[Recorded by Electronic Apparatus]

Monday, July 29, 1996

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[English]

The Chairman: Order. The finance committee of the House of Commons is beginning its hearings into the economic and compliance costs of corporate taxation in Canada.

We have nine witnesses today: from the Coal Association of Canada, Mr. Ken Myers; from the Business Council on National Issues, Sam Boutziouvis; from the Certified General Accountants' Association of Canada, Vern Krishna and Jean Précourt; from the Canadian Labour Congress, Andrew Jackson; from the Retail Council of Canada, Peter Woolford; from the University of Waterloo, Alan Macnaughton; from the Mining Association of Canada, Robert Keyes; from the Canadian Association of Petroleum Producers, David Manning; and from the Forest Sector Advisory Council Secretariat, Doug Shaw and Frank Dottori.

When looking at the economic and compliance costs of corporate taxation, in terms of economic costs, first, what are the prices that businesses have to pay in rearranging their affairs to reduce taxes rather than pursuing the most optimal business plan? How does the tax system make you less than productive in your business decisions? In terms of compliance costs, we're looking at the resources spent by businesses on tax planning, filing, auditing and tax litigation.

A number of the objectives of the technical committee appointed by the Minister of Finance under the chair of Dr. Jack Mintz and his executive director, Mr. John Sargent, are as follows.

First, in undertaking this examination, we are to look at ways that we can help promote job creation and economic growth. Are there ways in which we can simplify the overall tax system? In looking at the various tax burdens imposed on different businesses and different industries in Canada, are there ways in which we can enhance fairness?

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In our first round, I suggest that perhaps witnesses limit their remarks to five minutes. There will be plenty of time after that to bring forward points you were not able to make. We look forward to a lively discussion. I want to thank all of you for being with us today.

Perhaps we could start off with Mr. Ken Myers from the Coal Association of Canada.

Mr. Ken Myers (Chairman, Economics and Taxation Committee, Coal Association of Canada): Thank you, Mr. Chairman.

On behalf of the Coal Association, I want to thank you and the House of Commons finance committee for this opportunity to present the coal sector's view of the economic and compliance costs associated with business taxation.

The coal industry is an important component of the Canadian economy. We provide$5.8 billion of Canada's GDP and generate one-fifth of the total tonnage exported from Canada's seaports.

In response to the questions set forth by the finance committee, we have structured our responses under the headings of economics, multi-governments and international competitiveness. While some of the recommendations may apply to more than one of these headings, each recommendation is referred to only once.

Under economics, we'd like to say that a costly feature of the federal and provincial taxation systems is the lack of deductibility of unused tax pools and corporate losses within a related group of companies. Legal and other professional fees incurred to develop elaborate tax plans, effect reorganizations and incorporate new companies would not be required if companies were permitted to file consolidated tax returns.

Secondly, tax legislation needs to have a sense of stability and certainty to encourage job creation and long-term investment. Businesses need to know and understand the rules of the investment they will have over the long term. Ongoing reviews, excessive complexity, and lengthy and continued legal appeals create an environment of uncertainty.

Third, the federal and provincial governments need to elaborate and/or consolidate tax filings where possible. Examples of where consolidation may be obtained are in federal and provincial income and capital tax returns and in provincial sales tax and federal goods and services tax filings and remittances.

As for multi-governments, as the association for a capital-intensive industry, the Coal Association feels that the various levels of government - federal, provincial, municipal - need to make a cohesive effort to understand the total tax burden assessed on capital-intensive industries such as coal mining. While governments are perceived to be cutting programs and costs and keeping income tax stable, the reality is that the total tax burden has actually increased through newly introduced user fees.

All levels of government need to understand that excessive taxation, in whatever form, will affect international competitiveness and will ultimately affect the ability to create and maintain jobs in Canada.

Federal and provincial governments need to establish a unified tax assessment and collection agency from an operational cost perspective. This would provide both industry and government cost savings while retaining the individual province's right to set policy initiatives that are different from those of the federal government.

With respect to international competitiveness, taxes not assessed on profitability should be minimized so as not to discourage business development and international competitiveness. Capital taxes, property taxes and sales taxes are based solely on investment and discourage capital investment and job creation.

In assessing Canada's international competitiveness, the federal and provincial governments need to review the tax burden extracted from the Canadian rail companies and port operators that transport coal. In Canada, the single biggest cost in producing and exporting coal is transportation. Included in the transportation costs is a burden incurred by the rail and port operators. A reduction of fuel taxes and port lease charges and the harmonization of Canadian rail tax depreciation rates with U.S. practices would make Canadian facilities' costs comparable if the benefit of these savings were passed on to the coal producers.

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Mr. Chairman, in conclusion, I would like to state that a strong, vibrant and growing coal industry provides needed, highly technical, high-paying jobs in Canada and positively contributes to our foreign trade. Care must be taken not to tax away the coal industry's competitiveness and its ability to attract capital in Canada. Thank you.

The Chairman: Thank you very much, Mr. Myers.

Mr. Boutziouvis, from the Business Council on National Issues, please.

Mr. Sam Boutziouvis (Senior Associate, Policy, and Economist, Business Council on National Issues): Thank you, Mr. Chairman.

Chairman Peterson and members of the House of Commons committee, employment prospects and economic growth are currently at the top of virtually every Canadian's priority list. The Business Council is also concerned with these issues and welcomes the opportunity to offer its views on ways to improve the taxation of Canadian business in order to contribute more to economic and employment growth in Canada.

I would like to offer these comments before the technical committee on business taxation within the context of the three main objectives.

First, improve the tax system to promote job and economic growth. To be sure, this review was initiated based on the government's increased focus on the revenue side of the budget and based on the view that progress in the deficit has been achieved and further progress is in sight. This is true: the federal government is establishing and reaching its deficit targets; several provinces have balanced their books; and total federal and provincial deficits have declined by more than $18 billion over the last couple of years.

But Canadian federal and provincial governments are suffering from a huge debt overhang. The federal government alone accounts for more than $600 billion in debt, which is equivalent to 75% of GDP, and this rises to over 100% of GDP when the provinces are included. Also, while interest rates have declined significantly across the maturity spectrum over the past 18 months, real, long-term interest rates remain unacceptably high.

I realize that the federal government has achieved results on the deficit with some action on the expenditure side of the equation - I am referring to program review, phases I and II - but more needs to be done.

In our view, the federal government must achieve budget balance through further expenditure restraint rather than through revenue increases. The best thing governments can do to promote job creation and economic growth is to provide balanced budgets. Then they can begin thinking about paying off debt and eventually lowering taxes.

Balanced budgets, lower debt and lower taxes will greatly improve the savings and investment climate for businesses and for people in this country.

From the business tax perspective I think there is private sector unanimity that the federal government has yet to foster an optimal environment conducive to employment creation and sustained growth. The environment is much improved, but there is still more to be done.

Importantly, payroll taxes have substantially increased over the past seven years. There are different views on the ultimate effects of payroll tax increases over time upon employment and growth, but over the short term to the medium term I think the evidence is pretty clear that payroll taxes have a detrimental impact on putting people back to work. Yet the federal government continues to demand higher premiums for unemployment insurance than is otherwise justified, given both the level of unemployment and the growing unemployment insurance account surplus.

In addition, premiums for CPP and QPP are set to increase dramatically over the medium term. The increase in payroll taxes that will be necessary to move to fuller funding of CPP represents foregone job creation by firms over the short term and lower wages for workers over the longer term, which are both highly questionable labour market outcomes.

At the very least, we believe the federal government should consider reducing UI premiums in view of the fact that CPP contributions are set to increase by the end of the decade.

Canada is a medium-sized open economy, highly dependent on international trade and investment, more so today than ever before. Exports represent 37% of gross domestic product, and according to the Department of Foreign Affairs and International Trade, exports sustain more than two million jobs in Canada. The majority of Business Council member companies compete globally, in particular in the U.S. Corporate tax rates are therefore an important factor - not the only factor, but an important factor - in the investment and future business location decisions of companies.

Corporate tax rates, and indeed the total tax mix, including personal income taxes, need to be roughly compatible and comparable with those in industrialized countries, especially with those of the United States, our most important trading and investment partner. Therefore, any changes in business taxes at the federal level should reflect this global reality.

Second is enhancing fairness to ensure that all businesses share the cost of providing government services.

[Translation]

In the past, many people have complained about the inequity of business taxation in Canada. The decrease in public revenues from corporate income tax has become a symbol of the unfairness of our tax system. The relative decrease of government revenues derived from corporate taxation may have been caused by a general drop in profitability of businesses in the last two decades.

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We also heard comments about the record profits achieved by Canadian businesses in 1995. While it is true that profits have shown a remarkable recovery, we should keep in mind that as a share of gross domestic product, before tax profits are still below the long term average of 10 per cent of GDP. Profits before taxes were at 8 per cent of GDP in 1995, an increase from their level of 4.5 per cent during the recession that followed the depression of the 1930s.

It is also important to note that over the last two financial years, corporate taxes have been the fastest growing federal revenue source, with a 32 per cent increase in 1994-95 and 24 per cent in 1995-96.

[English]

More broadly, other taxes paid by Canadian business have increased dramatically in both number and impact over the past 10 years. These include, of course, as was referred to earlier by Ken, taxes on capital, property and payroll.

The complexity of the system at the federal level is compounded, therefore, by the fact that taxes are also paid to municipal and provincial governments. All three levels of government seem to be looking for ways to enhance revenues by tapping into the corporation. Consequently, any discussion of the fairness of business taxation should be mindful of all taxes paid by corporations at all levels of government, not just taxes on income.

Fairness also means giving consideration to who in Canada ultimately bears the burden of corporate taxation. The Ontario Fair Tax Commission - and you will hear from Professor Allan Maslove tomorrow - has in fact concluded that corporate taxes tend to be passed on to employees in the form of lower wages, to consumers in the form of higher prices, and to investors in the form of lower dividends.

This assessment only reflects the latest in a number of reports that have been brought to the government's attention over the past three decades and that have reached the same conclusion. So who is really being hurt by corporate taxation?

Finally, the recommendations of our 1986 report are instructive today. The most important one, I believe, is the principle of neutrality, the equal tax treatment for all types of investment, which should probably guide the technical committee and standing committee in their deliberations.

The equalization of effective tax rates for different investments and activities would improve the overall competitiveness of the Canadian private sector. In this regard, we are broadly in favour of restructuring effective corporate tax rates to reflect greater equity in the tax system.

Finally, on simplification... I can't do any justice on simplification. Ken has made many comments, and I'm sure there are going to be many other comments, on simplification of the tax system in detail. I will only say that the GST heralded an important shift away from taxation on manufacturing inputs and toward consumption.

This was a welcome development. One thing that is probably not readily known is that as a result, it has helped improve the competitiveness of the Canadian private sector rather dramatically.

There have been modifications over the past few years, many of them recommended by this committee, that have helped improve and simplify the system. But the future health of certain sectors of the Canadian economy, most notably the retail sector, could suffer economically as a result of harmonization with the Atlantic provinces. A decision to move to tax-included pricing of products will increase the costs of doing business in the Maritimes for national-based companies. This committee, therefore, should give some attention to problems associated with harmonization as the new tax system is put into place.

As a final comment, we need harmonization on payroll and other capital taxes, provincially and federally. Based also on our unity conferences, held in March and May, we continue to endorse the concept of a national revenue commission in the hope that it will help simplify and reduce the costs of administering the tax system. We realize there are some important hurdles that need to be overcome, but we're still broadly in favour of such a development.

Thank you.

The Chairman: Thank you, Mr. Boutziouvis.

From the Certified General Accountants' Association, Mr. Jean Précourt, s'il vous plaît.

Mr. Jean Précourt (Chair and Chief Executive Officer, Certified General Accountants' Association of Canada): Thank you, Mr. Chairman.

With me this afternoon is Mr. Vern Krishna. He is a member of the CGA Canada board. He is also a professor of taxation at the University of Ottawa law school and executive director of the CGA tax research centre.

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As chairman and chief executive officer of the Certified General Accountants' Association of Canada, I would like to thank the chairman and members of the finance committee for the opportunity to participate in this round table.

CGA Canada is a self-regulating professional body that represents over 50,000 certified general accountants and CGA students in Canada, Bermuda, and nations of the Caribbean and Pacific Rim, including the People's Republic of China.

Mr. Chairman, CGA Canada is concerned that in spite of sluggish economic growth and persistent levels of unemployment, the tax burden on businesses has not diminished. In fact, the opposite is true. According to the Department of Finance, direct taxes on business - federal, provincial and local combined - totalled $51 billion in 1993, up almost 42% in constant dollars since 1980.

More significantly, total business taxation has risen sharply as a percentage of pre-tax income. Approximately 70% of direct business taxes, including many levied at the provincial and local level, are not proportional to income. They include employer-paid payroll taxes, property taxes and capital taxes. Because they must be paid regardless of the profit level, they have produced extremely high, and increasing, effective tax rates during economic downturns.

[Translation]

There are also indirect taxes on business inputs that are not related to profits. Such taxes are levied by the federal and provincial governments and are paid by businesses when they purchase goods and services. Examples include the excise taxes on fuel and provincial retail sales taxes.

Not only is the tax burden on businesses high, the tax system itself is complex, creating large economic and compliance costs for businesses.

Businesses are confronted with three and sometimes four levels of government - federal, provincial, municipal and regional - when complying with the tax system in Canada. This is especially onerous for small and medium-sized businesses, because they generally have only limited in-house resources to deal with complex tax issues and record keeping.

Let me give a couple of examples, especially for small and medium-sized businesses. If a small firm is administering its own payroll system it has to deal with employee deductions of CPP or QPP, UI and income tax. You have monthly remittances all based on different criteria and the annual burden of reporting to both the individual and government.

That same annual report would form the basis for provincial payroll tax purposes or for workers' compensation, but again criteria may be different further adding to the compliance costs.

There are also horrendous compliance cost associated with taxable benefits - particularly automobile benefits - that must be calculated and reported for individual employees.

A suggestion you may wish to consider is to eliminate the taxation of benefits of the individual taxpayer and replace it with a flat tax on employers. For example, if a business had $100,000 in taxable benefits for 40 employees, the $100,000 may be allocated in 40 different amounts. The government could get the same amount of tax and free the employer from paperwork and the compliance cost by levying a flat tax on the employer. It is better for the employer to spend one hour on activities generating profits and jobs than spending one hour on paperwork meeting compliance requirements which do nothing to create economic growth and jobs.

[English]

Mr. Chairman, it is the view of CGA Canada that the federal government must halt and eventually reverse the increase of taxes that are not sensitive to profits. It must increase the $200,000 small business deduction, which has been in effect since 1981, for those corporations wishing to expand and create jobs in the Canadian economy. As a phase-in step, tax increases toward the general rate will act as an incentive, not only to pay taxes but also to use the tax paid on returned earnings productively rather than spend time, money and effort in tax planning to ensure that there are no excess earnings above the $200,000 threshold.

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We suggest that the small-business tax rate and limit be increased by five percentage points for each $50,000 of taxable earnings above the current limit until the general tax rate is reached. An extrapolation of the inflation impact on the $200,000 since 1981 shows that the current value will be approximately $375,000, which is close to the $400,000 mark. Again, the current general tax rate will apply.

Increase federal-provincial coordination to reduce the complexity of the tax system; continue negotiations with remaining provinces to harmonize the goods and services tax, which provincially saves taxes; and consult with the business community before implementing changes to the tax system so that their economic impact and the compliance costs associated with a tax change are well understood.

Mr. Chairman, I will stop here. I look forward to participating in this afternoon's procedures.

Thank you.

The Chairman: Merci, Mr. Précourt.

We now have, from the Canadian Labour Congress, Mr. Andrew Jackson.

Mr. Andrew Jackson (Senior Economist, Canadian Labour Congress): Thank you,Mr. Chairman.

I'd like to make a few general remarks about the economic costs of so-called business taxation in the context of the review by the technical committee.

I think one major focus of the committee's work... I read Professor Mintz's remarks before this committee. He also gave another speech about the impacts of globalization on the way in which we tax business. I think the concern expressed by Professor Mintz at the committee was that tax rates in Canada are higher than in the U.S. Professor Mintz said Canada must ensure its business tax structure is consistent with greater openness of the economy so that investment and job creation can be fostered.

I think that's a general concern, expressed by Professor Mintz and by business spokesmen, about the competitiveness of the overall Canadian tax system, our way of taxing business, really associating our system of business taxation with loss of potential jobs. I'd really like to take some issue with this equation that's been drawn between the competitiveness of the tax system and job creation. Really, there are two key aspects of the economic costs of business taxation that we should take into account and separate.

The first is the loss of potential new investments, productive investments, in Canada, and the jobs they create. The second is the potential loss of revenues that arises from corporations operating in more than one jurisdiction, declaring profits, none of which, obviously, has implications for revenues.

I do think the second issue - in particular, loss of revenues through transfer pricing and so on - is an issue that has to be taken very seriously. But with respect to the first issue, the concern that high tax rates and increasing tax burden is killing investment and jobs, I think we first of all should make the general observation that business does receive substantial benefits for the taxes they pay in the form of education, infrastructure and other areas of public expenditure. It's by no means axiomatic, I think, that a lower business tax burden is good for business if you take into account the loss of services.

I think Canadians in general are concerned about the fact that corporate income tax revenues are falling as a share of federal revenues. I would maintain that even when we look at the share of business taxes, corporate income tax, as a share of corporate profits, there has been a decline over time.

I think Canadians continue to be concerned about the fact that there are many profitable companies, highly profitable companies, paying no tax, or effectively very low rates of tax. That lost revenue is of concern in terms of financing not just services but also potential public investments, which can create jobs.

So really, are there grounds for concern that the Canadian tax burden has somehow become too high and that we are losing investment and jobs as a result?

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I just want to point out briefly that a number of empirical studies have been done recently on this issue by Pat Grady, the Conference Board, and Ernst & Young for the Ontario Fair Tax Commission. They have all come to the conclusion that the overall differences between the marginal corporate income tax rates in Canada and in the U.S. are quite modest indeed, and if anything we might have a slight advantage on the manufacturing side.

In that context, I think that if there were a move toward a general lowering of rates in Canada, the likely result would be a lowering in the U.S. and a race to the bottom. I don't think the research indicates that there's much of a problem there in terms of comparability of tax rates with the U.S. Also, the case that if you reduce business taxes, particularly corporate income tax, which will result in increased investments and thus increased job creation, is not well established in the literature.

There was an important overview study done in the Canadian Tax Journal about three years ago by Rushton, who surveyed the studies and found no solid evidence that lowering corporate taxes produces more investment or more jobs for Canada. Even those economists who think there is an impact of corporate taxes on investment jobs do generally concede that this impact is marginal and that other factors are much more important, such as land costs, etc.

It is quite striking, I think, that when you survey the major economic literature - and I draw your attention in particular to a major OECD study that was published in the OECD Economic Studies in 1991 - it's very difficult across countries to relate differences in levels of investment or trends in investment to the cost of capital and to tax rates on corporations.

Business spokespersons really try to put forward the proposition that if you lower tax rates you're going to get more investment, which is more or less axiomatic. Economists have had enormous difficulty demonstrating that this in fact is a proposition. I think one key reason is that the major driving force behind investment is demand in the economy or prospects for sale, rather than the cost of capital, which turns out to be a relatively weak factor.

Apropos of that, if you look across different countries, I think it's striking that the business tax burden tends to be and has been relatively higher in Japan and Germany, countries that are not notably low investors by any means. If you compare Canada and the U.S. over the last 10 to 15 years, overall our business investment has been somewhat higher than in the U.S., even though our tax burden is comparable or perhaps slightly higher in Canada.

The key point I really want to put is that if you look at the impact of the level of taxation on the level of investment and thus on jobs, I think economists are far from having any clear understanding that the case that's commonly put forward by business is well founded.

That said, I think there is a real concern that if we have higher tax rates in Canada, it could lead to having corporations operating on both sides of the Canada-U.S. border and there will be a tendency to allocate profits to the lower tax jurisdiction. I think that's essentially a compliance issue. It's one that certainly requires strict auditing. I know the committee is familiar with this issue of the lack of disclosure by corporations to Revenue Canada of international transactions, so that's certainly an area worth pursuing.

I think the whole area of international cooperation and coordination in terms of taxation of corporations is an issue that's very much before us. I know the Department of Finance has been active in that regard.

I'd just note that recently in the European Commission there was quite a strong recommendation, which unfortunately is not being proceeded with, that there should be a minimum level of corporate tax established across Europe in order to prevent downward harmonization, a disratcheting effect downwards. Certainly various proposals are being put forward for systems of unitary taxation of corporations to stop this allocation of corporate profits to low-tax areas.

So I think the issue of where profits are reported for tax purposes is an important one, but it's mainly a compliance issue and I think it's a mistake to respond to that through a general impulse to lower rates.

Finally, I want to speak to the whole issue of the effectiveness of corporate tax expenditures and tax incentives as means of boosting investment and jobs.

I certainly don't want to make the point that all corporate tax expenditures are inefficient and ineffective and that all are to be condemned, but I think the literature that's out there does generally show that the cost in terms of foregone revenues of a lot of corporate tax incentives has not been worth the results in terms of higher investment.

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You can make quite a plausible case if you go back to the early 1970s and the budgets of Finance Minister Turner, which really began a proliferation of corporate tax expenditures in an effort to boost investment. The results of those in terms of investment were very low and there was a huge revenue cost, which in many ways lies at the origins of the deficit and debt difficulties.

I draw to your attention last year's staff report on Canada from the International Monetary Fund, which pointed out that corporate tax preferences in Canada are relatively generous, particularly the R and D tax credit. I've also noticed increasing support for the small business tax credit. It is generous in an international context. The IMF concluded that ``the effectiveness of these measures in promoting investment does not appear to have been large''. I think there are a lot of studies along those lines.

So I think there's a real need to look at the effectiveness of corporate tax expenditures, such as accelerated depreciation, the small business, the special low rate for small business, and resource depletion allowances, given the very substantial revenue costs of these expenditures and the lack of efficacy in many of them that's been demonstrated.

To conclude, I think this committee should be very careful about business calls for lowering tax rates and increasing corporate tax incentives that are out there. There's certainly a need for a careful review of these elements. I think we should be wary of buying into this line that our business tax system is making Canadian business uncompetitive. I think we should be very alive to the revenue side of this equation as well.

Thank you.

The Chairman: Thank you, Andrew Jackson.

Next we have Peter Woolford from the Retail Council of Canada.

Mr. Peter Woolford (Senior Vice-President, Retail Council of Canada): Thank you, r. Chairman.

First of all, thank you for allowing me to appear here today. I'd especially like to note my thanks to your clerk, who made some special adjustments so that I could appear today rather than tomorrow. I do appreciate that kindness on her part.

I wanted to step back from this a bit. You had talked at the beginning, Mr. Chair, about the search for a tax regime that both lowers compliance and minimizes the inefficiencies that collecting public revenues places on firms. I think we have to recognize first of all that in a federal country there is always going to be a measure of duplication and overlap simply by having a number of jurisdictions that collect revenues. That clearly, by design and by its nature, means that there will be a higher base level of inefficiency and additional costs, such as compliance costs and collection costs, which go with it.

On the other hand, we should also remember that it allows for a certain measure of experimentation and testing of new approaches and new ideas, which has stood Canada in good stead over the years. In response to the deficit problems the governments have faced, we have seen a number of different governments in Canada trying different approaches to that, and that's led to a healthy public dialogue.

Equally with respect to taxation, I think we have seen that in some areas of taxation governments have found ways of cooperating that have reduced the burdens and the impacts. On the other hand, we've seen areas where governments have decided to compete with each other, to great detriment both to companies and to Canadians generally.

I wanted to take a case study today and look at both how a tax can work well and how it can run off the rails. It's in the area of consumption tax. My favourite, as always, is the goods and services tax. That type of tax is far and away one of the most important for the retail trade because they are the principal collectors and administrators of consumption taxes.

The good side of the GST has been that we have seen a cleaner, more efficient, more economically competitive and internationally competitive tax system put in place. Through the efforts of the previous government and the current government to harmonize this tax with provincial taxes, we have seen a desirable attempt to try to limit the number of different consumption taxes that retailers and other businesses must collect and to provide a single framework within which that system operates.

As members of the committee know, our organization has been a strong vocal supporter of harmonization of the GST for many years. We've been around the country a number of times, trying our very best to persuade provincial governments to join what we see as a rational system of taxation.

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Initially we were very pleased when three Atlantic provinces announced they were going to harmonize their retail sales taxes with the GST. All the elements of rational tax behaviour were there. We saw a relatively inefficient, old-fashioned tax, a retail sales tax, being replaced by a value-added tax instrument, which is very much the way everybody around the world is going for very strong economic reasons.

We saw the commitment on the part of those four governments, the feds and the three provinces, to go to a single base, a single rate, a single administration, agreement to calculate the allocation of revenues on a formula basis. It sounded like exactly what the business community was asking for in terms of rational harmonization and rationalization of tax systems. That was the good side of it.

The bad side was the proposal to include the tax in prices. At a stroke, for the retail trade at least, that had the effect of completely negating and outweighing any savings the retail trade would gain from moving to a more rational type of system you'd expect in the second half of the 20th century.

I'd like to explore that a little bit. At the heart of every retail company is the price. I'm grateful to one of my members for explaining this. The price is what drives every retail firm in all of its systems: in its financial systems, in its planning systems, in its ordering, merchandising, advertising, even in its human resources, where people are paid on the basis of performance. Managers and senior staff often get a portion of their income, which varies with the value of the goods their unit sells. In that circumstance the price is enormously important.

What tax in pricing in part of the country has done is to force firms essentially to run two completely separate systems. They will now have to have two different prices for every piece of merchandise they carry - one tax in, one tax out. That implies enormous additional costs and burdens on the way they operate. It places significant inefficiencies in their ordering systems, in their financial tracking systems, and in all the other systems they use to sustain their business.

Going back to the focus Mr. Peterson put on this discussion at the beginning, of looking for ways of avoiding inefficiencies and ways of reducing compliance costs, GST harmonization works fine until we get to the point of requiring tax in pricing in only three provinces in Canada.

I should note that this is a problem not just for the large national companies that have these problems, but also for independent retailers in Atlantic Canada. They buy from wholesalers outside their province. They bring in prepriced merchandise, which they will have to reprice on the shop floor at significant additional cost. They will have to buy new computer systems. They will have to put in place new software. They will have to retrain their employees just as much as the large firms will. All of these are needless additional costs that just get in the way of efficient retailing.

Exactly the points that were made to the committee in some of the research about where these costs go apply in the case of this tax. Merchants face a grim choice. They can raise prices. Well, good luck in this kind of environment. They can cut employee hours. They can cut employment. They can reduce the range of merchandise in their stores or they can go broke. Notice that I didn't say they can reduce their profits, because they don't have much in the way of profits to reduce - least of all in Atlantic Canada, which as everybody knows is an economy that is already struggling.

If there's one thing this committee could do to help employment in the retail trade, which accounts for roughly one-eighth of the labour force in Canada, it would be to urge the government not to proceed with tax in pricing until provinces are on side. We of course will continue to work with the government as hard as we possibly can to persuade those governments to come on side with a rational tax system.

I'd like to turn to one other issue and then I'll pass the baton.

In some of his remarks, Mr. Martin has identified payroll taxes as job killers. He's absolutely right. When you tax something, when you raise the price of something, as the most preliminary economics tells us, the demand for it goes down. Yet the memorandum of understanding that the federal government and the three provinces have signed with respect to the GST and harmonization allows for additional payroll and capital taxes.

We think this is a very unfortunate and retrograde step. It will mean that provinces are given the green light to go ahead and put in place additional or new taxes that tax the one commodity that is in the shortest demand in Atlantic Canada, and that is employment. We think that's a very, very unfortunate step. It will harm the welfare, outlook and prospects for employers and employees throughout Atlantic Canada. Other than tax in pricing, I can't think of another step the government could take that would reduce employment in Atlantic Canada more.

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Mr. Chair, those are my opening remarks. I would be glad to participate in the discussions.

The Chairman: Thank you, Mr. Woolford.

From the University of Waterloo, we have Alan Macnaughton.

Professor Alan Macnaughton (School of Accountancy, University of Waterloo): Chairman Peterson and members of the House of Commons committee, I'm here to talk about compliance costs, mainly about the corporate income tax because that's what I have been doing research on in the last couple of years and will be continuing to do research on.

The first thing is that I don't think compliance costs are nearly the problem in Canada that they are in some other countries, such as the United States. I think of a study done in 1993 for the U.S. Tax Foundation by a couple of professors, Slemrod and Blumenthal, in which they surveyed large corporations and asked them what features of the tax system were most causing them to have compliance costs.

The thing they identified most was depreciation, which is much simpler in Canada than in the United States. Under the U.S. rules you have to keep track of each asset and depreciate each asset separately. Since 1948 in Canada, we've had a pooled capital cost allowance system where you can combine things into roughly 30 classes and do much more simplified calculations.

Also, in the U.S. they have an alternative minimum tax for corporations, which is much more complicated than our equivalent, the large corporation tax or LCT. I'd have to say it's really a bit of a nightmare there.

Also, we have amazing federal-provincial cooperation in corporate income tax compared to what the U.S. has with its state governments. The provinces, with only minor differences, basically impose their taxes on the federally defined taxable income. We use almost the same base for all provinces, with slightly bigger differences in Quebec, whereas in the U.S. there is no agreement and there has not been. That's a big problem there.

So there are three problems in the United States that we don't have here.

I've done some research on the level of compliance costs in Canada with one particular program, the R and D tax credits. We picked that one because we thought if there were going to be high compliance costs in Canada, that was where they would be. You have to justify to Revenue Canada that you have an innovative project, that it's really research and development, and that's a difficult thing to do. You have to get it past their science advisers, and there's all the financial proving to show that the costs you're incurring are really related to research and development. And there are high audit rates. Something like three-quarters of all corporations incurring R and D are audited in any particular year, which is way above the rates elsewhere. So we thought if there were going to be high compliance costs, that's where they would be.

We did a survey of corporations that did about a third of the R and D in this country. Our finding was that compliance costs were less than 1% of the credits claimed, even less for the big corporations.

Now, there were some issues. There was a start-up cost. The first year you were claiming the credits there was a problem. You had to learn about them and that was a difficulty. But audit costs were not a problem, even with all those audits and people complaining so much about them. We actually worked out how much it was costing them, and according to our survey respondents it was maybe one-sixth of the annual cost of complying with the credit. So audits didn't turn out to be a big problem.

I don't mean to say there are no compliance cost issues in Canada that we can deal with, but it's perhaps not that great a problem.

In terms of what we can do to drive it still lower, my feeling is that the best choice would be to lower the corporate tax rate while broadening the corporate tax base so that we would... I'm not talking about a decrease in revenue; I'm talking about keeping the same amount of revenue, but sort of a combination of lowering the rates and broadening the base.

This was exactly what was proposed in the 1985 budget. There was a document, The Corporate Income Tax System: A Direction for Change, in which they moved somewhat in that direction, but they didn't go very far. I think their arguments still hold water today and are very good arguments for this. I'll tell you some of the reasons why.

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One has to do with tax losses. A lot of corporations have tax losses. The problem is that a lot of energy goes into using those losses. Within a corporate group you want to move the losses to a company that has taxable income. There's lots of planning and lots of fees paid to accountants to do that. Also, when a company is taken over, to avoid being taken over strictly to use the tax losses, we have acquisition-of-control rules - very complicated.

I wouldn't recommend going to a consolidated reporting system like in the United States. Although this at first seems attractive, when you actually look at those rules and what it costs to comply with those rules, it's not so attractive at all. That's why it would be better to broaden the base so that we don't have as many tax losses as we have right now.

Another reason to lower the corporate tax rate is that Canada has a higher corporate tax rate than the United States. The difficulty is that it creates a lot of incentive to try to move profits into the United States rather than showing them in Canada. Transfer pricing, locating financing in Canada versus the United States - it's a big industry among tax accountants to try to move income into the United States. I don't really think that's productive activity.

Just in general, even if corporations are not operating abroad, the benefits of tax planning are a function of the tax rate. The higher the tax rate, the more it pays to have your accountant scrutinize the Income Tax Act to find every last possible deduction.

For all these reasons, and the reason of generally not interfering with business decisions, I would recommend this idea of lowering the tax rate and broadening the tax base.

I don't have a lot of suggestions as to how exactly to broaden the base. We could look at reducing CCA rates, at tightening up the R and D definition as was proposed by the federal government in the fall to say there had to be one arm's-length sale of the product to make sure it is in fact R and D. But primarily this is a problem for the Department of Finance. Outsiders really don't have the data to determine the best way to broaden the base.

I would say that small business does have a problem with compliance costs. Every study around the world will tell you that, and our study showed the same thing. Unfortunately we don't have a great many ideas on what to do about that. As far as I can see, we're doing as well as we can to keep those compliance costs low.

Finally, I'd say that some Revenue Canada forms seem unnecessary, particularly the statistical types of forms where you're not actually doing a calculation...the T661 form for R and D and the T106 form for related-party transactions.

The Chairman: Thank you, Alan Macnaughton.

Next is Robert Keyes from the Mining Association of Canada.

Mr. Robert Keyes (Vice-President, Economic Affairs, Mining Association of Canada): Thank you, Mr. Chairman. On behalf of the Mining Association, I'm very glad to be here this afternoon.

Before preparing my remarks, I also talked to one of our sister organizations in the mining industry, the Prospectors and Developers Association of Canada. What I have to say reflects some of their views as well.

I'm grouping my remarks under six headings and I'll be glad to elaborate on them later if there are questions from the committee.

The first heading I would call something like mining sector complexities. Most industrial sectors in Canada pay tax to three levels of government. They have corporate tax to federal and provincial governments and they also have taxes to municipal governments.

We have a third level of tax that we pay to the provincial governments and the territories: mining taxes and royalties. Even though these levies are profit-based, they're levied on a different tax base. Moreover, they are a factor in the calculation of corporate income taxes, and inevitably another series of taxes raises compliance costs.

Given the structure of jurisdictional responsibilities for resources in Canada, it seems likely that this system will continue. I think all we can ask for is that federal and provincial governments cooperate to the maximum extent possible.

Explaining the tax system as it applies to the resource industries to a non-Canadian is a very complicated business. But even with this complexity, I would stress that we're not looking for simplification simply for the sake of simplification. The Income Tax Act and various mining tax regimes all contain important features, which, while adding complexity, also reflect the particular nature of the sector. These tax features are there for a very good reason, particularly with respect to the level of risk involved in the industry. Given the competitive environment we operate in internationally, it could be seriously damaging if the various elements of the tax system were removed simply for the purposes of simplification and harmonization.

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Let me move on to capital taxes. I'm sure the committee is aware that these are a growing feature of the Canadian tax scene. Each province and the federal government levy a form of capital tax, but they're all calculated on different bases. Needless to say, this variation requires a repeat calculation for each jurisdiction. It might be helpful if the various jurisdictions were to have more commonality on the capital tax base, leaving only the applicable rate as the variable to be applied.

Outside the compliance issues, which are of direct interest to this committee at the moment, I would only note our continuing concerns about capital taxes, especially from the perspective of a capital-intensive industry.

My third point I've put under the heading of ``Revenue collection and compliance''. Income tax policy and intent essentially rest with the Department of Finance, but compliance with the act requires taxpayers to have close workings with Revenue Canada. On the whole, I think our companies have good relations with Revenue Canada, but there are specific instances of difficulties. Some companies have reported problems with the new business number system as it relates to partnerships. Apparently there are some difficulties with that system coping with the partnership arrangements that are often common in our sector.

Companies have noted that audits are a time-consuming and lengthy process. They require Revenue Canada personnel, in the case of large companies, to have almost permanent offices on company premises. This has to mean increased costs for both government and industry. In some cases, tax years are being left open for a long period of time. This too will have cost implications.

Clearly it would be helpful if there were better coordination between federal and provincial governments on audits. This is especially true given some of the complex transactions that take place in our industry.

For example, on hedging transactions, gold loans, share swaps, derivative financing, etc., it would be very helpful if a single audit could meet both governments' requirements. It can be difficult for government auditors to keep up to speed on these transactions, but hopefully companies should not have to explain these things several times.

My fourth point is that there is a potential new area of compliance costs with respect to foreign affiliates. The federal government is about to add to the complexity and cost of compliance through the proposed rules regarding reporting on foreign affiliates. These look as though they're going to add significantly to the paper burden and the time and cost required.

We would suggest that the potential burden by these proposed requirements could be significantly reduced if the measures were limited only to controlled foreign affiliates, not all foreign affiliates. In some cases, we think the required information is going to be very difficult and very time-consuming to obtain. There also seems to be a perception that, rightly or wrongly, auditors are almost automatically suspicious of virtually every international transaction when in fact nothing offensive is happening. So we hope these rules will be looked at from the perspective of potential compliance costs.

My fifth point, which has been touched on by a number of people, is non-profit taxes and levies. This is definitely a growing feature of the Canadian scene, and the list is long in terms of the type of levies that come under this. Rapidly being added to this is another form of cost, that of cost-recovery mechanisms such as the cost of environmental assessment, court charges, marine service fees and so on.

Some of these levies do represent a service or a good provided by government, but where the industry has little or no control over how they are determined and levied they can become taxation in another form. Again, they have both a cost of compliance impact and inevitably a competitive impact, especially important in an industry like minerals and metals where these costs cannot be passed on.

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Moreover, because they're not based on profit or cashflow, they can become economically regressive and therefore damaging. Indeed, this point is critical to all the discussion here today about compliance costs. In our business, we cannot pass them on; we do not set the prices for our products.

My final point is on the proposed revenue commission. We think this offers the promise of a more streamlined and simplified regime. We don't underestimate the growing pains and the operating parameters, but I think the proposal offers the potential to reduce the efforts involved in compliance by both governments and industry. The objective is certainly to support and try it out, especially if it can assist in closer federal-provincial cooperation.

Thank you.

The Chairman: Thank you very much, Mr. Keyes.

From the Petroleum Producers Association we have Mr. David Manning.

Mr. David Manning (President, Canadian Association of Petroleum Producers): Thank you, Mr. Chairman and members of this committee. I appreciate both the interest of the committee and the invitation to the Canadian Association of Petroleum Producers. I also appreciate my position at the table, which allows me to be brief and encourage discussions we would all like to have with members of this committee.

However, I should take this brief opportunity to point out that the upstream industry, which is the portion of the oil and gas industry that I represent, does supply about two-thirds of Canada's energy needs. In addition, it does about $12 billion in export revenue per year, so it's a significant player in our international balance of payments, falling just behind forestry and ahead of autos. We employ pretty close to 120,000 Canadians, or 190,000 if you include indirect and the induced employment that goes beyond there. We're a very key employer in this country.

Most importantly, as a group we reinvest approximately 100% of our after-tax cashflow. Because it is a capital-intensive industry and because we are in fact price-takers from the mining sector, as my friend Mr. Keyes pointed out, costs and variables on the competitive nature of this basin have a profound impact on the upstream oil and gas industry. That of course is the issue you're trying to address at the moment. We are very dependent on foreign investment because of the reinvestment that takes place, because it is a capital-intensive and diminishing resource that is a strategic and critical element of this operation.

As in most industries, there have been some substantial adjustments going on within the upstream sector over the last several years. We are not, however, convinced that this restructuring depends disproportionately on the tax structure. We are not at all convinced that those decisions are being made because of the tax regime, I should say.

I would echo the words of Professor Macnaughton; we are not convinced in our industry that compliance costs are a significant impediment to the business plans and developments of the upstream oil and gas sector. We are, however, adamant that the lifeblood of this industry is the competitiveness of Canada's basins relative to other regions of the world.

The attempts, which others would encourage, to balance the playing field or level the impact of Canada's costs on an industry-wide basis in Canada do not have much appeal to an industry that is based on commodity pricing worldwide and that must stack up in the international marketplace in terms of competitiveness. Therefore, as opposed to or as an alternative to a complex analysis of some of these costs, we think a lower overall tax regime and lower overall tax costs would contribute more to the competitiveness of this industry.

The return on capital, which is a tough part for our industry, is something less than 4%, based on the recent Globe and Mail analysis. That compares to 13% for electricity utilities and 16% for gas utilities, which are other elements of the energy industry. That just demonstrates that there's not a lot of margin within the upstream sector, based on the price-taking commodity nature of what we do.

That, of course, raises the question of our costs. Part of the difficulty is that when the federal government downloads the costs of maintaining governance in Canada at this level, those costs have a tremendous impact further down the line. Bob Keyes alluded to this as well.

The expenses and fees and taxes that are paid by the upstream industry to all levels of government in all forms can be extensive. We don't even have a complete handle ourselves on what total costs are paid to governments. We know that out of the industry we paid about $5 billion in 1995 in terms of taxes and fees to governments, but we have not been able to track all the various costs and impacts on us throughout the line.

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That raises the question of federal-provincial harmonization, which is an important issue for us. We worry sometimes if the preoccupation might be on the administrative side, the idea of some sort of central administration of the tax structure in Canada. That has less appeal than a harmonization of actual taxation rules.

We concur with previous speakers that compliance costs are very often more extensive in the United States. We do not have a lot of complaints about compliance costs in Canada relative to other places our industry operates. However, we do suggest that there is an opportunity... Perhaps a national regime of harmonization within the federal-provincial framework would be more difficult. We would even suggest that some sort of regional review be undertaken to see if some small steps could be taken rather than a large bite.

The international side of this industry is very important. I do have one specific measure to raise. A great deal of the new employment taking place in the energy sector has been in marketing the kind of expertise and technology that have been developed in Canada. Therefore, when a Canadian-based or a Canadian-owned company is doing business in an international region or an alternative or competing basin, it very often employs Canadians who maintain homes and families and a tax base in Canada. It very often and usually employs technology that is based in Canada.

For instance, much of the geophysical analysis in Asia and Mexico is actually processed within Canada. The field work is done internationally, but much of the processing is done back here. So when you talk about that kind of expansion of Canadian firms internationally, it shouldn't be viewed just as a departure by any stretch.

On that note, we do have one small bone to pick, if I may say, and that is the understanding of some of the royalty regimes of other developing nations. This is not so relevant in those developed nations where we have tax treaties, but many of the developing countries of the world that host exploration and development activities by Canadian firms have production-sharing arrangements - royalties in kind, more or less. These are not recognized in all cases by the Canadian government as a foreign expense.

That's an issue we have taken up in the past and will continue to take up. There might be an opportunity for greater repatriation of Canadian capital if in fact there were an effort on the part of the Canadian government to recognize and analyse those expenses that are in fact deductible in some nations but not in others. That is because the industry is expanding, as I've indicated.

Most importantly, the investment dollars that drive this industry have legs. They will go to the most competitive basin. The variable margins can be fairly slight. As I say, this particular element of Canada's industry is driven by investment. There are not sufficient investment dollars within Canada, and the foreign investment dollars have legs and will seek out the most competitive regime. That, therefore, is the challenge for Canada. It's based on total tax costs throughout the entire system. The understanding and certainty, of course, are just as important. Geology is perhaps the most important, and certainty is probably the second most important, but cost is the third most important when they make those investment decisions.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Manning.

Mr. Shaw.

Mr. Doug Shaw (Acting Director, Forest Industries and Building Products Branch, Department of Industry): Actually, it's Mr. Dottori.

The Chairman: Oh, thank you. Mr. Dottori, from the Forest Sector Advisory Council.

Mr. Frank Dottori (Co-Chair, Forest Sector Advisory Council Secretariat): Thank you, Mr. Chairman.

We've heard all the comments, and let me just say that our industry is very similar to Mr. Manning's, so we share some of the same concerns. Before coming to this presentation, I thought I'd take a different tack - and I'm glad I did in view of the comments that were made here - and take a rather simplistic approach to the problem from a business point of view.

Let me give you a bit of background. I'm president of a company that started off from a shut-down mill, and we built it up into a billion dollar company. We are probably Canada's most international company in the pulp and paper sector. We sell to over 50 companies, so we have a good idea what competition is like out there. We've created over 4,000 jobs.

I'm also co-chairman of FSAC, the Forest Sector Advisory Council. I'm here today to talk to you on the basis of the pulp and paper and forest products industry, which is Canada's wealth creator. Last year it brought $35 billion into this country. When you look at taxation, it's important to look at its effect on our industry, which is the number one wage earner and creator of wealth for Canada.

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As mentioned earlier, I think some of the questions of compliance, although they're important, are not fundamental. I started from a different point of approach on how we look at our business and just covered some of these items so you can get a different perspective.

Of course, the first thing we believe is that this country needs capital investment. It needs capital investment to protect the jobs we have and it needs capital investment to create jobs and develop this country to value-added products. What I'm going to address is more in that general sense.

We need exports. Out there today it's basically an economic war between countries, whether they want to recognize it or not. All countries are competing for jobs and Canada is no different. That's why we have a high unemployment rate. So we're coming from that approach.

Bear in mind that FSAC is a combination of forest product industries, including unions. I sit as a co-chairman with Mr. Stoney, who is president of IWA. Some of my comments are tempered with what we believe is also the labour point of view in our presentation here today.

The always interesting question is how to attack these issues. We look at them very simply. First of all, as a Canadian exporter we have to have market access. I want to cover some of the issues that tend to be avoided. It's part of taxation, it's part of cost. A lot of the governments in Canada and a lot of the media suggest that we should get value-added and we should put investments into this country.

The problem we have is that the other countries have tariffs against our value-added products. For example, in Europe we can't put value-added products into Canada because they have a 9% tariff for coated paper, but they'll buy our pulp at no cost without tariffs. We have the same thing developing in Indonesia, Korea, Japan, etc. They put very high tariffs, up to 34%, to prevent our products from going into those countries.

We say the Canadian government should promote free trade and promote the elimination of tariffs, but we should also up the ante; make it tit for tat and fair trade where it doesn't work. The U.S. knows that very well and we think it's about time Canadians learned that rather than being the good guys all the time. If you want us to build, create, and get value-added, we need access to markets.

The second item is costs. Again, we would love to pay corporate taxes, but in an international business it's a marginal business and there are a lot of factors that come in there at the end of the day. For example, our industry pays over $5 billion, directly or indirectly, to the Canadian government, although some people say we don't pay any corporate taxes. I think a lot of people have addressed this in terms of fees and user taxes that are camouflaged and get away from the corporate tax point of view.

For example, wood costs are 40% of the costs in our industry. We have stumpage, we have fuel taxes, we have road taxes and all sorts of taxes that are in there and that are camouflaged. Then we get attacked by the U.S., who says we're subsidized. On the other hand, it costs us $45 a cubic metre to deliver wood to our mill yards. It costs them $20 and they claim they have $23 of stumpage. Unless they have a fairy godmother cutting the wood, I don't know how they do it.

In the U.S. all the roads are built by the government and all the infrastructure is provided by the government. Here, they download it on us. We have to provide those services because of the country's geography. In addition, we have to pay stumpage, so we're put at a disadvantage.

The next issue is energy. In many cases in Canada energy used to be an advantage. Today, if you don't own your own hydroelectric dam you're at a disadvantage. In Ontario, for example, it costs 5.8¢ per kilowatt-hour. You can get power today on an increment basis for 2.2¢ using our own natural gas. You can buy it out of the U.S., but you can't do it because we don't allow wheeling.

Again, this shows government's pervasive influence over the costs of manufacturing if you want to be competitive. In the U.S. they have PURPA, which allows a transfer of energy and subsidizes co-generation. In Canada, particularly in Quebec, you can't even build a co-generation plant without asking permission.

On the question of chemicals, which is more international, we don't have a problem. We have a competitive chemical industry in Canada and competitive costs.

Next is the question of labour, of payroll taxes. I've done an analysis, in our company in particular, including provincial and federal sales tax. It has cost us 53.85% in tax deductions. UIC is 7.2%, the pension plan is 5.4%, federal tax is 16.8%, including income taxes, and so on. This is an area that inhibits and reduces competitiveness and should be looked at as one we need to address.

A return of a few percentage points on dropping income tax makes a big difference to the average worker. It's more take-home pay. We think individuals can best manage the money. Of course, we recognize that this will take some time, since the government has to address their deficit before that, but it's something to look at.

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Transportation was brought up - 15% of our costs. In terms of fuel taxes, the regulations across Canada are a hodgepodge. Although there are, again, steps made to help that out, we think these are fundamental issues that affect our cost competitiveness or our margin of profitability. We were happy to hear Dr. Mintz say he's going to recognize the complexity and take a look at some of these issues in the overall context.

The other important issue in our business is cost of capital. Again, I hear that the cost of capital is not important. I ask you, when you go to build a house... I'm not an economist, but I signed over $1 billion in requisitions in projects. When you look at it - and I don't think it's much different when you look at building a house - if the money costs you 10%, if you can go someplace else where it costs you 5%... I'll give you an example. If it's 10% in Toronto and 5% in Oshawa, and you have a choice to move, where are you going to go?

So the cost of capital is very important. It's not much more complicated than that at the end of the day, although I realize that how you get there is complicated.

Our mills can't move. When we put capital, hundreds of billions of dollars, into this country, we can't pick them up and move them out in the back of the truck, as can high-tech. We're here, and therefore we take a lot of time - and we need security - when we make our investment in some long-term planning. We don't need fast changes. I'll give you a specific example.

Our company built a $300-million machine. At the same time, I was paying... Do you remember how interest rates went to 14.75%, plus 0.5% on top of that? In Japan at the same time, one of our competitors was building a machine at 3.2%. If you multiply that difference times$300 million, you can see who's going to win at the end of the day here. Then people say we're not as smart as the Japanese. I guess my point is, give me money at 3.2% and we'll see what's going to happen to the Japanese.

A lot of studies done by the government, for example - one must be about this big - show that the cost of capital in Canada, aside from availability, has been between 1.3% and 1.7% higher, with the exception of the last six months, since at least 1978. So I can't stress too much the importance of the cost of capital in Canada for capital-intensive industry. If you want to reinvest to protect jobs, reinvest to build jobs, you need competitive costs of capital. That's the future. I'm assuming we have a profit margin and a good business to start with, but if you want to build and expand, that's what you need.

We have some specific recommendations in that area on the costs of capital. We think large capital tax is a disincentive to capital investment. If the government wants a minimum tax on corporations, do it on cashflow. I find it incredible that we have a $300-million project and I get whacked with a $2-million capital tax when I'm almost going bankrupt and I have to ask for term-preferreds.

I'm saying it just doesn't make sense. You have to get rid of that. When I make $10 million,$15 million, $20 million of positive cashflow, then fine, peel off 10% tax. If you want a minimum tax, that's fine, but large capital tax has to go if you want to promote capital investments in this country. If you want to go after the banks, find some other way of getting at them without penalizing capital-intensive industry.

We think you need a business transfer tax system of some type. We spend a lot of money. This is probably one of the areas of merging and amalgamating. There are ways of getting around this. We all do it, so why don't we just face up to the fact and eliminate the problem?

We think you need tax incentives that have to be fair and applied to everyone. People will say, well, here we go again, but I can tell you, we have a plant in France, and anywhere you build in the EEC they have 17% to 22% incentives. You can go to Thailand, you can go to India and you can go to China, and you can get 2.5 to 3 years that are income tax-free - no taxes. They'll even pay the personal taxes. You can go there and get all these incentives.

I think this government has to look at that. Whether you like it or not, you have to face reality. You're in an economic war out there. You have to look at something that's fair and equitable. It's not to make the rich richer and the poor poorer; it has to be fair for everyone.

You have to address that issue. We're suggesting, to provide some stability, something like an RRSP. You can make it simple. For example, you can put money in designated investments, whether it be environmental or R and D. Where companies in our business are very volatile, we can protect some funds, as they've done in Sweden and elsewhere, so that we can spend during the bad times and keep our investments going.

The other thing I would suggest... I hate to use the term ``capital gains tax'', because it tends to provoke a reaction from everyone. Call it what you want, but you have to create something that provides an incentive to entrepreneurship in this country. Whether we like it or not, people are motivated by greed. Greed is what gets people to go out and take risks so that they can have a better life. We can get as philosophical as we want, but that's the reality of life.

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We have to create some way in which people who put up money and take a risk in capital-intensive jobs or job creation - and I emphasize job creation. My union counterparts have made sure that I stress it is only directed towards job creation.

There are incentives to create capital pools, to get people to take a risk, to go out there and start up a business, and I think we need more of that in Canada. That's the climate we need here. If we do that, I think we're going to raise government revenues, we're going to help balance the budget, and we're going to have a better country. We certainly have the assets. We have the infrastructure, we have the brains, we have the people. I think we need a little push on the incentives, and with that, along with the good climate, I think you'll see this country move ahead and take its proper position in the world.

Thank you.

The Chairman: Thanks, Mr. Dottori.

Could we turn now to questions from members?

[Translation]

We will start with you, Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): Thank you, gentlemen, for your outstanding presentations.

Let me state, first of all, Mr. Chairman, that we were greatly disappointed when we found out the direction you chose for our review of business taxation.

When the Minister of Finance brought down his last budget - his speech was incidentally broadcast again today on CPAC - it was our understanding that we were undertaking this review from the perspective of making the Canadian tax system more fair.

There are businesses who pay their taxes, as Mr. Dottori mentioned earlier. However, a number of others, by using various devices or combining two or more special measures contained in the Canadian tax system, manage to avoid paying their dues to federal coffers.

On the other hand, most individuals pay their taxes. However, this is not true of some of the wealthiest people, like the one referred to by the Auditor General who was able to transfer to the United States $2 billion of family trust assets without paying any taxes. There are people in Canada who do not pay their taxes.

Normally, we should have been able to expect that this review of the tax system would be aimed chiefly at achieving greater fairness. Indeed, it is a fact that since 1960, in the space of 30 years, the contribution of corporations to federal income tax revenues dropped from 20 per cent to 10 per cent.

If we look at the sum total of taxes paid by Canadian businesses to all levels of government - federal, provincial and municipal - we see that ever since OECD started this kind of studies, Canadian businesses have been, of all OECD member countries, those who contribute the least to government revenues. This has been going on for 25 years.

Instead of trying to reform the tax system and looking at the many tax expenditures - including tax deferrals by businesses which amounted to $34.6 billion in 1994 - we are talking about compliance costs and administrative interaction of federal and provincial taxes.

I must therefore conclude, Mr. Chairman, since you chose this direction for the committee's work, that you have in mind two ultimate goals.

First, you want to justify the mandate of the new revenue commission that would take over the role of provincial governments in collecting taxes. Several witnesses took up this subject earlier. It is one of the three areas of focus you have imposed on the committee.

Secondly, the Liberal government is trying to preclude a real reform of the tax system, one that might compel those corporations who presently escape taxation to pay their due share in the future. The many exemptions that benefit them might otherwise be closely scrutinized and critically assessed as we move towards the year 2000.

In short, Mr. Chairman, just as it happened with the untaxed transfer of $2 billion of assets to the United States, the Liberal government is trying to confuse the issue and to avoid the necessary reform of business taxation.

I have heard a few good suggestions from our witnesses, including that of Mr. Macnaughton regarding depreciation and tax deferrals that I find really interesting.

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These seem in line with the message sent by the Minister of Finance when he tabled his last budget and to be dealing directly with the real issues of business taxation and the overall tax system that we must confront due to the precarious situation of our public finances.

The first of my three questions deals with the contribution of businesses. Could someone explain to me why since 1965, over the last 30 years, the contribution of businesses to federal income tax revenues has decreased by half? Could someone provide a good explanation of this erosion of the contribution of businesses?

The Chairman: Could anyone answer Mr. Loubier's question?

[English]

Mr. Boutziouvis.

Mr. Boutziouvis: Thank you, Mr. Chairman.

There are several reasons why we've basically seen this tendance or trend of corporate profits declining as a share of total revenues in Canada over the past three decades.

First of all, I think we need to point out - and in fact, I wanted to bring this up with regard to Andrew's comments - that virtually all OECD industrialized economies have witnessed a secular decline in the contributions of the private sector towards total tax revenue in terms of income taxes. It's not a tendency or a trend that's been prevalent just in Canada. It's been prevalent across the OECD.

Secondly, the most important reason why we've seen this trend or tendance is that corporate profits have basically been in decline for the past three decades, particularly in Canada. On a before-tax basis they've declined from a high in the 1970s and late 1960s of around 14% of GDP to, as I said earlier, the post-depression lows of 4.5% in 1993 in the period of intense restructuring.

The long-run average of pre-tax corporate profits as a percentage of GDP has been just above 10% of GDP, and yet we continue to be below that despite the fact that some companies did have some quite high profits in 1995. Overall, the private sector still hasn't reached its long-run level of profitability over the past three decades.

Mr. Loubier, it's not as though governments have not recognized that fact. In fact, they have recognized that corporate taxation on income has declined, and they have tried to fill the gap with all sorts of other taxes like those we've discussed this afternoon, such as taxes on payroll and capital. They've tried very hard to shift the burden of taxation away from taxation on income towards taxation on more fixed elements like labour, capital, etc., and on the cost recovery type of elements regarding business with respect to government.

Secondly, I think what has happened is that as a percentage of total tax revenue, taxes on personal income have increased dramatically over the past three decades, and basically that has been to fund the social security net more from taxation on personal income. There has been a huge increase in taxation in that regard.

Thirdly, despite the fact that we've had a stagnation in personal incomes over the past decade, over the past three decades there has been a huge increase in personal incomes for people in Canada. Therefore the tax take on personal incomes has also increased dramatically as a result. So when you take it over three decades there are several reasons why we've had the secular decline, and as far as we're concerned, those are very valid points, but I think we need to...

[Translation]

Mr. Loubier: Mr. Boutziouvis, you mentioned a drop in business profits. But this erosion of the business contribution to federal tax revenues happened even from 1970 to 1981, a period where profits increased continually, almost year after year, as you said. The proportional share business paid towards federal taxes and revenues was dropping even then.

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It is true that in 1981, 1982 and part of 1983, due to the recession, there was a drop in profits. These short-term circumstances account for part of the decrease in tax revenues. However, later on, in the 1980s and until 1990-91, the increase in profits resumed while the share of taxes paid by businesses to the federal government never ceased to decrease.

I wonder if the large number of tax deductions and exemptions, such as tax deferrals and accelerated depreciation mentioned by Mr. Macnaughton, that presently exist within the federal tax system for businesses would not explain this relative decrease of the corporate contribution to federal coffers and the corresponding increase in taxes paid by individuals. If my memory is correct, Canadian businesses started using accelerated depreciation and tax deferrals heavily in the early 1980s.

[English]

The Chairman: Mr. Macnaughton.

Prof. Macnaughton: I'll just add that there is one thing that provides a lot of useful information. The Department of Finance published a thing called Government of Canada: Tax Expenditures, in 1994, which lists a lot of the corporate deductions and credits that are available and lists how much they cost the federal government. I think if you're looking for a shopping list of some things that could be changed in the corporate tax system, that would be a good place to look.

I have to say, however, that it's really not enough information. One problem we have as people who are outside of the Ottawa loop is that the Department of Finance releases very little data about the operation of the tax system.

For example, it would be nice to know exactly what percentage of companies are paying tax in any given year. I don't know that number. The latest information I know about is more than eight years old. I think perhaps that is something that could be done to help the operation of the tax system. Have more information made available.

[Translation]

Mr. Loubier: Mr. Macnaughton, we have been pressing for an in depth review as early as 1993, since it was clear, even in the document you mentioned and that I read with religious zeal, that we do not have sufficient data. We are lucky to have researchers like you to look at these issues in depth.

[English]

The Chairman: Merci. Mr. Jackson.

Mr. Jackson: I have just a couple of points. On this question of looking at the overall trends of corporate profits as a share of national income, I think what really happened is that we had two very severe recessions recently, in the early 1980s and in the early 1990s, where corporate profits dipped very severely. In fact, I think if you struck those out of the picture, corporate profits as a share of total national income haven't really declined in a secular way. It's a matter of looking at a line with a couple of dips and trying to see if it's a trend down or if it's a straight line.

I don't think there is much of an overall downward trend. If there is one, the trend has been for income to shift from corporate profits to the category in the national accounts called ``interest income''. Part of the reason for that, I think, is that interest costs are deductible for corporate tax purposes.

There is an incentive in the tax systems for corporations to finance themselves through debt rather than equity. In other words, the composition of property income has shifted somewhat if there has been a change from corporate profits towards the interest side of the equation. There has been no increase in the wage and salary share of national income.

With respect to Mr. Loubier's question about why we have this sort of downward trend and the corporate income tax contribution to total revenues, I think the significance of those two recessions has been that we have very generous loss carry-forward provisions in the tax system. I guess it was alluded to here...about a lot of corporations really going through a lot of games to use those. The fact is that there were a lot of companies that lost a lot of money, both in 1981 to 1983 and in the early 1990s, and that's going to have a significant continuing impact as long as we have the seven-year carry-forward provision.

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Now I guess we've entered a period in which a lot of companies, certainly by no means all, have had a recovery of profitability. There are whole sectors of our economy where rates of return on capital are as high as they've ever been, but those losses and the ability to carry them forward means that there is a substantial lag.

Here's just one quick information point. Statistics Canada used to publish corporation taxation statistics every year that gave you the opportunity to look at both profits and taxes, and track the relationship of one to the other. It gave you numbers of corporations that weren't paying taxes. But that catalogue is no longer being published. It would at least help to have a source of information to look at those questions.

[Translation]

The Chairman: Thank you, Mr. Loubier. We will now go to Mr. Grubel.

[English]

Mr. Grubel (Capilano - Howe Sound): Thanks, Mr. Chairman.

I am always pleased to see Mr. Jackson come up with facts and studies that are contradicted not only by conventional wisdom but by witnesses and so on.

I just call the attention of the audience again to the fact that he asserted that U.S. and Canadian income tax rates are the same. Mr. Macnaughton, a scholar from the University of Waterloo, says the United States rates are lower, which is why a lot of tax accountants are reporting income in the United States. However, I'd like to take his position and see what logical conclusions there are that are inconsistent with what I would say.

Proposition A concerns the compliance when a country has higher rates than that of a neighbour or trading partner. You won't get less investment. There will be only a very little effect. The main cost will be because these tax lawyers report the profits abroad. That's proposition A.

Proposition B is that the Europeans in fact have gotten together and will now have an agreement whereby they will not lower rates in competition with each other in order to get more money reported.

Proposition C - this is again what Mr. Jackson said - is that somebody has lower rates than Canada, and money is reported abroad. That's one reason why we have a shrinking of our tax base.

Mr. Jackson's conclusion is that we should therefore hire more people at Revenue Canada to make sure no transfer payments are reported as profits in the United States.

I'd like to suggest an alternative conclusion from those three propositions, which is that Canada should lower its tax rate. Since we are a small country, there would be so many transfer payments coming from Europe and the United States, which are stuck at their high rates, that we would probably have an enormous increase in tax revenue. Wouldn't we have this? It follows from your proposition.

Second, even though there may not be a great response on the investment side to raising the after-tax income by having lower tax rates, we would nevertheless still have more direct investment. You wouldn't reverse a sign of that change.

So I don't understand. Take your empirical propositions. It would seem to follow from those that we should lower corporate tax rates in order to get foreign companies to use transfer-pricing mechanisms to report more of their profits here. In other words, make Canada the Switzerland of North America and we would get ourselves enormously increased tax revenues. What's wrong with that argument?

Mr. Jackson: If we are in agreement, I must have misspoken myself.

Some hon. members: Oh, oh.

Mr. Jackson: With respect to the tax rates, clearly, whether the tax rates are comparable or not depends on whether it's a small business or whether it's a manufacturing business. There's an arena of tax rates. It depends which state or province you're looking at.

So there's no blanket statement that tax rates are higher or lower. I guess the U.S. rates are somewhat lower if you take the general rate for an average state. I concede that.

The key point I wanted to make is that the studies I have seen that have looked at the overall impact of the corporate income tax system and capital taxes on rates of return have come to the conclusion that the incidence is just about comparable, or it's a very small difference. If anything, we have a slight advantage on the manufacturing side. I think that's an important point to put out just in terms of the proposition that somehow our tax system is uncompetitive.

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With respect to your proposition that if we lowered our tax rates we'd stop tax avoidance and get a flood of new revenues, that sounds a little bit like supply-side economics: if we lower tax rates, we'll get so much more activity and more revenues. The curve didn't work out in practice when it was tried in the U.S., right?

Mr. Grubel: No, but I'm just taking your -

Mr. Jackson: But surely the other point is... I thought you were being a bit contradictory.

Presumably there's a problem in the other jurisdictions if we lower our tax rate. Say you're down in the state of Ohio. You say now that Ontario has this tax advantage, you've got to lower it. So I'm driven to what makes sense, which is to have some sort of international coordination of understanding to avoid this purely shuffling around of profits to the low-tax jurisdiction.

Look at the extent to which the European Community is exploring having some common rules about not ratcheting down tax rates. That seems to be a useful way to go. My impression was that they were sort of less advanced on it.

Mr. Grubel: Your proposition was that there is a high elasticity in the flows of reported profits to lower tax rates in one jurisdiction.

Mr. Jackson: I'm saying that the impact is more on the reporting side than on where investment -

Mr. Grubel: It's so substantial that, on average, a combination of states in the U.S. would be so driven by that amount of money coming to Canada that they would lower their tax rates. You said that; I made a note of it.

Now you can't have it both ways. If it is very sensitive to that, then the best thing Canada can do is to have the lowest tax rate in North America. If it isn't so, then it doesn't matter and the United States won't follow. What is true? What are you saying? Do we have this high elasticity and therefore we should do it, or don't we have it?

Mr. Jackson: Clearly, if you have companies operating on both sides of the border and there's a tax advantage to declaring profits on one side as opposed to the other, there will be a tendency for companies to do that, with some loss of revenues as a result.

I was trying in my remarks to say that the impacts of the tax system were a lot more on the side on which profits are reported than on the real investment side. With respect to that problem, I was trying to argue that it's a mistake to deal with that simply by lowering rates, because as soon as you lower rates, other jurisdictions are going to lower rates. So you get a sort of temporary advantage at best.

Mr. Grubel: You're making an empirical proposition that given the size of Canada and the number of companies brought between these two jurisdictions, if we lowered our tax rate we would put so much pressure on the United States that they would lower their tax rate. Do you want to go on record with that proposition?

Mr. Jackson: Forest companies in the U.S., for example, seem to be quite sensitive to all kinds of issues in Canada. I think that would be the case sectorally.

Mr. Grubel: Thank you, Mr. Chairman.

The Chairman: Mr. Campbell, please.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.

It's only fitting that I have Mr. Grubel on my right and Mr. Jackson on my left.

I want to turn to a couple of other issues that haven't come up. Just before that, when we get into these discussions about comparative rates of corporate taxation, we always end up with an argument between what the appropriate comparison is. Is it the rates of the United States in the U.S.? Is it the rates in the OECD?

In my experience listening to witnesses, those who wish to assert that our rates are too high tend to cite the U.S. as an example. Those who want to assert that our rates are too low cite the OECD. But rarely do we have before us, Mr. Chairman, a group of people of this calibre who have studied it, or live it every day in their work.

I don't want to do what some have done before, which is take a poll, but I want to get a sense from people here. What is the appropriate comparison?

I take Mr. Jackson's point, and I think Mr. Macnaughton made the same point, that it may be a given state or a general rate, but is the U.S. the best comparison, or is it the OECD? Which is the best comparison for our purposes? Does anybody want to take a stab at that? Mr. Krishna?

The Chairman: Mr. Krishna.

Mr. Vern Krishna (Immediate Past President, Certified General Accountants' Association of Ontario): Thank you, Mr. Chairman. I'll address that issue initially, and then come back to certain other general comments that I wanted to make.

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I was encouraged earlier to hear the comments that tax compliance is not a real problem. As a person who spends a great deal of his professional life arranging and rearranging transactions, I was very encouraged by that. We do spend an inordinate amount of time moving transactions and structures and income from high tax jurisdictions to low tax jurisdictions.

I think Mr. Campbell's question is a pointed one, and it focuses the discussion in this sense. Obviously the United States, being our major and largest trading partner, has to be looked at very carefully, because their tax rates will determine where we locate industries, activities, goods and services, and transactions. Even within the United States it is not useful to discuss the United States as one country because their tax rates vary so substantially.

I have two examples to illustrate this point. Why did BMW and Mercedes-Benz locate in the southern United States? I'm not quite sure of the exact state now, but I think it's Alabama or the Carolinas. They moved there for domestic production purposes for a number of reasons, not exclusively tax, but tax was a very important reason over there. It is well known that you can move down to the United States and, depending upon the particular location, drop your tax rate by 13 to15 percentage points. That's a very substantial reduction.

But, having said that, the OECD and some of those countries are now becoming increasingly important and we cannot choose to ignore them. The best illustration of that is Ireland. Ireland has become a very attractive manufacturing tax haven in the last few years because of their tax rates. It provides a very useful entry point into the European Union. Therefore, for both of those reasons, some OECD countries are now assuming great importance.

I don't wish to prolong the discussion, but I think the short answer, Mr. Campbell, is that the United States is probably the most significant but the OECD and certain segments of the OECD are becoming increasingly important.

Thank you.

The Chairman: Let's start with Mr. Keyes.

Mr. Keyes: I have just a short answer to Mr. Campbell's question. I don't think there's any nice and easy answer to it. I would suggest to you that there's a sectoral factor here, depending on your sector and your competition. If you're a manufacturing plant where you have a facility which is much more mobile than something like the resource sector, that's a very different situation.

In our case, we have to look at the United States but we also have to look at Australia, Peru, Chile, Argentina, Brazil, South Africa, PNG, Indonesia, and on and on and on, anywhere where that mineral potential is because that's where the capital will go. In that international tax climate, assuming your geology is somewhat equivalent, capital will flow to where those conditions are best. Tax issues are one element of that competitiveness. I think you'll find very wide sectoral variations in your question.

Mr. Boutziouvis: I would have to agree with both my colleagues' comments. I'd just like to point out that investment in the United States continues to be the number one source of our investment in this country, followed by the U.K. Overwhelmingly it continues to be the United States.

Frankly, I must agree with Andrew. Tax competitiveness is one criterion by which a company is going to make its investment decision. There are many other criteria that go into the decision-making process for investment in this country. That being said, we still need to make sure that we are roughly compatible and comparable with our largest competitors in terms of our tax systems, on the personal income basis as well.

I think it's unfortunate that Andrew chose Japan and Germany as comparables, because Germany and Europe, for instance, are very complementary towards our tax system in particular. We appear to have more flexible labour markets and therefore lower fixed costs on labour, so they tend to be looking toward our system as perhaps a future model.

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In Germany, in fact, as my colleague has said here, it's currently a very difficult climate for the private sector. It's obviously currency related, but it also has to do with very high fixed costs on labour. Clearly, in that country the high fixed costs on labour is having a detrimental impact on future job creation growth.

Finally, I would say, Mr. Campbell, rather than looking at Japan and Germany, particularly with respect to Canada, you should be looking at Singapore and Hong Kong. They are small, open economies, possibly even more comparable to Canada than are Japan and Germany. They have very low tax rates, and it's where the entrepreneurial system is alive and well, as my colleague referred to earlier.

The Chairman: Mr. Woolford.

Mr. Woolford: Mr. Chairman, I can be very brief.

As he often does, Sam went there ahead of me. I was going to note that one of the key areasMr. Campbell had missed was the Far East, which increasingly is emerging as a source of economic interchange with Canada. That's one of the key comparisons we should be making.

The second point is simply to observe that it's not just Germany but indeed all of Europe that has the serious problem of sclerosis in their economies. A lot of European observers are very concerned about the stasis they find in their economies, a legacy of the time when Europe had a relatively high-growth economy but virtually zero population growth. That's no longer the circumstance. They're in there suffering those pains.

So I would suggest that, again, the U.S. is the logical and first place we should look, but we should be casting our net wider than simply Europe and the U.S., looking at some of the other economies we do business with or will be competing against in the future.

Mr. Campbell: Mr. Chairman, I had an additional question, but in the interests of time, I think my colleagues may want to ask questions now.

The Chairman: We'll come back to you, then.

Mr. Campbell: I would be happy to do that.

The Chairman: Thank you very much for that gesture, Mr. Campbell.

[Translation]

Mr. Bélisle, please.

Mr. Bélisle (La Prairie): Mr. Macnaughton, you said earlier that we could decrease rates and widen the base, that is reduce credits, for example the research and development tax credit, as well as measures such as accelerated depreciation. Could you explain the approach you advocate?

Secondly, how do you explain that tax deferrals and other measures such as accelerated depreciation will mean that in future some businesses will pay no tax for the next ten or 15 years?

[English]

Prof. Macnaughton: This is a difficult question to respond to. We don't really have a lot of good data as outside observers, outside the Department of Finance, about what are the best actions to take to increase the tax base.

I would name accelerated CCA as probably one of the biggest-dollar ones, but I'd hesitate to name particular things, because I really couldn't say that I knew what the answer to that would be. Sorry.

[Translation]

Mr. Loubier: I would like to ask a supplementary.

Mr. Macnaughton, are the accelerated depreciation regime and tax deferral regime as generous elsewhere in the world, in other industrialized countries, as they are in Canada? Are they today so generous that businesses can brag about never paying taxes due to an inopportune cumulation of tax measures?

[English]

Prof. Macnaughton: Absolutely. Corporate tax systems around the world have a lot of special deductions, special credits. Ours is not unusual in that respect. It's hard to know for sure, but we may have one of the cleaner systems in the world in terms of that, but perhaps somewhat less than other countries. It's hard to be sure. That's not to say it couldn't be improved, however.

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[Translation]

Mr. Loubier: Yes, but if we look at the OECD data, we can see that in Canada, as a share of GDP, taxes paid by businesses to all levels of government are the smallest of all OECD countries. Do you not agree that we may have a bigger problem with the many exemptions granted to businesses and various measures in our tax system, which mean that the federal government is not getting from corporations all the tax dollars it could? A large proportion of businesses pay, but others do not pay anything despite record profits.

[English]

Mr. Dottori: I have to take real objection to Mr. Loubier's questioning here, because for a capital-intensive industry that earns 3.5%, as was mentioned earlier - in our industry it's about 6% - you can put your money in the bank and earn more money. So this whole idea that we have to tax them more because they're ripping us off, or whatever the hell the objective is here, is just not sensible. I mean, what you're going to have is nothing in Canada. We can't even exist in the future unless we have a higher profit margin.

I can tell you, we have investments outside of Canada where we don't have CCA as we have here in Canada. I have, for example, a project in Europe, which we just built two years ago, where I didn't pay income tax - none - for two years and made 100 million francs. Let me tell you, eliminate the CCA and tell me that every time I invest I get two years tax-free, that I don't pay any taxes, and that you're going to give me 1% money I have to pay back over 10 years, and we're in business. You have to look at it -

[Translation]

Mr. Loubier: This is not an objection you are putting forward, Mr. Dottori. I am quite willing to agree that this is not the case in your sector and of the businesses you represent and who do their part as corporate citizens, but we know that some businesses do not pay their share and never will. By combining different measures in the federal tax system,...

Mr. Dottori: That is a different issue.

Mr. Loubier: ...they manage to defer taxes they would normally have to pay not only for six years, but for ten, 12 or 15 years. Some corporations and business managers brag about never paying taxes.

Mr. Dottori: I agree with you, but...

Mr. Loubier: I am not talking about your sector.

Mr. Dottori: We do not pay much taxes in our industry because we are not making profits and invest a lot. In our industry, some businesses may pay less. A resource-based industry which requires a lot of investments, for instance, usually has the lowest profit margin. In fact, we pay a bit less. Furthermore, thanks to the tax carry-forward and the loss carry-forward, we pay less.

As somebody mentioned earlier, maybe the focus should be on the transfer of profits to other countries to avoid taxation. This may be a bigger issue than CCA and other such devices.

Mr. Loubier: This is why we should undertake a real review of the tax system. This is why I criticized earlier the direction taken by our committee; this is not the direction we are going into.

We should review the tax system in total in order to determine whether there is justification to allow businesses that make productive investments in your sector, among others, to continue using tax deferrals and accelerated depreciation. However, on the other hand, there are corporations who play around with federal income tax rules and it might be possible to identify these if the Department of Finance would only collect the required data, which it ceased doing several years ago.

Mr. Dottori: I agree. There is unfairness. The system should be equitable. But this is not true regarding investment.

Mr. Loubier: That is all we are saying.

The Chairman: Fairness for all others.

[English]

Mr. Solberg.

Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman.

I'd be curious to follow up on the comments made by Mr. Woolford with respect to harmonization in Atlantic Canada. One of the things I think we want to take a look at is how decisions are reached with respect to tax structure. Of course, we had a long time to consider harmonization since the government came to power, and we're now in a situation where you say we're actually going to be seeing some jobs lost, I guess, and possibly people considering pulling out of Atlantic Canada, certainly the most vulnerable economy in the country.

I wonder if you could tell me whether or not the Retail Council had input into the issue of tax in pricing and tell us a little bit about that process, how those decisions were arrived at. Clearly, if you had some input into this situation and we ended up with this type of situation, then your group is culpable. If it's not, then it really begs the question of how this all happened.

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Mr. Woolford: We were deeply involved with the Department of Finance on questions regarding the GST. Our attention was mostly on the questions of base rate and administration. Our assumption was that the issue of tax in pricing was not going to be decided at this time, so we did not put much focus on it. You're looking at the person who is responsible for that decision. It was a surprise to us, as I think it was to many observers, to see that pop out.

The second thing is that we had always hoped we would see more provinces come in at the time of harmonization. We've ended up with the unfortunate situation of three provinces having decided to integrate their tax with the goods and services tax, but they account for about 5% of the domestic economy. There's not a lot of leverage there, and we end up making adjustments for a relatively small portion of retail sales for a relatively small portion of employment for a small portion of the country. So it rather caught us by surprise.

I should say, though - and I should give credit where credit is due - that on the other issues we did consult extensively with the government. We appeared before this committee twice, I believe, to talk about the issues of base rate and administration. In those areas we're very pleased with the work the government has done.

The one area we felt was a matter of policy for governments at that time was the question of whether the tax should be included in prices or exposed. That was because we were working on the basis that we would see a national agreement in this area, with all provinces coming in. I think our members generally would be quite willing to include the tax in prices if all provinces, or the overwhelming majority of provinces, came into such a system. The difficulty for us arises when it's only about 5% of the economy.

In short, we were surprised. I take at least a portion of the responsibility for that. It was based on some assumptions on our part about how this would play out.

Mr. Solberg: I'd be reluctant to blame you. I'm just wondering why the decision to include tax in pricing came about. Obviously you don't know. It really gets to the issue of how tax structure is decided and how tax policy is set. If these issues aren't discussed when we bring forward all the players, then it brings into question whether or not these types of meetings have any value.

Mr. Woolford: May I respond to that, Mr. Chairman? I should acknowledge that when this committee had hearings across the country, consumers and consumer representatives did call for tax in pricing. This committee has heard requests from a number of speakers for tax in pricing. For example, the Consumers' Association was calling for tax in pricing on the basis that it would be a national sales tax. Everybody was talking in those terms. That may well be part of the pressure that the government is responding to.

Mr. Solberg: I completely understand that. I guess as long as there are three provinces involved and that's all, it leads to tremendous problems in the most vulnerable economy in the country.

As a follow-up question, have you talked lately to your members? What are the ramifications of this decision if the government doesn't change the policy?

Mr. Woolford: I have some work here that I will send to the clerk of the committee for distribution. Our estimation is that we will see significant costs placed on the trade. These come in a number of ways.

One is changes to the internal computer systems that retail firms use to manage their business. The second is on the general merchandise side, the side that is not grocery but rather all the other stuff. There is a lot of what we call source-tagging going on in the industry in the interest of efficiency, where the price you see on the product is put on in the factory. The best example of this is greeting cards, where it's printed right on the back. Paperback novels, books and many other products have the price printed right on them, at virtually zero cost. It is an extreme case, if you will, of pure efficiencies.

When we move to essentially two price systems in Canada, that whole operation is blown apart. Firms have to reprice their merchandise either at the distribution centre or at the store, at significant additional cost and some confusion to the consumer.

So those are the kinds of costs we can see playing through this. There's the time to train staff. For firms doing any kind of inter-regional advertising, there are additional costs in presenting prices in two different regimes.

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As well, there will be some breaking apart of the domestic economy in that we now will have in essence two markets, one where prices are tax-in and one where prices are tax-out. It will be more possible for firms to change their pricing policies between those two markets than it was before, because the prices are already visibly different to the consumer. So a number of factors that go into this are both cost-raising and ineffiency-inducing.

The one I forgot to mention as well is that the whole logistics chain has gone through the same kind of just-in-time process we've seen in manufacturing in the last 10 years so that product moves through very quickly and efficiently. When we move again to essentially two-price systems, that works against the efficiencies in those systems. Again, firms will find themselves both less competitive and facing increased costs. So that's the kind of concern my members have from this move.

It's very unfortunate, because most of what the rest of the agreement focuses on is very positive for industry. If you go to a single base, single rate, single administration, you end up with a very good system. It's exactly what Canadian business has been asking for, and we're very pleased with those elements of it. They constitute the basis for a very strong system of consumption taxation in Canada. The one problem for us is the requirement to include tax in price.

Mr. Solberg: Thank you, Mr. Chairman.

The Chairman: Mr. St. Denis, please.

Mr. St. Denis (Algoma): Thank you, gentlemen, for being here to help us today. My first question was going to be similar to the subject area Mr. Solberg asked about, so I thank him for allowing the air to be cleared on that and for his question, maybe, to fall a bit flat.

If I understand it, Mr. Woolford, the issue here is that with respect to tax included in pricing, all the country isn't on side yet, all the provinces aren't on side yet, but at the point in time when a significant majority of the provinces are on side with harmonization, it won't be an issue.

Mr. Woolford: That's correct, but before then, it is a very serious issue. We can't do this in little steps. We need to wait until we get that -

Mr. St. Denis: I think that's an excellent point. The fact is, harmonization is the way to go. We've heard that from chambers of commerce, from the council, from consumer associations, from many people, including Mike Harris, the Premier of Ontario, during the campaign, and from the Reform Party in its first minority response to the committee's report in the spring of 1994.

I would like to get away from some of the bigger and important philosophical questions and ask just a couple of questions of clarification, with your indulgence, Mr. Chairman.

First, Mr. Précourt, you mentioned that there had been a 42% tax increase, in constant dollars, for the business sector. I wonder if you could elaborate a little bit on that 42%. Is it cash dollars? Is it a 42% increase in percentage rates? I wonder if you could elaborate a bit on that statistic. I believe you are the one who raised that.

[Translation]

Mr. Précourt: If I understood your question correctly, you talk about...

[English]

Mr. St. Denis: Since 1980 to the present there's been a 42% increase in taxes. That was the point.

[Translation]

Mr. Précourt: The small business deduction has not changed. If we were to convert it into constant dollars, we would have today a threshold of $400,000, instead of $200,000, before the large corporation rate kicks in.

We suggest that excess earnings be subject to a 5 per cent rate increase for each $50,000 step. Maybe this would not be in the interest of us accountants, but we suggest that instead of always trying to do tax planning in order to keep business profits under the $200,000 threshold, small businesses pay 5 per cent more for each $50,000 of taxable earnings above the current threshold until the business reaches $400,000 in profits, at which level it would pay the same rate as all corporations, including large corporations. This would encourage businesses to report higher undistributed profits and to invest this money to create jobs.

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[English]

Mr. St. Denis: It wasn't so much a matter that the overall taxation to business has gone up by that percentage since 1980. What you're suggesting is that the concessional rate for small business has been...the concessions have been reduced so that we now have 42% less benefit to small business in comparison to benefits in 1980. Is that...?

[Translation]

Mr. Précourt: No, this means that if we had converted this amount of $200,000 to account for inflation between 1981 and 1996, for instance, the small business threshold would be $375,000. In other words, we say that $200,000 is not enough.

As soon as the business reports profits exceeding $200,000, it is subject to a higher rate. Small businesses are the mainstay of the Canadian economy, in Quebec as well as in other provinces. They are the ones who create the most jobs. Rather than strangling these small businesses who are not in a position to prevail themselves of measures to defer a lot of taxes and make them pay the maximum rate, we should allow them to report higher profits and tax them step by step in order to allow them to create jobs. Today, in most cases, large corporations lay-off employees while small businesses create jobs. So let us give a hand to small businesses to allow them to expand and to eventually pay the large corporation tax rate.

[English]

Mr. St. Denis: Thank you, Mr. Chairman.

The Chairman: Ms Brushett, please.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.

One of the reasons we're looking at possibly changing the corporate tax system is to look at how we might do better job creation. We haven't talked much here today about job creation, and I would like to draw some links between corporate taxation and the idea of job creation in this country.

Traditionally, the old economic models of corporate tax incentives or benefits would lead to corporations creating more jobs. But recently - if the press is halfway accurate - we see that as profits increase, jobs are lost in the corporate sector.

We've heard here today that tax on capital is a great disincentive in this country, and I'm wondering what else people might say is a disincentive. I'd like to hear anyone's views on how we might do better job creation through restructuring, if that's the case with the Corporate Tax Act.

The Chairman: Mr. Manning has something to add to that, Ms Brushett.

Mr. Manning: Yes. I hope there are a number of responses to this one, Mr. Chairman, but I certainly would like one shot at it.

I did allude in my comments, Ms Brushett, to the kind of changing job structure within the upstream industry, and I think it's also important to note that these sorts of changes give the sense that perhaps there's a greater growth within small businesses...that sort of thing.

We're not sure that is in fact the case. What is happening here is that restructuring is going on within the industry so that it remains competitive. That is giving rise to a different type of job and to a different base for that job.

As I indicated, we're finding that while many of the upstream companies are in fact downsizing in terms of their own loads to remain competitive and to compete globally, many of the people who are leaving those positions are establishing consultancies or smaller firms or international firms, and much of the expertise that has been developed within Canada on a technical side is being exported, but it's being exported with a Canadian base.

So to say that there has been a downsizing, a restructuring, within the entire resource sector is a misnomer. In fact, the traditional idea of who's in the business is changing.

The company names from our membership that you and I would have discussed ten years ago were very different. There's a very different series of names today. There are a very different number of Canadian-owned companies providing much of the real leadership in terms of growth within Canada. They're also establishing a major international presence, and as they do that they certainly are employing people elsewhere, but they are taking with them many of their employees from Canada along with the expertise developed here.

That's part of change within the corporate structure and employment of those covenants. It has not been tracked as yet. In fact we are working on tracking that for this committee and this government.

It is very difficult to respond to concerns in the press about the jobless recovery, if you will, where companies are in fact remaining competitive without doing so with a smaller and leaner group. In fact we're finding that there is a very different group of companies maintaining those kinds of production levels in that work and we're trying to track that down.

The Chairman: Mr. Jackson.

Mr. Jackson: I have one very brief comment on a facet of this issue.

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I think one issue the committee should look at in terms of the impact on the tax system and the way employment is structured is that the small-business tax rate means effectively that the rate of taxation on an incorporated small business is now often significantly lower than that on income from employment.

If you look at payroll employment for the last three or four years, actual paid jobs have barely increased at all. A very large share of the very small increase in employment we've had recently has been in self-employment. Across a whole number of dimensions, there's no doubt that there are some good jobs in self-employment, but there are an awful lot of bad jobs in which people earn very low incomes in precarious self-employment.

I think there are ways in which the tax system is contributing to firms not hiring people. Firms are contracting out to people who are nominally self-employed. They might not be genuinely self-employed in the way we might understand it. The quality of the job is inferior. Also, the revenues that go to governments are being substantially undercut. So I think that is a facet of the whole way in which we tax small business that is not looked at sufficiently.

The Chairman: Is there someone else who wanted to say a last word to Mrs. Brushett on that one?

Mr. Dottori: A little bit of my crusade here is job creation, so I think it's very important. I think that corporate taxes and some of these levels are not as critical as creating jobs in Canada. I think you have to provide an incentive for entrepreneurship in this country, whether that is through a look at the capital gains or through lower rates on small business to give people more of an incentive to go out and take a risk.

You could do it two ways. You can do it by forced unemployment whereby people have to go out and look for a job, but it's nice if you can do it with an incentive. That's government policy that has to be looked at. In a lot of countries, that's what governments are doing to promote jobs.

In this country, it creates a bit of a problem with those who have and those who have not. So you have o address the element of fairness.

I do think governments can look at incentives to get the small people to start businesses: take a risk and go out there. It can be through some kind of tax incentive, which you have to provide. I think you have to assure that they're fair and geared to create jobs.

There's a lot of criticism, for example, in capital gains, whereby people could flip real estate and basically not create anything except a lot of money in their pockets while avoiding taxes. That's the kind of thing you have to avoid in a tax policy; otherwise you lose your credibility. If you do it in the sense that someone goes out, takes a risk and creates jobs, I think you'll find that you can sell that.

In the discussions we've had with the labour unions that make up part of our council, they said that's an incentive if you can make it equal and fair; it's not to make the rich richer and the poor poorer. That's the type of thing I think you can look at.

I think Canada has the opportunity, but you have to simplify a lot of the regulations. Say you're a small-business person going into business. I think this was mentioned earlier. This is certainly a lot more important than for a big corporation like ours that can hire the tax experts and make it become a smaller percentage.

For a small-business person creating five or six jobs, this is very important. It's a different concept. I can tell you that for a big business like ours, it's not a big deal, but I think for the small-business person it's extremely important to have simplification and deregulation, and to keep it simple.

Mrs. Brushett: If I may, we are addressing small business in other forums; today we are addressing corporate taxation and big business. We're here for the purpose of you telling us today what we can do.

We know the problems with small business. We deal with those daily. They are the creators of the jobs today. At least they are the perceived creators in society. But it's the corporations and the corporate tax system that we are here to discuss today.

Mr. Dottori: I'm in a bit of a different position. We started off with 300 employees; today we have 1,100. We've never laid anybody off in the last five or six years.

Mrs. Brushett: Are you creating jobs?

Mr. Dottori: Yes, we are creating a lot of jobs.

Mrs. Brushett: What can we do better to help you create more jobs?

Mr. Dottori: As I mentioned earlier when I covered my presentation, I think the government first of all has to give us access to world markets, because we sell in the world markets. I need free, fair access to our products and the world markets. I think we need a simplification in the government with a lot of these user taxes that are becoming more significant than corporate taxes today.

I think we have to let the government set the rules to protect and respect the needs of society, then let business carry on. We're not suggesting getting rid of regulation to let business do what it wants; we're saying set the regulations and let it get done in the most efficient way possible.

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I know a lot of people are concerned about the social services, but I think what you see taking place in Ontario is a major step in the right direction. I think at the end of the day you'll see other provinces and other areas having to follow suit. We're not suggesting going like Hong Kong or Singapore where it's wide open, but you have to move in that direction, including for big companies.

I think the governments are moving that way, and that's a very important factor. It affects our costs. When you sell at a price, you deduct your costs. The smaller they are the more profit you have. Then you can reinvest. When you reinvest, what do you want? It's like buying a house. If you're going to go out and risk $100 million, you want to know what the cost of capital is, what it's going to cost you. You want to know there's stability. You want to know there are some set policies there for a long term, because it's a big investment. That's an area in Canada where we have to move a little more.

Addressing the deficit is a big issue, but I think you see the confidence building up in Canada today. I think we're going with the right step. It's a little psychological at times to feel comfortable...I can go and invest. I think we're getting there, but if we keep pushing in these areas... I don't think, personally and from our corporation, that the tax rate between Canada and the U.S. is a big factor.

Mrs. Brushett: Then you're going to invest more in Canada and create more jobs here.

Mr. Dottori: Yes, we will.

The Chairman: I know that a couple of others want to add something. If any members have questions, perhaps we could complete them and then I can give members of our witness panel an opportunity to add and summarize, each in one minute. Would that be acceptable? Thank you.

Mr. Campbell.

Mr. Campbell: Coming back to the discussion between Mr. Woolford and Mr. Solberg, and then my colleague Mr. St. Denis, I know the government has welcomed the involvement of the Retail Council in the design of the harmonized system. Contrary to Mr. Solberg's suggestion, I want to be very clear here that somehow these things are designed entirely in a vacuum. I'm somewhat surprised at the suggestion, given Mr. Woolford's appearance twice before this committee and the extensive consultations we had and the extent to which this system design reflects the very testimony we heard at this committee.

I welcome Mr. Woolford's endorsement of harmonization and encourage him and the council to continue the effort towards a national harmonized system. I'm surprised, though, that in speaking about costs and going through the litany of costs associated with beginning this process in only one region of the country, he didn't speak at all about savings to business. That was one of the reasons the Retail Council was so favourably disposed towards harmonization. Surely, Mr. Chairman, some of those savings will offset the temporary inconvenience of a system getting up and running in this fashion.

My question - and members of the panel may want to incorporate it into their wrap-up remarks - is really quite a central issue. We've talked around this a number of times, and given the representatives of various sectors and viewpoints here, I wonder if the panellists would comment, now or in their wrap-up remarks, about whether the economy and the interests they reflect here would be better off with lower rates and a broader base or higher rates and lots of special incentives. I may be throwing the cat among the pigeons, Mr. Chairman, but that's really the kind of question we need to be debating.

So again, lower rates and a broader base, or higher rates and lots of special incentives targeting those export industries, targeting those new up-and-coming sectors...? I wonder if we could ask panellists to comment, Mr. Chairman.

The Chairman: Who would like to respond? Mr. Myers.

Mr. Myers: The question maybe focuses on the problem. We're talking about whether we should have lower rates or a broader base. But the real question, especially in the coal mining sector, is the extent of taxes. We're not looking at just income tax; we're looking at capital taxes, payroll taxes, production taxes, transportation taxes. You can't solve the problem by looking at one aspect of it.

To be a Canadian company and to be competitive in an international marketplace, what's it going to take? The committee should consider that represented at this side of the table today we have the oil and gas sector, the forest sector, the mining sectors. These generally produce real jobs that stay in Canada for a fair length of time. Generally, based on the current release of 1994 median incomes, it's these sectors that are producing true high-paying jobs that are staying here for a lengthy period. Granted, those people are paying high taxes, but it comes out of a system of being competitive. If we're not competitive, we're going to lose those jobs. We have to look at the broader issue, not just the rate versus the base.

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The Chairman: Is there anybody else? Mr. Krishna.

Mr. Krishna: In answer to Mr. Campbell's question, the evidence that has been accumulated on this particular issue shows that incentive provisions, if we are talking about high rates of many incentives, tend to have a short-term life and a life only during the time the incentive is in place. They tend to be target-inefficient and very often cost an enormous amount for that reason. We in this country have lived through the incentive provisions of the scientific research tax credit regime, which cost the government an enormous amount of revenue loss with minimal amounts of gain and an enormous amount of administrative cost in the prosecution and pursuit of the lost tax dollars. The evidence suggests that it may not be the most efficient way to go.

Today, while we are focused on two issues, rates...there are two other very important issues I would urge this committee to consider. They've been touched upon only tangentially today. One is the enormous cost - and by cost I mean both the economic and compliance costs - associated with the differential treatment of dividend income and interest income, or dividend costs and interest costs. A good deal of professional time and energy and life is spent restructuring and structuring to account for that difference, and it's a very inefficient difference.

The other that needs attention in any meaningful exercise, and that makes international comparisons extremely difficult - and the question was raised earlier of OECD rates and accelerated depreciation, etc. - is the double taxation of corporate and shareholder income. Different countries have different regimes. Some countries have a full double taxation system with accommodation, such as the United States. Some countries, such as Canada, have a partial system of double taxation and an integrated system for small businesses but not big businesses. Over $200,000 of income, we have double taxation. Some countries have a complete flow-through of corporate income to shareholders with no double taxation.

In making comparisons of international rates, it is important to bear in mind that you cannot simply look at the corporate rate in isolation. You must bear in mind what happens to that income when it flows through into the shareholders' hands. It is the ultimate total incidence of taxation, both at the corporate and shareholder levels, that really makes a meaningful impact on any decision.

I urge the committee to give those two aspects some further thought in its deliberations. Thank you very much.

The Chairman: Thank you, Mr. Krishna.

Mr. Woolford. This is the last person before we sum up.

Mr. Woolford: Mr. Chairman, we find ourselves in a time of extraordinary structural change in our economy. It seems to me that in principle this is not a good time to try to put in place rigidities or second-guess where our economy is going. As a matter of principle, I think that avoiding special preferences, special deals, things that require governments to guess what the desirable outcomes should be, is by definition less desirable than a lower rate and a broader base. Particularly at a time like this, when we are in a state of flux and are very unsure what the proper structure and direction of our economy should be, we should be allowing the market and individual firms to find their way through that.

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As I said earlier, one of the strengths of Canada is that the federal system allows us to make relatively small experiments, and that kind of structure on the tax side allows for it as well. If you try to pre-guess what will be successful and what will not and reward it, you may miss opportunities or provide incentives to activities which are not desirable. You also carry with you then the preconceptions of today about what tomorrow will be like. The one thing we know is that whatever we think about tomorrow will be wrong. We're going to be optimistic or pessimistic or wrong in some way.

So to the extent that we can allow many decisions in response to a fairly neutral set of instruments to guide us in that way, we will be better off and more flexible than if we try to judge them in advance.

The Chairman: Thank you, Mr. Woolford, Mr. Campbell, and Mrs. Brushett.

We've come now to the time for very brief summaries. Perhaps we could start with you,Mr. Dottori.

Mr. Dottori: I can tell you that I think it's a very complex issue. What we tried to do was to break it down into simple components. I'm still an advocate that you have to look at taxes as market access and bear in mind that a tariff is a reverse taxation, so it's actually a tax credit if you tax the competitor.

In terms of the costs of production, deregulation, and simplification, I think everyone around the table gave you a list of all these items. There are 115 regulations under just the Shipping Act, and there are 30 or 40 types of CCA. Keep it simple and then it's easier to avoid tax loopholes. You broaden the base and make everyone more fair and more uniform.

I think the cost and access to risk capital is very important and should be addressed. Again, this is another complex issue. There are some good examples in Canada, like QSSP, to develop pools that provide risk capital. I think it's very important to stimulate entrepreneurship, and again there's a variety of ways. I'm sure economists could come up with fifty ways and we'd all have our own favourites.

I think that's where you have to put the focus. Keep it simple, broaden the tax base, and lower the rates, and I think you'll find it's fairer, more equal, and better for everyone. The better we understand it the easier it is to plan.

The Chairman: Thanks, Mr. Dottori.

Mr. Manning.

Mr. Manning: Very briefly, stay the course in terms of the battle for deficit control and reducing the debt. Be sensitive that you have to have a competitive regime. I know those two concepts are not mutually exclusive, and it is naive for me to suggest otherwise.

Be sector sensitive and recognize what Canada does well, recognizing also that what Canada will do well five years from now may not be what we're doing currently. Recognize that those things we do well and we historically have done well are those activities which will create good, viable, and sustaining jobs.

Continue to work with the various levels of taxation cost and expense within the Canadian system, which goes much beyond the Canadian federal government, to look for some sort of an understandable, cohesive, consistent, and efficient method of taxation. Remember that there's only one taxpayer and it's a multitude of jurisdictions. Notwithstanding that we do it better than many, there's still an opportunity there. So it's a very large challenge, Mr. Chairman, but I think it's still worth doing and has to be done.

The Chairman: Thanks, Mr. Manning.

Mr. Keyes, please.

Mr. Keyes: Thank you, Mr. Chairman.

I have two points, I guess. First, maximize intergovernmental cooperation to minimize effort, overlap, and duplication. This has been said around the table this afternoon by several people. The relative cost in the overall scheme of costs of compliance for large corporations may not be a big number, but for smaller companies it certainly is, and the complexities are certainly very difficult for people to get their mind around. As they continually change, the ability to keep up with these things involves a high effort for both big and small companies on that score.

My second point comes back to the international competitive situation. My colleague just mentioned being sector sensitive. I absolutely agree. We cannot act out of step with our major competitors. Tax may be only one element in business decision-making, but it is an important element, and the sector-specific situation cannot be ignored. Thank you.

The Chairman: Thank you, Mr. Keyes.

Professor Macnaughton.

Prof. Macnaughton: Thank you, Mr. Chairman. As many of the panellists have already said, I really do think that a broader base and a lower rate is the way to go. What that does is allow us to keep corporate revenue constant while getting the benefits of lower rates.

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Also, as a longer term measure we need more data released by the Department of Finance so that we can answer the kind of questions your committee would like to know the answers to. I'm thinking of something like the publication by Revenue Canada called ``Taxation Statistics'', for the personal income tax. We need the equivalent of that for the corporate sector, like the one already available in the United States.

The Chairman: Thank you, Professor Macnaughton.

Peter Woolford.

Mr. Woolford: Thank you, Mr. Chair.

I agree with a couple of earlier comments. Stay the course on deficit reduction. Debt reduction is number one.

Second, keep comparing, keep looking abroad, keep taking those glances at the U.S. and at the European Community to find out what they're doing and how we stack up against them, as difficult as it may be.

Third, keep the tax system neutral between different types of economic activity.

Fourth, avoid profit-insensitive taxes like capital taxes and payroll taxes.

And finally, please don't do counterproductive things like tax-included pricing. You knew I had to put that in.

The Chairman: That's your tip for us for today.

Andrew Jackson.

Mr. Jackson: I think the committee perceives that it should really keep in mind some of the wider objectives of business taxation, particularly the corporate income tax. It is an important way of taxing property income in ways we can't through other means, particularly given the very high level of foreign ownership of our economy. The corporate income tax is essentially the way we tax property income flowing to non-residents.

If we don't have an adequate corporate tax system, high-income individuals will be able to shelter incoming corporations, which is not the right way to go in terms of fairness either.

I think generally there is a lot of concern about the extent to which corporate tax breaks can be built one on top of the other, so that even very profitable corporations end up avoiding tax or minimizing tax. I think that is a concern.

With respect to the whole issue of the future of business taxation and the changing international environment - just to conclude on that theme - I think an awful lot has been said here about the need to maintain an internationally competitive tax regime. I think we have to be really careful to avoid a race to the bottom here in securing competitiveness just by lowering rates. I think those rates will inevitably be matched elsewhere.

The really important issue in terms of thinking about how our tax system fits into a changing international environment is to really think about international coordination, international discussions and international regulation to stop corporations essentially arranging their transfer price and other means to minimize taxes in any jurisdiction.

As I've tried to argue, I think the importance of the tax system is more on where profits are declared than on real economic activity, but there certainly is a concern on that side.

The Chairman: Thank you, Mr. Jackson.

Mr. Précourt.

[Translation]

Mr. Précourt: In concluding my comments and those of Mr. Krishna, I would like to raise again part of our initial presentation. If we want to reduce the deficit and are considering limiting in the future capital taxes, it might be useful to set a cap on capital taxes, including for large corporations, and to increase corporate income tax and the large corporation tax.

When large corporations make lots of profits, they would pay slightly more tax. When they do not have profits, they would pay nothing. It would be the same as with individuals; it would be difficult for us to pay tax when we do not work. Since we are looking at reducing tax benefits, it might be a good idea to set a cap on capital taxes for large businesses and maybe to increase slightly their income tax rate.

Thank you.

The Chairman: Thank you, Mr. Précourt. Mr. Sam Boutziouvis.

[English]

Mr. Boutziouvis: What an opening!

I have two comments. First, on an overall basis governments need to provide the appropriate macro-instructional policy framework in which firms can grow and operate. That includes sound public finances, price stability, fiscal consolidation and a tax environment conducive to the efficient operation of the economy.

I'm afraid I'm going to have to disagree with my colleague who just mentioned that we should have higher taxes on large enterprises and lower taxes on small and medium-sized enterprises. Overall, I think we have to recognize the central role of the firm in the process of job-creating, knowledge-intensive economic growth and technological progress.

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Furthermore, large enterprises, contrary to what I think most people believe on probably both sides of the table, play a critical role in the economy and in society here in Canada. They cannot be treated in isolation. To have their taxes increased in order for economic redistribution efforts, etc., in my view flies in the face of critical elements related to globalization today.

Small business is obviously important. In fact, large and small enterprises are critically and uniquely joined, and cannot be separated. In fact, large enterprises feed into small enterprises, and vice versa. Their relationship is that they cannot be separated.

Finally, a global consensus on job creation has been developed extensively over the past decade in Detroit, in Halifax, in Lille, in Paris. Job creation requires a dynamic private sector for all sizes of enterprises, a skilled and motivated workforce, efficient social policies, non-intrusive regulations, non-inflationary growth, high levels of productivity, flexible labour markets, manageable debt loads, competitive tax levels, freer international trade, and the last kicker, political stability.

Thank you very much.

The Chairman: Thank you.

Mr. Myers.

Mr. Myers: I think just about everything has been said. Sam took care of most of that.

The critical points are deficit control, so that the tax dollars we do pay are going toward constructive purposes rather than toward payment of debt; and stability, where we can attract capital over the longer term, over 20 years. When people are looking at making major investments they want a return on the project. Most long-term projects are of that duration.

We need more communication between all three levels of government. We've talked principally of the federal and provincial governments. Municipal governments today, though, are having a major impact on the tax structure.

The last area is that taxes should concentrate primarily on profitability rather than on capital and start-up.

Thank you very much.

The Chairman: Thank you, Mr. Myers.

It would be presumptuous of me to try to make some consensus out of what we have heard today. I think members of Parliament from all parties, however, are extremely cognizant of the fact that we have before us today some of the major wealth creators, employers, exporters and job creators in this country: forest industries, oil, mining, coal, and the Business Council on National Issues. We also have before us the leading spokespersons for labour, the CLC. In addition, we have the Retail Council, which represents about one-eighth of the jobs in this country; experts from the Certified General Accountants' Association; and Professor Macnaughton.

If I could take a couple of messages from what we've seen, it is that in designing future tax policies, corporate taxation means different things to different industries, to different sectors, to different businesses. Second, there seems to be a consensus from people speaking to us today that taxes should be based on income or cashflow, not on capital or other items that do not reflect the health and profitability of an industry.

We have heard pleas from different sectors for various forms of tax coordination and harmonization and for the end of duplication and overlap among governments. This is something we as politicians should be capable of doing. We have heard about the cost to taxpayers and the inefficiencies it creates for you and your businesses, the non-competitiveness, the added cost burdens for you simply because we cannot get our acts together on taxes, be they corporate, personal or sales taxes.

We have heard some interesting suggestions for individual changes as well as for the principle that perhaps we could eliminate specific incentives in favour of a lower rate and a broader base. Over the months ahead I am sure suggestions will come forward, but I would encourage each of you through your industries to tell us which of those specific breaks we could eliminate in favour of a lower rate as it would affect your industries or other industries you may feel better able to comment on in terms of what the tax impact would be.

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I know we members of Parliament have scoured through the tax expenditure book before every budget, looking for those magical dollars we are seemingly wasting or giving away. So we encourage you to work with us to find those schemes where we can make better use of our tax dollars, where we can distribute them more fairly and where those tax breaks are not effective.

In conclusion, let me also say that I agree completely with one thing Peter Woolford said. In his opening remarks he praised our clerk, Susan Baldwin, who filled in at the last minute when our committee's regular clerk could not be here.

On behalf of all of us, Susan, I want to thank you and all of the staff, who have made these hearings in mid-summer possible.

Finally, on behalf of all members of Parliament, may I thank witnesses for very compelling and very important presentations to us. You have made our task more important to each one of us, if not all that much easier. Thank you very much.

Some hon. members: Hear, hear.

The Chairman: We are adjourned.

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