is your concern, then this is a way to implement a tax cut on a cautionary principle.”

Mr. Rick Limoges: Okay.

Mr. Jason Clemens: My view, again, is that the way to go is to reserve unexpected revenues towards debt reduction and continue to reserve the contingency fund for debt reduction, and to accelerate what the federal government has already stated are their intentions over the five-year program. Again, I would applaud them—I think all of them make sense—but I would accelerate it.

Mr. Rick Limoges: Thank you.

The Chair: Thank you, Mr. Limoges.

Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Mr. Clemens, in your paper you talk about the so-called brain drain, if I can call it that. If, at the Fraser Institute, you were to put some weightings on why some Canadians go to the United States, what weightings would you put on higher incomes versus more diverse economy for greater career opportunities as opposed to taxation levels?

• 1625

Mr. Jason Clemens: I would say that all of them are quite important. Part of the question is like the chicken and the egg—that is, why do we see greater diversity and why do we see greater opportunities in the U.S. economy?

I think at least part of the explanation for why, to be quite frank, we see the higher level of diversity and a higher level of growth in the U.S. economy is a total lower tax burden. So I would agree that there are other reasons, and one of them is definitely opportunities, particularly for advancement in corporations and in business, small businesses and large businesses alike, in the United States. But I think part of that explanation is also the tax structure.

I would say that a competitive tax regime will in fact yield benefits in terms of curbing the brain drain, but I think there are other things that have to be done, such as reforming the corporate income tax system.

Mr. Roy Cullen: The fact that the United States economy is maybe ten times the size of ours, which would clearly, then, offer more opportunities just in terms of size, forget about how creative, how innovative, how wonderful it is, you wouldn't put much weight on at all, nor would you put much weight on, I gather, the fact that...

For example, there's a big growth in the United States now in so-called e-commerce and information technology. It's a huge amount of growth. But your proposition would be, then, that this growth is fueled simply by a lower tax regime in the United States?

Mr. Jason Clemens: No, no, I wouldn't say it's a simple... I mean, I'm not going to say it's a one-variable explanation for why we see greater diversity in the U.S. economy. What I'm saying is that one of the factors, clearly, that is affecting the brain drain and affecting the growth in the U.S. economy is their tax regime, is their tax structure, but I would agree that there are other factors.

I think one of the things that is of concern going forward is that companies, individuals, and entrepreneurs will increasingly be able to be more mobile with an open economy. That is, if you want to service the California market, you don't necessarily have to be in California. You have to have a distribution system, but in terms of research and development in manufacturing, etc., that in fact does not have to be located in California. So other factors, I think, play a large explanatory role as to why we see the location of firms.

In fact, a group of professors at the University of Calgary is now doing a major study on how to explain locational decisions by business. The hypothesis is that one of the major explanations is corporate tax rates.

I think one of the other interesting answers, in terms of corporate locations, is the tax treatment on stock options and capital gains. I think those two are also possible explanations.

Again, I would applaud the federal government's move in terms of changing the treatment of stock options to be much more competitive with the U.S. system. However, I think there are still things we need to do. I would echo other commentators that it is not enough, I think, for Canada to be competitive with the U.S. We actually have to have a comparative advantage to the United States.

Mr. Roy Cullen: Just on that line, if you were moving forward from here, if you had to make a choice around corporate income taxes or personal income taxes, where would you go?

Mr. Jason Clemens: I would concur with Professor Mintz that corporate income taxes will give you the biggest bang for your buck, so to speak, but I think there is more than enough room to implement both corporate income tax reduction and personal income tax reduction, particularly if you look at some of the spending profiles that I believe can be eliminated.

Mr. Roy Cullen: Well, that leads into my next question, the issue of spending. I wouldn't sit here and suggest that all spending in the federal government is good spending. I mean, it's a big organization, and things happen, some of which can be done better, obviously.

I'm just trying to get a sense of whether the Fraser Institute sees any spending at all as good. I'll just throw out a few things—for instance, investments in infrastructure, investments in the military, the RCMP, investments in health care and post-secondary education through the CHST.

In particular, I'd like to know the views of the Fraser Institute... I know you place a lot of emphasis on the market. You know, that's great; I too like the market. But in terms of investment in an innovative economy—research development, providing Canadians with the tools they're going to need—do you see any role for the government in that area as well, or is it the market that's going to fix that one?

• 1630

Mr. Jason Clemens: I'll do the former question first.

If you look at the second-last page, I refer to a study by Tanzi and Schuknecht of the IMF and the World Bank. They have done, I think, what is some important research on the optimal size of government. Their conclusion, along with several others', including Scully, has been that, in fact, in different jurisdictions what we see is an optimal size of government, whereby moving beyond that level has diminishing returns—you're spending more on the size of government but not really getting anything in return.

I would say it's quite interesting that Michael Walker, the executive director, has said that there are governments that are too small. For instance, governments like Hong Kong don't spend enough, so they could actually gain a positive return by increasing the size of the government.

Now, I would concur with you that most of the areas you talked about are primary areas of government responsibility—protection of property, protection of self, infrastructure development. If we believe education and health care are public goods, then the financing of those programs...

I would emphasize, both as a researcher myself and, I would say, most of my colleagues at the Fraser Institute, that we would not say that we are talking about a zero government. What we're talking about is an appropriate level of government spending where we need the government to spend.

I would say the profile of upwards of $7 billion being spent on regional development programs and corporate subsidies and subsidies to crown corporations don't yield us. I mean, in terms of society, we're not getting a benefit from those funds. They would be better off to be eliminated and tax reductions placed for individual Canadians and families and businesses so that those people and organizations can spend that money.

Mr. Roy Cullen: Thank you.

Ms. Watts, you mentioned the Canada Student Financial Assistance Act, and you talk about delaying calculating interest on the loan for a period of one year. In the 1999 budget, I think, our government brought in some rules to allow more flexibility for students in repaying their loans and also in terms of the deductibility of interest.

You're suggesting, I guess, that we could do more. Do you think this particular provision, delaying calculating interest in the loan for a period of one year, would really help students? Is that going to be enough?

Ms. Diane Watts: It's a possible approach. As our brief says, it's a possible approach. It's one suggestion that would possibly relieve some of the pressure.

We didn't really make an extensive assessment of the entire program. We would just like to make that one suggestion.

The Chair: Are you asking for 12 additional months of interest relief? Because we give 60 months now. Is it above and beyond the 60?

Ms. Diane Watts: Our brief states that a possible approach would be to delay calculating interest on the loan for a period of one year. This would give the person time to establish himself in the paid workforce.

The Chair: We pick up the interest, though, for 60 months.

Ms. Diane Watts: You're saying that they pay no interest for 60 months? Then that would not apply in this case.

The Chair: Yes. We'll double-check, but I'm quite certain of that.

Mr. Roy Cullen: That's why I was confused as well, because I knew we did a number of things for students and student loans.

Mr. Ken Epp: I might be able to add a little bit to this. My young assistant here has just come through this, and he has reported that he had to apply for an exemption from paying interest in three-month intervals. It was based strictly on his ability to pay.

In other words, as soon as he got an income, it was denied—and probably justifiably so. He has a good job now. He loves it.

Mr. Roy Cullen: He has a good boss, right?

Mr. Ken Epp: Well, he has a good boss.

I think what we need to do is probably have the federal government arrange its affairs so that students don't have these huge loans when they graduate. That's the big problem as far as I'm concerned.

• 1635

Mr. Roy Cullen: I see the 1998 budget provided an additional $1.5 billion per year to support improvements in student loans, study grants, millennium scholarships—of course, that was another big one—research in lifelong learning, and incentives to save for children's higher education, but it doesn't have that level of detail.

We'll look at that recommendation in light of what we've already done and see if we can clarify that.

The Chair: Thank you.

Ms. Leung, would you like to ask a question?

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Yes, thank you, Mr. Chair.

I was attending another meeting. I'm sorry to have missed both of your presentations, but I've quickly read your reports.

Ms. Watts, yes, I understand your concern for the different tax rates for one-earner and two-earner families. I think it's very clear, and we are also looking into that.

I would like you to expand on your third proposal—that is, to reward through tax policies spouses who stay at home to raise their children. Could you expand a little bit on that?

Ms. Diane Watts: What we're suggesting here in terms of income tax is that the one-earner family, we believe, should have the spousal exemption equal to the personal exemption of the earner. In a two-earner family, there are two basic personal exemptions, personal deductions, when they declare their income tax.

You'll have a situation where you have two families each earning $50,000 a year, for example, and in one case, if you have one earner, you have one personal deduction and a lower one for the spouse. We would suggest that those be equal, because the woman or man who stays at home and cares for the family is of equal benefit to the family and contributes to family care and society.

So there's discrimination when it comes to work done by the one who earns the income and the one who contributes in another way to the family. We want greater equality in that area.

Ms. Sophia Leung: Thank you.

I have a question for Mr. Clemens.

You're from Vancouver, right?

Mr. Jason Clemens: Yes.

Ms. Sophia Leung: We get a lot of your reports.

An hon. member: We get that in every province.

Ms. Sophia Leung: No, I recognize that.

Mrs. Karen Redman (Kitchener Centre, Lib.): Are you from Vancouver, Sophia?

Ms. Sophia Leung: I think they know that.

Mr. Jason Clemens: It's a good thing, right, that you get our reports?

An hon. member: I enjoy them.

Ms. Sophia Leung: Anyhow, I have a question about your comment in terms of productivity. You did indicate that your data is really to 1996. This is on your page three.

Now, I'm sure there are different ways and means to increase and improve. Do you have any concrete suggestions?

Mr. Jason Clemens: I'm sorry, I didn't get the question.

Ms. Sophia Leung: You criticized Canada's productivity as being very low, the lowest among the G-7. Would you like to expand on in what way the institute can see...

Mr. Jason Clemens: The reason I included that in the submission was to put into context how we approach the budget—that is, dealing with some of the fundamental economic challenges facing the country.

In terms of productivity, again, this goes back to why I think corporate income tax reduction should be one of the priorities. When you look on the productivity side, many of the people doing research agree that restructuring and reducing the corporate income tax system will yield productivity gains, so I clearly think that's one area.

I think another area is on the personal income tax side, and some of the moves made in the most recent federal budget will begin to move in that direction, particularly the stock options, treating them the same as the U.S.

Again, I would say the biggest bang for the buck, so to speak, on the productivity side is going to be tax-based.

Ms. Sophia Leung: I see.

• 1640

You made a comment on migration and the brain drain. Of course you indicate that a lot more of the brain drain goes to the U.S., but as you are aware, we gain many skilled workers from overseas, from such countries as India and China, specifically in high tech.

Did you take that into account? Sometimes, according to my information, we gain more than what we drain out.

Mr. Jason Clemens: Here I would reference the DeVoretz work, in which he's looked at the churning—that is, Canadian taxpayers are putting money into subsidized education to train and impart knowledge and skills to our future workers, but through the brain drain process those individuals are lost.

I would agree with you that to a certain extent we're bringing in skilled workers from some other countries. The view, however, from DeVoretz is that it's still a net loss when you look at all the different types of costs associated with investment in skilled individuals at the post-secondary level and then losing those individuals to foreign jurisdictions.

Secondly, I think it's important to realize that most of the data that's talked about is U.S.-Canada migration. It doesn't include countries that we may be losing people to, particularly in the U.K.

An individual at C.D. Howe Institute, whose name escapes me right now, did work on the loss of scientists and engineers, and made specific note about Ireland and the U.K. Those two countries are gaining at this point. At least part of that, I think, can be explained through tax differentials, particularly in the case of Ireland.

Ms. Sophia Leung: Last night I was on a flight and I ran into someone I know. He's a manager at Nortel, which has a sizable office in Beijing. He told me they regularly train 10 or 12 high-tech technicians or experts who all intend to come to Canada.

I want you to know that. It's not just a one-way street. I've been told that on other trips as well. I'm saying that if you use isolated data to prove your point, you should also bring other data.

Mr. Jason Clemens: I would concur, but what I would say is that the U.S. migration data, in terms of an academic, or in terms of scholar, is secure data. In the paper, DeVoretz in fact makes note of the fact that it's an underestimation because it doesn't include temporary work permits under NAFTA.

I only presented this in order to put into context how we approach the brain drain. I would agree with you that there needs to be more research done in terms of people coming into the country, but I would say that most people looking at the brain drain would agree that we are in fact losing people to the United States.

Ms. Sophia Leung: Thank you, Mr. Chair.

The Chair: Just to follow up on the brain drain question, I mean, in a globalized marketplace you're going to have movement of labour. We have to factor that in. The real question is, how do you develop a culture of opportunity in Canada so that people stay and more people are attracted to it? It doesn't matter whether you lose one person or a thousand; we shouldn't be losing that first person if lack of opportunities is the issue.

I do agree with you that we need to speed up on the tax reduction. We need to make productivity the key issue. But I also want to draw it to your attention that the issue of productivity is often viewed as an issue that belongs to—quote, unquote—“government”. In reality, all the productivity gains are made on the shop floor, if we can still call it that, or in the various labs and centres.

Essentially, as far as we're concerned, we have a limited number of levers as a government to effect productivity gains—investment in R and D, taxation, making sure the microeconomic environment is stable—but after that it's really up to the workers in firms to be creative, to be entrepreneurial, and to enhance or bring about the type of productivity change that everybody's talking about.

The productivity debate is worrisome in the sense that far too many people—and I attended the BCNI event—just look to government, and I think it's just a partial solution to the problem.

What do you think of that?

Mr. Jason Clemens: I think there are several things. I mean, one of the important things to recognize is how the tax issue comes up repeatedly.

• 1645

For instance, one of the things we battle with in British Columbia right now is the tax on plant and equipment. That is, if the employer goes and purchases plant equipment to augment the skills and increase the productivity of his or her workers, and thus increase their wages and the productivity of the firm, they pay a tax up front on that equipment.

Alberta used to have that tax and in fact eliminated it on an accelerated pace because it was such a poor tax. They found that when they eliminated the tax, more companies invested in the plant and equipment and made their workers more productive, so they actually gained revenues on the corporate income tax side and the personal income tax side.

The Chair: Are you talking about capital taxes?

Mr. Jason Clemens: The capital taxes, yes.

So I think it's critically important to understand that there is a corporate income tax question, and that has negative effects, and then there's a personal income tax question, where, for instance, we have marginal rates that kick in at very early thresholds relative to the United States. There's also a capital gains tax. So when we talk about tax reduction in tax reform, in fact, we take a very broad approach.

I would somewhat agree that levers of government are limited, but I would say that the tax issue is a powerful lever that the government can use to indeed promote or facilitate.

The best analogy I can make is one that Dr. Walker uses, and that's fertilizing the field. The government has within its power... to create a much more fertile environment activity for business activity, for entrepreneurship, for innovation, and that is a total reduction of the tax burden, and secondly, to make the tax system more efficient by eliminating distortions.

The Chair: I'm just trying to identify the roles and responsibilities for the government and the private sector.

For example, because of the low dollar, relatively speaking, at 68¢ or 69¢, many companies think they're productive, whereas in reality what they're doing is using the low dollar as a competitive advantage over, let's say, the United States, just to give you an example.

So when you look at some of the investments that companies make, or lack of investments people make—in training, for example, or in capital investments—you also have to say that both corporate Canada and government have a responsibility to bring about productivity changes. I want to stress this. I don't think it's a one-sided debate.

Mr. Jason Clemens: Well, I would agree, but what I would say is that the instruments of the corporation—I mean, hopefully they are in an open market that is contestable, where businesses can rise and fall within the marketplace—are basically subject to those market pressures. So again, in our view, as long as the ground is fertile and you allow for competition, both domestic and foreign, there are pressures in the market system, through capital markets, financial markets, and product markets, that will enforce those types of productivity gains.

Again, though, I wouldn't underestimate the power of the government to really make that ground fertile, particularly by reducing the tax burden.

The Chair: Yes, no question. This committee has called for reduction of capital taxes a number of times.

I'll now go to Ms. Redman, followed by Mr. Szabo, and then we'll go to Mr. Epp for the final round.

Mrs. Karen Redman: Thank you, Mr. Chairperson.

I too would apologize for coming late to your presentations.

Since I've been here, Mr. Clemens, you've made a couple of statements I can agree with. You talk about the thoughtful recommendations from the Mintz report, and I would agree with you; I think they're well worth taking note of. But in answering Mr. Limoges' question, you talked about corporate welfare.

Can you flesh out for me what you think constitutes corporate welfare?

Mr. Jason Clemens: I could go through a long list, I suppose. One would be the portfolio of crown corporation subsidies. Another portfolio within the industry would be the subsidization of particular corporations through the direct subsidization of business and/or jobs promotions into business through the use of grants.

The numbers I think we have, at last count, were about $7 billion for fiscal 2000, if memory serves correctly, that were in some way or form a direct subsidy to business, through either crown corporations or those departments.

Those are the types of programs I would have been discussing.

Mrs. Karen Redman: I appreciate the clarification. I know that under this section of “Federal Budgets: Predilection with Spending”, you mention Human Resources Development Canada. I assume those are some of the programs you are alluding to.

I guess I'd have to underscore that in my riding specifically I know a lot of those grants have gone to partially employ or fully employ people from the disabled community. I wonder, if market forces are left to bear on their own, if those kinds of Canadians are going to achieve the type of contribution and participation in not only their personal lives but also in their community and in Canada's future that I feel they deserve and that I feel government has a responsibility to help ensure.

• 1650

Mr. Jason Clemens: In short, I would say that if there was a market failure in terms of hiring those individuals because of a lack of skill sets or what have you, I wouldn't necessarily disagree with you that on the periphery the government could be involved in that type of skills development program. The problem is, the bulk of those funds are really not... I mean, that's not the form they're taking.

One of the things that I think is misunderstood about job creation initiatives in general is that we only tend to add up one side of the ledger. Here we have x amount of dollars that have gone into job promotions and we've, for a short term, created y amount of jobs. The problem is, those funds were extracted from individuals with families or businesses that would otherwise have used those revenues, or disposable income, to purchase goods and services that may have indeed created jobs in those sectors.

So I would say that one is a sustainable development path whereby you're getting individuals and businesses making decisions about goods and services that they require. Goods and services that are in high demand will have new producers and new sectors developed. Those that are in low demand will be overturned in what Joseph Schumpeter referred to as “creative destruction”.

The problem in a grants program is that you don't have those mechanisms. Herb Grubel, for instance, has poignantly articulated the fact that if we're going to talk about job creation, we need to talk about net job creation and the fact that those moneys are coming from somewhere.

With regard to the specific reference you made to HRDC, we only looked at the budget of HRDC. We didn't look at the flow-through. We were talking about the $3 billion in the HRDC portfolio, not the total portfolio budget.

Mrs. Karen Redman: I have perhaps another personal observation. I know the youth employment programs—and I don't know, again, if this would fall under the broad-brush stroke you're using with these programs—have been highly meaningful in my community by stopping the old cycle where if you don't have experience you can't get a job, and you can't get a job if you don't have experience.

That has to be figured into the equation as well. It's not hard figures necessarily. Young people do go on to have full-time jobs, having gotten some kind of job experience through an initiative that our community, my community, has identified as something that's a priority for them.

Mr. Jason Clemens: Yes. The point I would make, though, is who is the better arbiter of where the job skills should be? What I would say is that giving employers the freedom, through the marketplace discipline, as we're expanding section... For instance, I can give you anecdotes about my hometown, and Ms. Leung's hometown, that those businesses will create sustainable skill sets for those individuals, for the students who are coming in.

When we talk about job creation programs, I think we need to talk about the net, not simply the gross amount of jobs created. We also did a study on youth unemployment to show that, in fact, youth unemployment is not nearly the problem it's made out to be if you look at the historical rate of youth unemployment.

Again, I would go back to the fact that I don't think the job creation program has been a net benefit because of the extraction factor and the costs associated.

Mrs. Karen Redman: Mr. Chairperson, I would be interested to see the study, if we don't already have it, that talks about that.

Mr. Jason Clemens: If memory serves, it's called something like “Youth Unemployment”, and the author is Marc Law. It is available on our website. In fact, all our studies are available, free of charge, on the website. I would be more than happy to forward you an original copy.

Mrs. Karen Redman: Thank you.

The Chair: Who says nothing is free in life?

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you.

I want to thank REAL Women for coming, because I kind of follow their work. I know a little bit of the background. They've been very supportive of children's issues and family issues. It's terrific. Having been involved with the subcommittee on the taxation of the family, it was kind of an interesting exercise to go through, at least to put some facts on the table.

I was interested in this one item that keeps coming back about the differential between the basic personal amount and the spousal amount, and it being different numbers.

You characterized it as being discriminatory. One of the things you didn't mention was that when there is a spousal amount being claimed, there is an income amount. In fact, in 1999, $606 could be earned without reducing the spousal amount. That has a value that is not available to someone who is in the paid labour force. So it has a value.

• 1655

I did some quick calculations. I think the basic personal amount in 1999 was $7,131, and the spouse amount was $6,055. The difference is $1,076, and the basic rate in non-refundable credits is 17%. So it's $182 difference in terms of... But the ability to earn $606, paying no tax, even at the lowest rate of tax, both combined federal and provincial, would be 25%. So that's almost all of it.

I mean, would you suggest that we change, say, the non-taxable amount, the $606, and make it taxable, make the numbers equal?

Ms. Diane Watts: Our concern is the inequality, the inequality that has existed over many years. If we're heading toward equality one way or another, we're happy with that, but it's important that we do recognize the role of the non-earning spouse, and this would probably be more visible.

Mr. Paul Szabo: Well, it would appear to, but I did the quickie calculations, and in fact if you made the $606 exempt income—i.e., you can earn up to that amount without reducing the amount the spouse in the paid labour force can claim for you—you're actually going to pay more tax by making it equal and dropping this. By making them exactly equal, you'd actually be worse off.

You may want to look at that, or have your people look at that.

Ms. Diane Watts: Yes, thank you very much.

Mr. Paul Szabo: The other thing to consider is that if two people are in the paid labour force, there obviously is an element of cost of employment, even if it quite simply is the transportation to and from work that's incurred by people in the paid labour force. That is not incurred by someone who is a spouse being claimed by another spouse. So in terms of economics, if you really wanted to work it out, it could get a little bit lopsided.

In any event, I do appreciate your points. I think the optics, you're quite right, are important.

Mr. Clemens, I wanted to ask you about the brain drain. I was at a meeting earlier today with a former president of the Canadian Institute of Chartered Accountants. He told me something that was kind of interesting. Maybe the Fraser Institute has some data on it.

He said that, basically, in the United States the investment they've made in the high-tech sector, in software, in the tech development side has been proportionately, in terms of the size of their economy, much greater than it has been in Canada. This is the fastest-growing sector, with a compound 12% growth rate annually. Certainly the opportunities yielding from that sector have been much greater and in fact are probably the ones that are more associated with the brain drain issue.

But he also said that we could totally eliminate income taxation in Canada and still not compete with the net pay, because the salaries being paid for those opportunities in the States are so much higher than they are in Canada. I think the president of Nortel, Mr. Roth, gave his own example about a first-year engineering student going into the labour force. They themselves were paying probably about 30% to 40% more for the same person, same qualifications, mostly because the demand and the opportunities to be serviced were higher in the U.S. than in Canada.

If his hypothesis is that no amount of tax cuts will equate these situations, what does the Fraser Institute say we should do?

Mr. Jason Clemens: Well, I, as a researcher, would respond by saying I would disagree with his assertion. One of the things that strikes me is that if you look at 1975, for instance, GDP per capita is at par between Canada and the United States. We've now sunk down, if memory serves, to about 70%. I think the figure is in here, actually. I mean, we were in a position where, on average, incomes of Canadians—yes, it's 61%—were at par. We were competitive, on average.

The question you're asking is, on the tail end are we competitive? I would say that we still could be competitive at the tail end, but one of the concerns would be, again, the tax burden.

For instance, our upper-income thresholds are much lower, substantially lower, than the upper-income thresholds in the United States. But given the fluidity of the markets, particularly the North American market, where, again, you don't necessarily have to locate in a region in order to service the region, I would say that those opportunities can and indeed should be present in Canada.

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An example from Vancouver—and this may be my partial bias, coming from Vancouver—is that Vancouver really should be one of the economic centres of not only Canada but North America given its access to the west coast and to Asia. In fact, what I would say is that the experience over the last nine years of, I think, detrimental economic policy at the provincial level has really impeded the development of a vibrant city.

It seems to me quite ludicrous, for instance, that Vancouver is the number five corporate headquarters in Canada while Calgary is number two, when really it is Vancouver that has the geographic location. We have access to a larger workforce and a more skilled workforce given the education profiles. I would say it's an underestimation of the effect that the lowering of the tax burden can have and the subsequent innovation and entrepreneurialism that occurs when you reward this.

In a very simplistic economic sense, when you price something higher you're going to get less of it, so when we're pricing things like innovation, entrepreneurship, and success at a higher rate than the United States—and I'm admitting that's simplistic—then I think we get... I think that's a partial explanation.

I guess I would just disagree with his hypothesis.

The Chair: Thank you, Mr. Szabo.

Yes, Ms. Watts.

Ms. Diane Watts: You seem to suggest that there is an equality between the one-earner family and two-earner family, but when it comes to families with young children in commercial child care, there's the child care expense deduction that the two-earner family is able to claim, which in a sense is subsidized by the one-earner family. The one-earner family does not get any of this recognition of the child care.

The child care at home is expensive. It is expensive for the mother or the father, the second spouse, to work, but it also is expensive to care for children at home and to pay for the activities that go on there. If that is subsidized for the two-earner family, then it's being subsidized by the one-earner family, which is not benefiting—

Mr. Paul Szabo: Your point is that regardless of whether you're in the paid labour force or not, there is still some cost to raising children, and there is a subsidy for those who are in the paid labour force rather than those who are in the unpaid labour force.

Ms. Diane Watts: That's right.

Mr. Paul Szabo: You'll be interested to know that if you read the subcommittee report, you will find out—and it's absolutely astounding—that less than 25% of the families who are eligible to claim the child care expense deduction actually do so. The average claim in 1997 was about $2,500, regardless of the number of children.

What it says is that there is a heck of a lot more informal, under-the-table child care going on. This idea that this tremendous tax benefit is being used by people is just not so. It's underutilized simply because there is a lot of under-the-table economic activity going on.

Ms. Diane Watts: There are also other choices. Parents choose relatives, friends, and other situations other than the type of child care that's regulated and commercial. These are choices that families make, and we want more choices for families.

Mr. Paul Szabo: I'm with you.

Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Szabo.

Mr. Epp.

Mr. Ken Epp: Thank you.

Mr. Clemens, you indicate that the per capita income of Canadians is considerably less than that of the Americans. Is that in constant dollars? Are you adjusting for American dollars?

Mr. Jason Clemens: Yes.

Mr. Ken Epp: So your numbers on page one actually do little other than simply reflect the relative value of our dollar.

Mr. Jason Clemens: No, we used purchasing power parity. We used that consistently through. We're not using the nominal value. If we used the nominal value, we would, yes... I'm not using the nominal values.

Mr. Ken Epp: If we used nominal values, the picture would be even worse, then.

Mr. Jason Clemens: It would much worse, much worse. If memory serves, the nominal purchasing power parity is...

The Chair: It's 82.

Mr. Jason Clemens: I was going to say 88, but 82...

Sorry, I can get you the number, but we do use purchasing power parity throughout. These are all in real dollars, so they're all inflation-adjusted.

Mr. Ken Epp: Okay.

I have a question with respect to RRSPs. Do you have any views on the limitations of foreign proportions of that?

Mr. Jason Clemens: There are two things on RRSPs. One, I did a study, I guess two years ago, on the foreign content rule. I would suggest that the foreign content rule—that is, the foreign property rule—should be eliminated. It is currently at 25% and going up to 30%, but I would suggest it should be eliminated. I think a variety of studies from a variety of organizations are looking at the foreign property rule.

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But equally as important, if I could just take a moment on the RRSP system, which I think is an important point, is that when we look at the cost of raising taxes, one of the most efficient ways to raise taxes is through consumption taxes—not sales taxes but consumption-based taxes. One of the interesting things in the Canadian system is that for approximately 88% to 90% of tax filers, we can very quickly move towards a consumption tax because of the RRSP system. Because so many Canadians almost exclusively save within the confines of an RRSP, moving towards a flat tax system, where you allow RRSP deductions, effectively gets you very close to a consumption-based tax without, I would say, too much disruption.

In terms of the United States right now, one of the debates is to go to a national sales tax, which would be a major reform. I think the fact that we already have an RRSP system in place bodes well for moving towards a consumption-based tax within an income tax system.

In short, in response to the foreign property rule, our recommendation was for its elimination.

Mr. Ken Epp: Have you done studies with respect to capital flight out of the country?

Mr. Jason Clemens: Yes. In our study on the foreign property rule, we looked at a number of studies that looked at the experience in the United Kingdom, Australia, Japan, and the United States. In fact what happened when those countries eliminated capital restrictions was that you had an inflow of capital, net inflow as opposed to a net outflow.

Now, the explanation for that was that a strong market signal was sent to foreign investors that this country or this region no longer needed capital protection, that in fact the companies and the entrepreneurs, the business people, were effective enough that they didn't need to be protected. What you saw was an inflow of foreign capital that more than offset outflow of domestic capital.

The other thing to realize about the foreign property rule is that through the use of derivatives and clone funds, you can effectively get around the rule 100%. So there really is no effective foreign property rule any more. The problem, though, is that to use those facilities, to use clone funds or derivative funds, costs you more than it otherwise would.

So there is a cost to Canadians to diversify their portfolio. The elimination of that particular regulation would benefit Canadians.

Mr. Ken Epp: What would be the effect if one were to remove these restrictions altogether? Do you have any study on whether or not that would actually increase the amount that Canadians are putting into RRSPs and thereby reduce the amount of income that's available to the Canadian government?

Mr. Jason Clemens: First, the RRSP system should be looked at as a tax deferral, because you're not eliminating your tax, you're just deferring it to a later period.

The studies we looked at in our study suggested that the equilibrium value for the average investor would be that about 30% would be invested in foreign assets and the remaining 70% in Canadian assets. We didn't look at any kind of response—that is, if you eliminate this regulation, would you see an increase in savings? What you would see, however, is a long-term increase in the rate of return to the average investor, because they would be able to diversify their portfolios.

So there would be an increase in wealth accumulation for the average investor, given that they would be able to diversify their portfolios beyond the current level.

Mr. Ken Epp: Okay.

Lastly, what studies have you done, or are you aware of, with respect to the effect on government income of reducing tax rates? Over and over you've been saying we should reduce the tax rates, reduce the tax rates. You're talking about a flat tax, and I would be interested in knowing whether the Fraser Institute has any really good documents on the flat-rate tax.

I'm also wondering whether you have any hard data, or at least really good theoretical data, on the effect of income to the government if these tax cuts were to be implemented.

Mr. Jason Clemens: Sure. We are coming out within the next probably two months with a major study on the principles and issues revolving around a flat tax. Dr. Reynolds at the Hudson Institute has a major study out on the flat-tax system in Hong Kong. The Hudson Institute is in Indianapolis. I'd be more than happy to supply the committee with a copy of that report.

In terms of the academic literature, I would suggest there's not general agreement on the effect of cutting taxes. A variety of scholars believe in the Laffer curve effect—that is, when you cut taxes... What you have to understand, though, is that you're moving towards an optimal level. So if you're beyond the optimal level, which is what we would say we are in Canada, in fact as you cut taxes you will gain greater economic activity that more than makes up for the revenue loss.

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Over the next year and a half the institute is undertaking a major study to look at the tax-cutting experience in the U.K., in Ireland, in the United States, and in Canada to see whether or not... Because normally what we talk about is a “J-curve” effect. Very quickly, it just means that the year that you cut the tax you actually see a dip in tax revenue, and then within a short time, normally two to four years, you see an accelerated increase.

The problem is, if you look superficially at some of the experience, you don't see that effect. What you see is that when you cut taxes, immediately there's an increase in revenue from increased economic activity. So the institute is undertaking that work.

In terms of the academic literature, I would say, from at least my own reading and experience, there is no general agreement in the academic circles.

Mr. Ken Epp: Mr. Chairman, I think that ends my questions.

The Chair: Thank you very much, Mr. Epp.

I have one final question for Mr. Clemens.

It is often said that Americans are more entrepreneurial than Canadians. Now, is that an an innate thing or is it because the environment is...

Voices: Oh, oh!

Mr. Rick Limoges: He's an anthropologist now.

The Chair: We have entrepreneurs on both sides. Why are they collectively more entrepreneurial than we are?

Mr. Jason Clemens: With my apologies, that just falls outside the scope of what limited expertise I may have. The only thing I can add is anecdotal, although I don't like to add anecdotes.

Working in Vancouver and then being in Calgary fairly regularly, there is a major and palpable difference when you're in Alberta, Calgary in particular just because I've spent time there, that is extremely entrepreneurial, extremely innovative and risk-taking.

Again, I would stress that this is anecdotal and not based on data, but my own experience is that colleagues I have who are now starting up companies in the Toronto area and in the Ottawa area are extremely entrepreneurial. I would say that their experience and my own research tends to indicate that if we remove the chains on them—that is, if we allow them to keep more of their money and reduce the corporate tax burden and the individual tax burden—then we would more than be able to compete with Americans.

In particular, when you look at the educational infrastructure we have, although there are reforms that need to be made in the educational system we in fact do have an educated workforce whereby if we allow those individuals to develop and foster those companies in Canada we would be more than able to compete with Americans.

Again, I would stress that part of that is at least anecdotal and my own experience as opposed to data.

The Chair: But as soon as you say that in B.C. and Alberta and certain pockets of Ontario people are more entrepreneurial than in other pockets of Ontario... You know, they're still under the same tax regime.

Mr. Jason Clemens: Well, in terms of Alberta and B.C., British Columbia is suffering right now. We are losing some of our best and brightest, so to speak, to Alberta if not to the United States. That's both data-based as well as anecdotally. In fact, my roommate is moving his company simply because of the tax burden and the amount of regulations he faces in British Columbia.

Interestingly, though, British Columbia has really been on its own path in terms of major increases in spending and very little in the form of tax cuts. I would say it's an irresponsible fiscal system whereby we are running major deficits at a time of economic expansion when most of the other provinces have moved away from that. In fact, the federal government has moved away from that.

I would say that in terms of the unique snapshots of Alberta and Ontario, where you've seen a reduction in taxes, more reliance on the market has yielded benefits.

The Chair: In a sense, you can rest assured that corporate taxes will come down and personal income tax will come down as resources become more available. We will do what it takes to make sure that individuals are going to participate in a freer and freer market. I think we ought to also move on lightening regulations and the regulatory burden in Canada.

After that, though, I think you need to express to Canadians clearly that there are benefits to being an entrepreneur, that we as a society also have to accept the benefits of risk-taking and accept the fact that sometimes we fail. I mean, we see it in our banking system, the financial services sector. Canadians are not as much risk-takers as, let's say, Americans are. That to me is pretty clear.

I'm just trying to figure out whether it's the environment or it's just that Canadians tend to be more conservative than Americans.

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Mr. Jason Clemens: Again, I think part of the explanation or the answer would lie outside the purview of the research I do.

The Chair: Yes, and I understand that. I just thought maybe you had heard the same comments in your... I'm sure it's nothing new.

Mr. Jason Clemens: In terms of the studies I do, I find quite interesting the generosity of Canadians and the capacity of the non-profit sector and charitable sector.

The differences between the provinces are quite stark when you look at per capita volunteering and the amount of money donated as a percentage of income. There are some stark differences between the provinces.

Granted, we are only in the first year—we've done one study and we're now doing a second study—but I think part of that is along the lines of what you're talking about, and that's a cultural difference. In fact, the four western provinces are quite generous when it comes to per capita volunteer hours and the amount donated as a percentage of disposable income relative to other provinces. That may lead to a discussion that there are cultural differences even between the provinces.

The Chair: And Americans are more generous than Canadians.

Mr. Jason Clemens: Yes. Overwhelmingly, yes.

The Chair: By 66%.

Well, that was a bit of sociology mixed with economics, but sometimes it makes sense.

On behalf of the committee I'd like to thank you very much for your input.

Yes, Ms. Watts.

Ms. Diane Watts: Can I make a closing comment?

The Chair: You sure can.

Ms. Diane Watts: Mr. Szabo mentioned the discrimination against a single family in terms of the deductions for the one-earner family, and the difference between the one-earner family and the two-earner family. We claim here that the one-earner family pays double the tax.

If I'm correct, you suggest that the non-working parent, usually the mother, can go out and earn $600, and that would wipe out the difference?

Mr. Paul Szabo: No. The tax act provides that a stay-at-home spouse can earn up to $606 before the amount of the spousal amount is reduced on a dollar-for-dollar basis. In other words, if you earn $706, the spousal amount that the spouse in the paid labour force could claim for you would be reduced by $100.

Ms. Diane Watts: Right. So you're suggesting—

Mr. Paul Szabo: The $606 is tax-free money.

Ms. Diane Watts: You're suggesting that the mother work, then.

Mr. Paul Szabo: No, it could be interest income, or it could be part-time, garage sales, or something like that. It could be almost any...

It's a nominal amount of money.

Ms. Diane Watts: That's precisely what we object to. Our latest issue talks about this year's budget. We say:

It is clear from the 2000 budget that the Liberal government has written in stone its policy that the tax system must be used to drive women into the marketplace and to discourage them from remaining in the home. This unfortunate decision was made in spite of intense pressure to recognize the work of women at home raising their children.

This is precisely what we object to.

Mr. Paul Szabo: It's a different issue. All I suggested to you is that if you made them identical, that a personal amount could be claimed for both the stay-at-home spouse and the working spouse, exactly the same as two working spouses, if you eliminate that exemption on the $606, you virtually—and I'm pretty sure about this, because you have to pay provincial tax on that if you had to claim that income—would be worse off. I think spouses who get the spousal amount and the exempt income in certain cases are actually better off having the exempt income.

Ms. Diane Watts: Yes, but many women are not in a position to earn that.

Mr. Paul Szabo: It's $606 we're talking about.

Ms. Diane Watts: The point is, we want the mother out working, don't we?

Mr. Paul Szabo: No, no, that's not a job—

Ms. Diane Watts: This is what we come up against all the time.

Mr. Paul Szabo: All I'm suggesting to you is that you have a look at the numbers. If you make them identical, find out what the implications would be to someone who actually has casual income. Maybe they had received some Canada savings bonds as a gift and annually they were getting $500 or $600 of interest income. That is not taxed if you are a stay-at-home mom with no other income—zero—whereas if you are in the paid labour force it is taxed.

Ms. Diane Watts: The point is, the work that usually the mother does is of value, and what we would like is recognition of that.

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Our figures indicate that there's a tremendous difference between the single-income family and the double-income family. Our figures indicate that.

Mr. Paul Szabo: Listen, if you apply—

Ms. Diane Watts: Earning the same amount of money.

Mr. Paul Szabo: —the same tax table—17% federal rate on the first $30,000, 26% on the next $30,000, and 29% on anything over $60,000—you're absolutely right, but even in the United States, where you have joint filing, they have actually a separate table for joint filers. It's a different system, a different system of taxation.

There's no question, a one-earner family that makes $60,000 does in fact pay more tax than two earners making $30,000, but I can assure you, if you read the report, you will have all the ammunition you need to demonstrate that this is a perfectly ludicrous comparison.

The best comparison is to take a couple, both working, and the woman is going to have a child. Now I have to make a choice: Do I withdraw from the paid labour force and provide direct parental care or do I incur the child care costs, get the deduction, and continue to keep two salaries?

If you have two people making $30,000, the comparison is two $30,000s with a child care deduction or one $30,000. That's $30,000 compared with $60,000 of gross income.

I can tell you, when you work out the mathematics you'll find out that the discrepancy has nothing to do with the taxation rates. It has to do with the loss of net pay.

So it's a choice, there's no question about it, but don't compare one $60,000 to two $30,000s. It's absolutely ludicrous. Please read the report.

Ms. Diane Watts: Finally, we would like to reiterate the value we put on the non-earning parent. We still feel that this unit is being forgotten in tax policy. It's being forgotten in government policy. That's been our view from the beginning.

If there wasn't a problem there, we wouldn't be here reminding you of it, and we'll continue to do that.

Mr. Paul Szabo: Okay, thank you.

The Chair: Thank you very much, Ms. Watts and Mr. Clemens.

On behalf of the committee, I'd like to express to you our sincerest gratitude for your intervention here on Bill C-32. As always, the committee needs input when we're dealing with these bills, and we're very fortunate that we can count on experts like you to help us out. Thank you.

We have a housekeeping item. We will proceed to deal with clause-by-clause on Bill C-24 as soon as possible. There's been agreement by all parties to move the 7 p.m. meeting to start probably anywhere from 5.30 p.m. to 6 p.m.

Is that okay?

Some hon. members: Agreed.

The Chair: So please stay where you are.

The meeting's adjourned.