FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 26, 1998

• 0904

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this morning. As you know, the order of the day is that pursuant to Standing Order 108(2) the committee will commence study of the recommendations contained in the report of the Technical Committee on Business Taxation.

• 0905

We have the pleasure this morning to have with us Jack Mintz, chairman of the committee, and Wilfrid Lefebvre, member, and John Sargent, executive director. We will of course commence with some introductory remarks, perhaps from Mr. Mintz, and thereafter we will engage in a question and answer session.

Mr. Mintz, welcome.

Mr. Jack Mintz (Chair, Technical Committee on Business Taxation): Thank you very much, Mr. Chairman. I very much appreciate the invitation to come and discuss the report of the Technical Committee on Business Taxation. I'm here with one of my colleagues from the committee, Mr. Wilfrid Lefebvre, who also served on the committee. We will share this presentation with you.

This is a long report on a very complicated area of taxation. To present it within 20 or 30 minutes with a question period of one and a half hours you might find is rather insufficient time to deal with all the issues in the report. I should say from the outset that if the finance committee would ever like us to come back at a later time to answer more questions, we would be happy to do so.

In today's presentation we wish to concentrate on key deficiencies in the business tax structure and discuss in a general way the recommendations of the committee. I hope you have the handout we prepared; there's both an English and a French version for you.

I'll turn now to my colleague, who will speak a bit more to some of the background underlying the committee's work.

[Translation]

Mr. Wilfrid Lefebvre (member, Technical Committee on Business Taxation): By way of background, we were appointed in 1996. Our mandate was to review taxes on investments and business operations. We therefore reviewed corporate income taxes, capital taxes, payroll taxes and personal income taxes paid on income derived from businesses, basically dividends or capital gains.

The Committee's objectives were to promote economic growth and job creation in an open economy, facilitate compliance by taxpayers and administration by Revenue Canada, and reinforce the fairness of the tax structure by ensuring all businesses share the cost of providing government services.

Obviously, certain limits were imposed on the Committee. I shall mention a few. First the recommendations were to be revenue- neutral, that is, no gain or loss to speak of in business taxes paid. Obviously, we had to keep in mind the interaction of federal and provincial taxes, since the provinces play an extremely important role in taxation. We were not asked to review the Canada Pension/Quebec Pension plan contributions, or the GST and QST, which were being reviewed elsewhere. Nor were we asked to give an opinion on the balance between taxes paid by individuals and businesses. Finally, the Committee was not a public commission, so that no public hearings were held. Public debate was supposed to follow the release of the report, and that is what is happening now.

Some of our findings and certain factors which had a significant effect on our recommendations are as follows:

First, businesses pay a considerable amount of taxes to the government. On page 4 of the documents submitted, it may be seen that businesses pay $85 billion in taxes, and this represents 30% of total taxes collected. These data are from 1995.

Profit-related taxes, that is, corporate income and tax deductions, account for only 25% of the amounts collected from businesses. Ultimately, these taxes fall on individuals, that is, workers, consumers, suppliers and business owners, all of which obviously raises the following question: Why tax businesses? What are the justifications for taxing businesses?

As for the service sector, data on the number of workers by industry are found on page 6 of the report. This sector includes transportation, communications and utilities. The entire sector to the right, beside transportation, employs nearly two-thirds of the workers. Moreover, these industries have accounted for almost all the employment gains for the period 1986-95. These sectors of the economy play a critical role in our knowledge-based economy.

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These service sectors are no longer protected from international competition, relatively speaking. The service sectors, especially transportation, wholesale trade and business services, face significant competition from international competitors, and this has a significant impact on job creation in these sectors.

Finally, Canada is no longer just an importer of foreign capital. Though direct foreign investment in Canada is still important, accounting for 20% of domestic investments, our economy is such that capital exports are now almost as important as capital imports.

[English]

Mr. Jack Mintz: Let me now continue on with what we've developed from this discussion and analysis of what's been happening to the Canadian economy.

What we were particularly concerned about is that the current business tax structure has several deficiencies to it. These deficiencies can impair the ability of Canada to create jobs and to provide better incomes for Canadians as we move into the 21st century. There are three particular deficiencies I want to emphasize, and these you will find on page nine of the handout, but I'll be referring to some of the pages after that page in terms of the graphs that are available.

The very first deficiency is the non-competitive corporate income tax rates in Canada. Canada's corporate income tax rates are well above international norms, and this you can see on the graph on page 10. The Canadian federal-provincial general rate is 43%, above four points on average compared to the U.S. combined federal and state rates but much higher than many other countries, such as the United Kingdom, which is now at 30%, Mexico at 34%, and, although it's not shown in the graph, Sweden at 28%.

When a country has high corporate income tax rates, as we do, it hurts us not only in terms of job creation but also government revenues. Businesses shift income out of high-tax jurisdictions and costs such as interest expense into low-tax jurisdictions. We find that Canadian and foreign-controlled multinational companies increased interest expense substantially over the period 1986-1994. In large part this is due to Canada moving from having lower corporate income tax rates than many other countries, such as the U.S., in the early 1980s, to existing rates that are higher than many other countries today.

The second key deficiency we found in the business tax structure is the current non-neutral treatment of businesses. Our tax system also treats businesses unfairly by imposing very high tax rates on some activities compared to others. Corporate income, capital taxes, and sales taxes on capital and business inputs are levied at much higher rates on services, construction, and forestry compared to other industries. Payroll taxes and contributions, net of the benefits received from public programs they fund, tend to fall most heavily on service industries. Combining all these impacts, we see, on page 11 of the handout, that the services industries, especially transportation, communications, utilities, wholesale trade and other services, pay more tax as a proportion of their costs compared to other industries. The economic and compliance cost of non-neutral taxes is substantial, reducing economic output in the Canadian economy by almost $25 billion, or 2.5% of GDP.

By making the tax system more neutral so businesses will choose activities that are economically sensible rather than trying to engage in activities that reduce taxes, we can improve the prospects for job creation and economic growth in the economy. Moreover, we not only have non-neutral taxes that especially discriminate against our service sectors of the economy, but we also tax them more highly than other countries, especially the United States—and this you can see on page 13. These high effective tax rates make investments in these industries less profitable in Canada compared to other countries, impairing our ability to create jobs in Canada for the whole economy, not just for these sectors.

The third key deficiency in the Canadian business tax structure is with respect to too much reliance on inefficient profit-insensitive taxes. In relation to the value of economic activity, businesses are more highly taxed today compared to 1950. The primary reason for this has been the growth of profit-insensitive taxes such as capital taxes, payroll taxes, and property taxes, especially at the provincial and local level.

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This you can see on page 14 of the handout, where on the left graph you'll see that we compute total business taxes in relationship to the value of economic activity the businesses contribute to the Canadian economy. You can see that the total amount of business taxes have risen since 1950 from 14% of the value of their economic activity to almost 18% today. A lot of that growth has been due to the growth of profit-insensitive taxes. These are the taxes that I mentioned—the capital, payroll, and property taxes that are levied.

You can also see that the provincial and local business taxes have grown considerably in relationship to business activity. Back in 1950, they were about 5% of the value of the business activity, and now they are close to 11%. So there has been a very significant increase in business taxes at the provincial and local government levels.

Profit-insensitive taxes are problematic for businesses when they are facing financial difficulty—an important consideration for a cyclical Canadian economy. More important, they can be very inefficient taxes if there is little relation between these taxes and the cost of using public services that these taxes are often intended to fund.

Based on these three key deficiencies, the committee came up with what we would call our recommended basic thrusts. These you'll find enunciated on pages 15 and 16 of the handout.

To address these significant deficiencies in the Canadian tax structure, and to foster better job creation and economic growth, we make a number of recommendations to create a more neutral tax structure with internationally competitive tax rates. If you wanted to pick out the two principles underlying our recommendations, they are both neutrality and trying to make our system better from an international point of view, so that we can attract jobs and create economic growth in Canada. That would be done through having internationally competitive tax rates. Those are the two key principles of our recommendations.

Our recommendations will result in a much better business tax structure, since they will encourage businesses to earn income in Canada without a loss of revenue to governments.

The four basic thrusts can be summarized as follows.

First, we would make the corporate income tax structure more neutral by having a broader base and by having lower rates of tax. This will increase both the efficiency and fairness of the corporate income tax structure.

We would do so by reducing the general federal-provincial corporate income tax rate from 43% to 33% on average for all large businesses. That is, we recommend a 20% federal rate, the elimination of the corporate income surtax, and a suggested point reduction in the average provincial tax rate. Small businesses would also get a reduction in tax rates by up to three points depending on their employment level, compared to the existing combined federal-provincial tax rate today.

Accompanied with these changes, there would be a number of base-broadening measures for the corporate income tax that would make the tax system more neutral. These are listed on page 17 on the revenue impacts, and we'll come back to these later. These measures would result in income measured for tax purposes being more reflective of the true economic income of the corporation. They would also better protect the Canadian tax base from international pressures that result in the erosion of the revenue base here, without impeding the ability of Canadian businesses to compete in international markets.

The second thrust of our proposals would be to make two federal profit-insensitive taxes reflect more accurately the user-pay principle. Businesses would pay charges that correspond more closely to the costs they impose on society for the use of public services or resources. We recommend that employment insurance be related to the lay-off experience of the business using the employment insurance system. We also recommend that the federal excise tax on gasoline be restructured into proper broad-based environment taxes.

Third, we also recommend a number of measures that would improve compliance with the tax system, including harmonization of legislation, better writing of legislation and technical notes, and commercial-like practices for Revenue Canada in the settlement of tax debts owed and in settlement of disputes.

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Fourth, we recommend measures that would disentangle federal and provincial business tax policies. First of all, this would be done by improving the harmonization of corporate and capital tax systems by making the base more common across the whole country.

Second, we would recommend that both federal and provincial governments provide industrial assistance through tax credits, and leave the corporate income tax base neutral for allocation purposes, for determining how much provincial corporate income tax would be levied. This would have a significant impact on reducing complexity for businesses.

Third, we would eliminate the incentive for governments to impose capital taxes by making them non-deductible. Capital taxes would no longer be used as a substitute for the corporate income tax, which are not deductible, because the burden of capital taxes is shifted onto federal and other provincial governments.

Our proposals are revenue-neutral for both the federal and provincial governments. It is a very balanced packaged so that no one industry or region is affected in a significant way, once all the numbers are sort of added together.

The committee was concerned that with revenue-neutrality some industries, especially manufacturing and mining, would be somewhat adversely affected by the proposals. We therefore suggested that the government should review the level of taxes paid by businesses.

The committee believes that its report will promote job creation and economic growth. Its proposals for a better business tax structure are consistent with important economic policies adopted in the past several years.

We have tried to get government right by improving the expenditure programmes of the federal government. Now it's time to get the revenue structure right as well.

Moreover, we are promoting the acquisition of skills in our knowledge-based economy, but it is important to get jobs to Canada so that our skilled workers will be employed here rather than elsewhere. Our recommendations for a business tax structure are an important part of an overall programme of improving job creation and growth in incomes in Canada.

[Translation]

Mr. Wilfrid Lefebvre: The impact of the recommendations on federal and provincial revenues is illustrated on page 17 of the documents given to you. It's the last document. The corporate income tax rate reduction would, at the federal level, account for $2.5 billion. Let's talk about some of the measures for broadening the tax base with regard to profits from foreign business operations.

Basically, the Committee's starting point was the famous double dipping, when interest expenses were deductible in Canada. The recommendation is that the interest expenses of resident businesses on loans contracted to invest in affiliated foreign companies now be non-deductible and that these interest expenses be added to the cost of shares, or that they be deductible but only to the extent to which taxable surpluses were received, which represents an estimated $400 million at the federal level.

We recommend the non-deductibility of capital taxes, since capital taxes basically represent a form of corporate income tax, rather than a payroll tax for funding public benefits. This would account for a contribution of $375 million.

We also recommend a tightening of the rules in research and development. At present, the Canadian system is the most beneficial one in the world where tax advantages for research and development are concerned. This system would be maintained under the recommendations. We would still be the country with the most favourable rates of credit, but some of the measures would be tightened up. That would account for $200 million.

Finally, we propose a corporation distribution tax. As you know, we have an integration principle, which means that people who receive dividends receive a tax credit. The rationale underlying the tax credit is that the corporation that pays the dividends has already paid income tax. In many cases, however, this is not the case. The proposal is that there should be a tax supported primarily by the corporations, that, when people receive dividends, they obtain their credit and that these taxes be credited against the income taxes paid by the corporation. All these measures would have a neutral effect with regard to revenue and tax expenses.

[English]

Mr. Jack Mintz: That concludes our presentation.

The Chairman: Thank you very much, Mr. Mintz, Mr. Lefebvre, and Mr. Sargent.

We'll now proceed to the question-and-answer session, beginning with Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman, and thank you to the technical committee for their report and for appearing before us today.

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The first question I have has to do with the profit-insensitive taxes, the payroll taxes, and that sort of thing. I'm wondering to what degree those sorts of taxes impede the ability of an economy to climb out of a recession.

I'm even thinking right now of British Columbia, where the economy has turned down quite dramatically. But because we have these taxes that are profit-insensitive, it's an area where irrespective of the profitability of the company, they're still paying these heavy taxes. How difficult does that make it, not only for those companies, but also for the economy in general, to recover?

Mr. Jack Mintz: I think it's important to distinguish between two types of profit-insensitive taxes. One type of profit-insensitive tax is a basic charge paid by a business or any taxpayer for the use of public services. Economists have often argued that those kinds of taxes are relatively efficient taxes in that they are better at matching the benefits a particular taxpayer would get from the use of a public resource or service with the costs of using that service.

In that case, whether the economy is in a good or bad part of the cycle, that's not a bad tax. That is just like when businesses pay for buying pencils from another business. We don't expect that they're going to start charging different prices for pencils depending on where you are in the cycle, except for what would be determined by demand-and-supply conditions.

Now, the other type of profit-insensitive tax is one that is not related to the benefits received—for example, capital taxes. Capital taxes do create some difficulty for businesses in the downturn of the cycle, because they must be paid regardless of whether the firm is or is not earning income at that point in time. It does exacerbate the financial difficulty at that point.

For that reason we recommended that we move to non-deductibility. What's happened is that over the past ten years there has been a significant growth in capital taxes relative to other types of taxes. They've grown more quickly. That's because there is an incentive for governments to levy these capital taxes.

They're not only deductible from the federal government's point of view, but through the allocation formula, when a province puts on a capital tax, it knows that a significant portion of that capital tax is going to be picked up by other provinces through the deductibility of that capital tax from corporate income they receive under the corporate allocation rule.

So that's why we recommend the non-deductibility. We suggested that with some of the money the provinces will have from revenue-sharing they would actually be able to reduce capital taxes from the revenue, the broad base and the revenue increase that they're going to get. Under our proposals the provinces will actually be able to afford some reduction in their capital taxes. So we think that's a good move in the long run.

Mr. Monte Solberg: You were talking about unemployment insurance, and you suggested that there should be a code experience rating of businesses. Have you expanded on that at all? Have you talked about the need perhaps to hive off employment insurance into a separate account so that the money doesn't go into general revenues and that kind of thing? Obviously when it does, then rates stay artificially high. Have you gone into any detail on that?

Mr. Jack Mintz: First, let me say that the mandate of our committee was not to evaluate the employment insurance program in terms of the overall benefits. We were asked to look at the contributions paid by employers, which is one part of the issue.

The view taken in the report is that any contribution that ends up to be more than the benefits received would in a sense end up being an implicit tax. In other words, based on the user-pay principle, when the benefits are matched to the contributions that are being paid by firms, then you don't have a tax per se. It's really more of a contribution toward payment of program benefits.

Under our experience rating proposal we suggested that now is an ideal time to bring in experience rating. This is in the sense that as the government is lowering the employment insurance premiums, and under the current legislation would balance the payments in time, this is an optimal time to bring in experience rating. You can bring it in while you're giving selective tax cuts, and the selection would be based on the lay-off experience of firms. Those firms that tend to have more lay-offs and create more unemployment would end up getting a lower rate reduction compared to those firms that create less unemployment in the system.

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Mr. Monte Solberg: In order to bring about all your recommendations, setting aside the revenue neutrality for a second here, but to bring corporate taxes down to where you think they should be, have you tried to figure out how much that would cost in terms of tax expenditures overall to the government on an annual basis?

Mr. Jack Mintz: Well, what we have is a balanced package where there is no reduction in actual payments of corporate income taxes, but there is a reduction in the rate of tax.

Mr. Monte Solberg: No, but—

Mr. Jack Mintz: Maybe I'm misunderstanding the question.

Mr. Monte Solberg: Well, you suggested that we need to take a look at the overall tax levels, period. I agree that they're far too high, they kill jobs, and that sort of thing. And you talked about moving the corporate tax down to 33%.

Mr. Jack Mintz: Combined federal and provincial.

Mr. Monte Solberg: Right. So what is the impact of that on the overall tax take?

Mr. Jack Mintz: Oh, well, our estimate is that for federal and provincial governments, there would be a loss of revenue of about $3 billion, and this is taking into account some expansion of the base as a result of Canada bringing down its corporate income tax rate below our international competitors or at the level of many of our international competitors.

Mr. Monte Solberg: And obviously, if we did that, that would really help out our competitive position. The point I'm making is it's not a huge sacrifice to make in order to make this a lot more competitive.

Mr. Jack Mintz: Well, our mandate was not to evaluate the fiscal position of the federal government and deal with the fiscal balances of the federal government. But let me say that the base-broadening proposals are important too, because this goes back to our theme about neutrality and the importance of neutrality.

Mr. Monte Solberg: Yes.

Mr. Jack Mintz: I wouldn't want to lose the issue involved with those proposals.

Mr. Monte Solberg: No, I appreciate that. You made a very good argument for why that's important.

I have one final question, and then if I may, I'd like to allow my colleague to ask a question or two.

It's probably the wrong time to ask this, but a lot of people would make the argument that corporations shouldn't pay any tax at all, because all of these taxes ultimately are just passed on to consumers or to workers in the form of lower wages or smaller dividends and that kind of thing. How do you respond to that? Why should they pay any tax at all?

Mr. Jack Mintz: That view has sometimes been expressed, but as we very carefully enunciated in the second chapter of the report, there are three very important reasons that we do tax businesses in Canada.

One of them is that taxation of corporate income is consistent with our personal income tax system, and because we cannot tax accrued capital gains—that is, the change in the market value of assets going from one period to the next—individuals would be able to avoid payment of taxes on income by leaving income in the corporation. Let's say the interest would be paid to a corporate account rather than to a person individually, and they would be able to avoid personal income taxes on that interest.

That's one reason we have a corporate income tax. It's consistent. It's sort of like a withholding tax on income for personal income tax purposes. That's why we have integration of corporate income taxes and personal income taxes, because it's in recognition of that withholding rule of the corporate income tax.

Secondly, we have corporate income taxes in Canada, as in many other countries where you have a significant foreign-owned sector, because those corporate income taxes are credited against foreign government taxes, and if you eliminate them, you give up something where effectively you're just transferring income from the Canadian treasury to the U.S. treasury. So that would argue that you wouldn't want to eliminate the corporate income tax, although it does argue to try to keep rates consistent with the international framework.

And third, we argued that many public benefits and programs go to corporations. We don't have user charges in every case, but we do have a number of taxes that reflect the use of those programs, such as gasoline taxes, property taxes, etc. But when you do have imperfect charges, there also may not be a sufficient amount of tax to be paid, so you might use other taxes as well to make sure corporations will pay some tax for those benefits.

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Mr. Monte Solberg: Thank you very much.

The Chairman: Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chair.

Thank you, gentlemen, for your presentation this morning.

To follow up on what my colleague was talking about, you're talking about a $3 billion net loss in taxation revenues at all levels.

Mr. Jack Mintz: But only with the rate reduction.

Mr. Gerry Ritz: Right.

Mr. Jack Mintz: Not in terms of the whole package.

Mr. Gerry Ritz: Okay.

Mr. Jack Mintz: There's no loss at all.

Mr. Gerry Ritz: Okay, because at page 12 you talk about a $20 billion, 2% annual loss in output.

Mr. Jack Mintz: That's from having a non-neutral system.

Mr. Gerry Ritz: Right. Okay.

We also have an underground economy that some estimates put as high as $30 billion. Are you factoring that in as well?

Mr. Jack Mintz: No.

Mr. Gerry Ritz: No, you're not. When you get into this revenue situation, which is more neutral and fair and so on, there are no figures in there for that underground economy?

Mr. Jack Mintz: One of the papers that will be coming out will be providing a survey on underground economy estimates. Those ranges really vary across different studies. They're as low as 3% or 4% of GDP to as high as 20% of GDP, I believe.

There are a number of methodological problems in trying to estimate the underground economy, and I'm certainly not going to go through that right now, but we did not look at the impact of rate reductions on even some improvement in terms of taking the underground economy and making it overground. Those estimates are not included in our numbers.

Mr. Gerry Ritz: Okay. So there will be a positive effect at that point too, or there should be.

Mr. Jack Mintz: There might be, but we don't know how much it would be.

Mr. Gerry Ritz: Okay. Fair enough.

I have one other short question. How quickly do you think these disparities can be corrected? How quickly can we move to this new revenue-fair taxation system you're talking about?

Mr. Jack Mintz: Well, some things could be done relatively early and other things would take some time for development.

As we tried to make very clear in our discussion, we basically advised the Minister of Finance that if you were to go ahead, you would like to get the provinces to work with you, not agin you. Under our proposals, if you have, let's say, some base-broadening, if the provinces don't change their rates of tax, then they will actually pick up more revenues and you'll end up increasing the amount of tax paid by businesses. So we feel very strongly that you have to have the federal government working with the provinces, and that will take some time, because there are discussions and debate.

Also, the consultation period with Canadians over this report is very important. People should have an opportunity to discuss this report and see where we want to go with it. And that will of course take some time as well.

Mr. Gerry Ritz: Well, it's very timely.

When you talk about working with the provinces, do you see this new federal government national collection agency as a help or a hindrance?

Mr. Jack Mintz: Oh, I think anything that will spawn better discussions between the federal government and the provinces can be a positive development. If the provinces feel very comfortable that the new agency will give them new opportunities to work with the federal government, then that will be a very positive thing.

Mr. Gerry Ritz: Okay. Thank you.

The Chairman: Monsieur Loubier.

Mr. Wilfrid Lefebvre: Perhaps I could add just one comment to your question.

In a number of recommendations we have to have long condition periods, because concessions have already been implemented, for example, in the resource sector. Some of the recommendations obviously will need a fairly long condition period. Other recommendations won't.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Messrs. Mintz, Lefebvre and Sargent, here you see the bulk of the federal income tax act since 1917. In 1948, the bulk of the income tax act was not very large. From 1970 to 1972, it looked like this. From 1980 to 1983, other tax provisions were added and here's what was added on taxation recently, in 1987 and in 1998.

While reading your report, I asked myself a question. To analyse it better, I got out the bulk of the income tax act since 1917, and I realized that the recommendations in your report would not really reduce the complexity of taxation, from either the business or the individual point of view.

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In any case, your mandate did not consist of examining the situation of individuals. Your chief mandate, however, was to reduce the complexity of taxation and to make it so that compliance would be easier.

I'm asking you the question because I've also asked it of myself. How is this huge report going to reduce the huge volume of the income tax act with respect to businesses? That's my first question, and I have others.

Mr. Wilfrid Lefebvre: You're perfectly right to say that, since 1917, our tax laws have become much larger. The size of the tax act is due notably to the fact that commercial transactions have become increasingly complex. The world has become increasingly complex, and the approach of the courts has always been to want tax laws that get relatively certain results. Hence the necessity of this sort of law.

The tax act could be made very simple. For example, in section 80, there is the debt remission system, which has been amended several times, as you observed, and which now takes up about 16 pages. It could be made completely simple by saying that now, any debt remission is account revenue and is missing. It would be very simple. But it would remove all the benefits attached to the complexity of the system, which means that all debt remissions are not account revenue. It depends on the circumstances and the situations. We try to cover everything.

Mr. Yvan Loubier: Mr. Lefebvre, your primary mandate was simplification. Do you think it's right that some 80% of the tax provisions at present concern businesses, while these businesses are barely responsible for 20 or 25% of the federal government's overall tax receipts? There is an imbalance between the complexity of the measures applying to businesses and the tax receipts for which they're responsible. The tax specialists who work with the federal tax law every day find that it no longer makes sense and that it's far from being simplified. On the contrary, every year, there's top loading on the old laws, particularly on what came out in the Carter report and the reform in the early 1980s. There's not any real clean-up in it, and that's not right.

Mr. Wilfrid Lefebvre: Many of the recommendations we make are aimed at simplification inasmuch as we say that we want to broaden the tax base. We want a more neutral structure, so that all businesses are taxed in the same way. So there's no preference for one or the other. Reducing the rates should bring about simplification of the system.

Mr. Yvan Loubier: There again, Mr. Lefebvre, I was looking at your main proposal, the one dealing with broadening the base. You talk about broadening in relation to provincial taxes. The main part of what you are proposing in the way of reform, except for an interesting idea that I'm going to mention later, is that the provinces should comply with federal proposals so that the tax base supported by businesses is reduced.

You do not ask the federal government to do a major clean-up, except with regard to depreciation rates, which I find a very interesting idea. We actually raised the fact two years ago that there was a considerable gap between accounting depreciation rates and real, economic depreciation. But aside from that, it's the provinces you are asking to do it. You're asking them to broaden their tax base, but to reduce their income tax on profits. The federal tax as such, its provisions— In any case, that's where I'm disappointed, as far as your report is concerned.

There were some nice surprises, for instance, concerning the depreciation rate, but as for the clean-up of federal taxation, I find that the effort wasn't there. After a year and a half, I expected something more substantial.

[English]

Mr. Jack Mintz: I'd like to give a couple of responses to your points, which I think are very important.

First of all, I think we have to remember that business relations in today's industrialized economy, with today's internationalization of business, are much more complex than they were many years ago. In fact I've been to some less developed countries, such as Guyana, where their tax act is very simple. It looks like our 1948 act, or whatever, because they don't have the complex business relationship we do today.

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There are two types of responses one can make in terms of trying to simplify the tax act. One type of response is to change policy. I've written on flat taxes and cashflow taxes almost all my professional life, and they can be simpler in some ways, but there's still a fair amount of complexity that's involved because of the way business operates.

You'll never again get an act looking like 1917. It's just impossible in today's world. There are things that could be done, though, in policy to simplify. Some of the things we recommend would result in some simplification, as Mr. Lefebvre has emphasized. Even some of the recommendations we have on amortization will help that simplification. But I don't think we should overemphasize the fact that somehow we can wave our hands and for the business part of taxation we're going to end up with the simplest system and end up having a small act. That will never happen. In fact when people used to talk about the GST being very simple, really it's not that simple when it comes to business transactions. There's a fair amount of complexity involved with that, and that's a relatively clean system; that's like the cashflow system. So you have to remember those facts.

The other part of what we try to deal with of course is the question of whether we should rewrite the act to make it simpler—just legislative rewriting, not changing policy, just rewriting the act. There are some countries that have been engaged in that process recently. What we have found with those countries is that they're having tremendous problems in rewriting the act, because you inevitably get into policy matters as you do that rewriting, and you create a lot of uncertainty for businesses. So we made some recommendations that there are some portions of the act that perhaps could be simplified in terms of their rewriting, but we didn't recommend a wholesale rewriting of the act.

[Translation]

Mr. Wilfrid Lefebvre: I'd like to make a final comment on the cost and those who are going to support the measures. The broadening of the tax base, as indicated on page 17, by refusing the deduction of interest for profits on foreign business operations, is one measure, to my mind, which is very important and which is criticized very much by those who invest abroad. This is $400 million at the federal level. As far as the corporation distribution tax is concerned, correction of the integration problem represents $350 million at the federal level. There's also research and development, and the depreciation deductions, as you mentioned. So our efforts affect the whole tax system.

Mr. Yvan Loubier: Speaking of efforts, Mr. Lefebvre and Mr. Mintz, I noted, at the beginning, that you were proposing the non- deductibility of capital tax. Did you realize, when you proposed this measure, that for the provincial data, which are not found in your report—this would be another criticism—43 or 45% of all capital taxes paid in Canada are paid in Quebec because of the special tax structure, even if, generally, 25% of taxes are paid by Quebec?

By proposing the non-deductibility of capital tax, you're hitting Quebec hard, much harder than the other provinces. Mr. Landry already reacted, moreover, in April, to this proposal by saying it was arbitrary to have decided to eliminate deductibility of capital tax to broaden the tax base. What do you have to say about this?

Mr. Wilfrid Lefebvre: You're right to say that Quebec is the one that collects the largest percentage of capital tax. There may be a reason for that. It may be the fact that it was deductible at the federal level. So it's true, in this regard, that this measure is going to affect businesses in Quebec.

There are other measures that affect many other businesses elsewhere in Canada. There's a set of measures we're proposing, for example, rate reductions, which will benefit Quebec businesses greatly, particularly in the—

[Editor's Note: Inaudible]— sector.

Mr. Yvan Loubier: In this regard, even when you talk about a reduction in the rate of tax on profits, if you had had some provincial data and had made proposals on that basis, the picture might have been a bit different. Generally speaking, you say that the tax rate on profits is about 13% in Canada. In Quebec, it's 9%. It's lower.

Mr. Wilfrid Lefebvre: Exactly.

Mr. Yvan Loubier: The tax on profits is lower. On the other hand, capital tax is higher.

Mr. Wilfrid Lefebvre: The capital tax compensates.

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Mr. Yvan Loubier: That's right. So, if you propose a reduction of the rate on profits, whereas in Quebec, we're already competitive with a rate of 9%—actually, we have a more competitive rate than many areas in North America—and you abolish deductibility of capital tax, you're not taking into account the tax structures and realities of the provinces, particularly Quebec.

Mr. Wilfrid Lefebvre: In our reasoning, we took account of the nature of capital tax. We reached the conclusion that it was a substitute for corporate tax. So it was on top of corporate tax and had to treated in the same way.

Quebec, as you said, in Mr. Landry's latest budget, reduced capital tax and increased corporate income tax, which is entirely in keeping with our report. This was the justification for making these things non-deductible.

If we talk about mines and oil, and tax credits in the Atlantic, each time, there's a part of the country that's affected. Overall, though, none of the regions is affected negatively if we look at the proposals as a whole.

Mr. Yvan Loubier: I looked at your proposal on tax losses and I had trouble following your reasoning, because you make too many assumptions. Just what do you want to do about handling tax losses?

You also say in your report, in section 4.16, talking about the 1987 reform, that restrictions were implemented "by imposing further limitations on the transfer of tax losses from one taxpayer to another, along with special rules on after-tax financing, leasing and tax shelters."

Are you saying that transfers of tax losses are still possible in Canada? You say here that more limits were placed on transfers of losses. Is it still possible to transfer tax losses?

Mr. Wilfrid Lefebvre: Within a linked group, yes. If you have companies that are all controlled by the same entity, there may be transfers of tax losses among the businesses. These are relatively complex transactions.

Mr. Yvan Loubier: But it has to be businesses having the same parent company.

Mr. Wilfrid Lefebvre: That's right. I can have one company making a profit and one company running at a loss, and I can combine them or have one borrowing from the other.

Mr. Yvan Loubier: That's right, but the 1987 act no longer allows a business to sell tax losses to another business that is not linked to it.

Mr. Wilfrid Lefebvre: That's right. It's prohibited. At present, even in a control situation, when there is a group of companies, it may be very difficult, occasionally, to transfer losses or arrange for the entity to benefit from the losses.

We're proposing a system of transfers. The government should examine the possibility that, by choice, an entity that is controlled may be transferred if it is entitled to losses. But it assumes an agreement at the federal-provincial level, because some provinces could lose out. It also assumes a discussion, namely at what time it may be considered that an entity is controlled by another one, thus making the transfer of losses possible. Is it at 50%, 70% or 90%? This is the discussion that must take place. We don't make a specific recommendation, except that we say that a system should be set up.

Mr. Yvan Loubier: You say, in section 4.13, that there is still a generous depreciation rate for ships built in Canada and abroad. Since I am a lover of ships these days, I'd like you to tell me about this generous depreciation rate. You tell me it exists. I find that this proposal to eliminate it is in keeping with what we've been defending for years. I'd like you to talk about this generous depreciation rate for ship-building. We'll talk about it later. We can talk about it on Thursday.

Mr. Wilfrid Lefebvre: Yes, if it's possible.

Mr. Yvan Loubier: It's section 4.13.

Mr. Wilfrid Lefebvre: I realize that.

Mr. Yvan Loubier: It says:

- the generous write-off rates on Canadian-built and other vessels should be reviewed.

Mr. Wilfrid Lefebvre: I have to admit that I don't handle ship taxation very much.

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[English]

Mr. Jack Mintz: The capital cost allowance rate for Canadian-built ships is relatively high. I don't remember the exact number right now, but it is quite substantial. So when we suggested that it would be reviewed, the idea would be to lower it.

[Translation]

Mr. Yvan Loubier: Would it be possible to obtain a few additional notes on how ship depreciation is handled? This is a subject that interests me a lot.

Mr. Wilfrid Lefebvre: I'd be happy to do so.

Mr. Yvan Loubier: Thank you.

[English]

The Chairman: Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): Thank you very much, Mr. Chairman.

I want to say that you and your team have done an excellent job. Your report made fascinating reading. We've got a lot of work to do.

I want to relate an experience that happened to me last night and which goes back to a previous question. Someone backed into the side of my car, so I had to take it to three body shops to get a quote. All three asked whether I was paying cash or billing somebody. I understand that; this is quite common at the body shop business, I guess.

I also went into a reputable shop to buy some golf clubs, and they too asked me whether I'd be paying cash. If I paid cash they would give me a better deal. I would never name the store, because we've probably all been there. It seemed to me that when reputable shops— And they knew I was a member of Parliament, which I thought was pretty risky.

A voice: Your reputation preceded you.

Mr. Nelson Riis: Yes, I guess, obviously.

It is quite humourous, yet I think it really reveals how people feel about our taxes. I think people just abandon any faith or any sort of sense of compliance unless they absolutely have to. I can't imagine what kinds of books these folks must keep and so on. I could get into this whole thing.

I'm really pleased to hear that you are looking at the underground economy and what this might mean, particularly as a reflection of what people think of the tax system. I appreciate that this is an effort to try to bring some rationale to this.

I wanted to just share that with you, because I think this underground economy is on the upper side of that estimate, as opposed to the down side.

The issue of the user-pay environmental taxes I found to be an interesting section of your report. Could you elaborate on what kinds of taxes that would contemplate—lowering taxes on fuels and moving into a more user-pay situation? I'd like you to refer particularly to the commonly referred to carbon tax issue.

Mr. Jack Mintz: First of all, in terms of our recommendations on the environmental tax, I think we have to go back one step and just ask why we tax gasoline more heavily than say toothpaste or some other commodity.

Generally, the original rationale for the federal excise tax on gasoline, outside of being a revenue grab by governments, was to try to create more self-sufficiency in world oil markets, so we would import less oil. That was back in the 1970s, when the price of oil went up substantially. The other rationale for gasoline taxes has been to fund roads and highways.

I think the problem is is that the gasoline tax at the provincial level makes a lot of sense as sort of a user charge to fund highways and roads, because people who drive the highways and roads more will end up paying more gasoline taxes in relation to the use of the roads, but it doesn't make as much sense for the federal excise tax. The oil sufficiency argument doesn't have as much sense today either.

So why do we do it? Although there's no stated government policy for this, I think a lot of people look at the gasoline tax as a way of trying to deal with environmental issues. So we stood back as a committee and said if this is really meant to be an environmental tax, having the federal excise tax on gasoline, is this the right one to do it, or is there a better one where in a revenue-neutral way you could change the gasoline tax so it would be a lower rate with broader bases, effectively a restructured environmental tax?

The reason we went this route was that we were very concerned over the transportation industry in Canada, which certainly has been hit very hard by the level of taxes relative to the United States.

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In fact, I was talking to some groups when they approached me. For example, the coal industry was very concerned about transportation taxes. They felt that this was really their number one tax problem because they were shipping coal down to the United States, across the U.S., and then back into Canada. That's a major distortion for us because we're losing out on that rail business associated with coal.

So we came to the view that having a restructured federal excise tax on gasoline and broader-based environmental taxes would make sense. That would be done by lowering the gasoline tax and by putting taxes either in other energy sources, such as electricity or coal used in electricity or heating, or into a “tox tax”, which would apply to toxins. There would be considerable work needed if one was moving our federal excise tax into this area.

I should say that in terms of a carbon tax, if anything, our proposal would in a sense move away from carbon because gasoline taxes are really related to two environmental issues. One is urban pollution, which we know very well. Coming from Toronto I can tell you about the urban pollution problem. Urban pollution is one issue. The other of course is the global warming issue. By moving to a revenue-neutral, broad-based environmental tax and reducing the tax on oil, we're effectively moving a little bit away from those environmental problems, but we'd be addressing other environmental problems created by other sources. So that would be the basic proposal we've made.

Mr. Nelson Riis: In terms of reducing the corporate tax rates and the growth of the revenue-neutral ones, does a quantitative analysis exist that would indicate that doing that would result in jobs being developed?

Mr. Jack Mintz: Yes, there are two types of analyses that I think are important to keep in mind.

The first analysis was done by the committee on the indebtedness of Canadian corporations, especially multinationals. What we found was that Canadian multinationals, over the past ten years, when the Canadian corporate income tax rate became higher than those in the U.S. and many other countries, increased their indebtedness by over five percentage points of their assets. That means we got more interest deductions in Canada.

Also, foreign companies, which are primarily U.S. companies operating in Canada, also increased their indebtedness in Canada in this period. Part of that is because of the fact that our Canadian rate is now higher than the U.S. rate rather than lower, which was the case prior to 1986, but it's also because the U.S. brought in tighter rules for interest deductibility in the United States, which shifted a lot of interest expense outside of the United States. Several treasury reports in the U.S. have confirmed that.

Of course, we were one of the countries that was a recipient of those interest deductions. So we believe that by lowering the corporate income tax rate, we would forestall some base erosion as a result of having high corporate income tax rates.

The other part of it is the movement to a more neutral system, which is a combination of having lower rates with broader bases. A number of studies have shown in the past that you do get gains to the economy as a result of just having a more neutral system because people will then invest in projects that make sense from an economic point of view or in terms of what would be good for workers and owners of capital rather than trying to make decisions that would be ways of trying to reduce their taxes.

Mr. Nelson Riis: Is there quantitative evidence?

Mr. Jack Mintz: Yes, there are several types of studies that have been done. We had some studies done for the committee on the impact of taxation on investment decisions especially for multinational corporations. Those studies do show that there is significant impact to taxes on investment decisions. That would be consistent with much literature today in the economic profession that suggests that taxes do matter, and they do impact on investment decisions.

The other part is general equilibrium studies. These are studies done by economists. Of course “economist” might be a swear word. Anyway, these were done by economists. They looked at what would happen when you have a non-neutral treatment of different business decisions.

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The last study that was done, just after the tax reform in the late 1980s, showed that by eliminating non-neutralities in the corporate income and capital tax systems, you can impact on economic output for the whole economy because of this better efficiency of the business system in Canada. These studies have shown that that would be roughly about 15% of corporate tax revenues. So if you had $25 billion in corporate tax revenues being raised today, that would be about a $5-billion impact on the economy on an annual basis.

Mr. Nelson Riis: Can you talk for a moment about deferred taxes? My question is this. A few years ago in the finance committee a number of witnesses appeared before the committee talking about deferred taxes. By and large, what they were saying is that while technically these deferred taxes will be paid one day, in reality they seldom are. I would be curious about your view on that.

Mr. Jack Mintz: Well, that's true. Deferred taxes are just simply an accounting device, where the tax depreciation rates aren't equivalent to what accountants use for measuring book profits. They are basically a computation based on the idea that the firm is getting a write-off early relative to a later time for tax purposes. So when the capital is depreciated for book purposes, later on down the line that depreciation rate is more than what will actually be written off for tax purposes. So there's an additional liability, and that's the deferred tax liability that's included.

Our proposals, which would reduce the capital cost allowance rate for certain assets, actually will reduce deferred tax liabilities. They will also have the benefit of actually increasing reported profits for corporations, which actually means a lot to their shareholders. In fact, a number of studies have shown that that can improve the way people view a corporation, because all of a sudden they'll have an increase in reported earnings.

Mr. Nelson Riis: In terms of the capital cost allowance write-offs, how does Canada compare to the United States? It seems to me that when I read the report it said we were actually in better shape than the United States.

Mr. Jack Mintz: On capital cost allowances?

Mr. Nelson Riis: Yes.

Mr. Jack Mintz: On average. There are differences. There are some assets where the U.S. may be more generous relative to Canada and other assets where we are. On average, we are certainly consistent with the U.S., especially for equipment. I think that's the reason why we didn't recommend a lot of reductions in capital cost allowances. We only picked just a few that we felt were well above economic depreciation rates today in terms of trying to reduce those. Generally our rates are somewhat similar to the U.S. and they're somewhat consistent with economic depreciation, although we suggested that the government should undertake a review of the capital cost allowance regime in order to see whether there are maybe even some assets that have too little depreciation today for tax purposes.

Mr. Wilfrid Lefebvre: I think by and large the American system is more complex in terms of the capital cost computations. Our system is fairly simple, so it's beneficial.

Mr. Nelson Riis: Perhaps a last question, Mr. Chair.

The Chairman: Yes, Mr. Riis.

Mr. Nelson Riis: There have been a lot of changes to the employment insurance system, and you're advocating another pretty serious shift. Mr. Mintz, could you use an example of a sector where the changes would be perhaps most noticeable?

Mr. Jack Mintz: Actually, the interesting studies that have been done by Statistics Canada, on a firm by firm basis, show that there's a lot of variation in terms of employment insurance. What we're suggesting is that by moving to experience rating, which has now been used for almost 75 years in the United States as a system, each firm would in a sense carry an account, and that account would be that its contributions to employment insurance would be added to the account. Then when they lay off workers the benefits under the employment insurance program would be charged to the firm in terms of the firm's share of the employment insurance premiums relative to individuals.

In terms of the actual industries that would be impacted, there are calculations by average, but there's a lot of variation within industry, which is why we recommend this should be done on a firm by firm basis, not on an industry by industry basis. Our numbers do show that the industry that gets, let's say, on average the most benefit out of employment insurance programs is the forestry industry, where costs of using the employment insurance program in terms of lay-off costs are much greater than the contributions made by forest firms on average. However, I want to state that there's a lot of variation, and even within that industry there are firms that are on the other side of the ledger. They're actually paying more in terms of employment insurance contributions than in the costs they impose on the employment insurance system, the lay-off costs.

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So we think there's a very significant gain in terms of moving to employment insurance experience rating, because you will make the system more efficient. You'll make it where effectively you're taxing lay-offs by firms, and by taxing those lay-offs by firms, you'll reduce your turnover rates and also reduce the unemployment rate in Canada. Many economic studies have shown that employment insurance and the lack of experience rating is one of the significant factors underlying unemployment rates in Canada.

The Chairman: If I could piggyback on Mr. Riis's question, how do you stop firms from changing their name year in and year out? You could have ABC 1998, ABC 1999, basically the same firm. How do you apply experience rating for a firm that does that? In the United States, apparently that happened quite often.

Mr. Jack Mintz: That becomes a design issue for experience rating. In the U.S., they've of course had experience dealing with that, and the choice becomes sort of where you want to start the firm at in terms of its rate of tax. If you start at the high end—let's say it pays a maximum rate at the beginning—then it will only get reductions in rates as a result. So if it tries to turn itself into a new firm, then it will end up being at the very high end.

If you start at the very low end, then you can get what has happened in the United States, where you get employee leasing companies, where effectively you have a company that let's say was paying a lot of unemployment insurance premiums in the United States because of their lay-off experience, and then what they do is fire all their workers. You get an employee leasing firm that picks up the workers, and then they rent them back to the firm. If they start at the very low payroll tax or at the very low unemployment insurance rate, then there's a real incentive to do that.

So what would probably happen in the design system is that you would start maybe at the average, although this is something that would have to be worked out.

The Chairman: Thank you.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): I would like to commend you for your thoughtful presentation and diligence in providing us with this information.

When you say the impact of these changes would be revenue neutral, are there any supply side assumptions in there at all, or is it revenue neutral?

Mr. Jack Mintz: There's an assumption about behavioural effects. In terms of the rate reductions, we had some work done for us by the Institute for Policy Analysis that suggested what the impact of lowering the rates would be and the impact on expanding the base.

In terms of the base-broadening measures, we took into account that if you broaden the base, there will be some erosion in the amount of revenue you pick up, because there will be less compliance or there will be some adjustments in the affairs of businesses where they wouldn't end up paying as much as a result. So we took those things into account.

Mr. Scott Brison: So you didn't, for instance, consider that perhaps by creating a simpler and fairer tax code, and by putting more Canadians to work, there would be maybe more personal income tax? That wasn't taken into account?

Mr. Jack Mintz: No, the efficiency gains and any impact on the underground economy were not included. So if one took those into account, then actually revenues for governments could increase.

Mr. Scott Brison: You said there were some quantitative estimates, in terms of job growth, of some of these impacts. I know this is a tremendously difficult question, but do you have a ballpark figure of impact on job growth in Canada of these changes, something that is more quantitative, that there is evidence to that effect?

Mr. Jack Mintz: There are two estimates that we discussed in the report. The first estimate was on experience rating for employment insurance. We didn't recommend going to full experience rating, only partial, about one quarter the way there. We suggested that the unemployment rate, under our recommendations, could be reduced by half a percentage point. We think that's kind of a low-ball estimate, based on the fact that if you went to full experience rating, you could reduce unemployment rates by almost two percentage points. That's one estimate we provide.

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The other estimate is the impact of making the tax system more neutral, with lower rates, for corporate income taxes and capital taxes in Canada. Under that recommendation, we suggested that we would go about one-third of the way there in reducing non-neutralities. We would improve gross domestic product by approximately $1 billion to $2 billion—let's say closer to $2 billion. We didn't try to convert it into the number of jobs, but you could do an estimate based on that. Let's say jobs are— Well, it would be hard to do. I can't do it offhand right now.

Mr. Scott Brison: You're saying that there is reasonable evidence to suggest a half percent to potentially a two percent improvement with some of these?

Mr. Jack Mintz: Experience rating would reduce unemployment rates by half a percentage point. The impact on unemployment rates as a result of moving to a more neutral corporate income tax system, I'm not sure. It could be something like 0.1% or whatever, but I don't know.

Mr. Scott Brison: Okay.

With the global economy, with the mobility of capital and freer trade, etc., it's becoming increasingly difficult, especially with e-commerce, to try to tax corporations—especially to maintain differences between one sovereign state and the way they tax and another sovereign state.

To what extent did you look at the U.S. model of corporate taxation? How close would this put us to the U.S. model? It's going to become almost impossible to maintain significant differences between the tax environments of corporations.

Mr. Jack Mintz: First of all, I remember my colleague at the University of Toronto, Richard Bird, used to make the comment that the Carter report, when it came out, shot for the moon, and then tax reform ended up somewhere in the United States.

My comment on our report is in a way that we ended up in the United States relatively quickly, but I wouldn't say that we are trying to make our system exactly the same as the United States', because there are some warts in the U.S. system that I don't think one would necessarily want to include.

For example, one of our studies on compliance costs of large businesses, because our methodology was similar to a study done in the United States, showed that U.S. compliance costs with the business tax income tax system is much greater than in Canada. That's as a result of certain items in the U.S., such as the way their state income taxes operate. The harmonization is much less, compared to what you find in Canada.

Also, as Mr. Lefebvre mentioned, the depreciation deductions in the United States are much more complex in the way they're handled compared to Canada. We have much simpler ways of doing it.

In our discussion of international income, we looked at the U.S. system in terms of the way they tax foreign-source income of U.S. corporations, where they tax income that's remitted like dividends and interest expense coming into the United States, and they give a foreign tax credit.

It's a very complex system. In fact it accounts for about 40% of compliance costs for businesses in the United States, and it raises very little revenue for the U.S. government. There's a study that's been published that shows that actually the revenue has been negative on foreign-source income because of certain ways in which the U.S. system operates.

We decided not to try to duplicate the U.S. system in the taxation of foreign-source income. On the other hand, we were very cognizant of the fact that you do operate in the international world. We have to try to protect our revenue base in Canada. At the same time, we have to foster job creation and economic growth in Canada.

Our recommendations about bringing rates below the U.S. I think are very much consistent with that idea of trying to protect the revenue base as well as job creation. Tightening up on transfer pricing rules, for example, or our rules in international business income would also help protect the revenue base in Canada. We didn't look at it as a way of trying to tax foreign-source income or trying to get revenue from taxing foreign-source income; we looked at it as a way of trying to better protect the revenue base in Canada. I would say our report very much thought about these international issues and they were very important to us.

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Mr. Scott Brison: So in a nutshell you're saying that taxes are meant to raise revenues and they should be fairly neutral in terms of the impact. That is in stark contrast to the personal tax code of the Canadian tax code, not just in terms of corporate tax but in terms of personal tax, because we use tax policy in Canada as a vehicle for redistribution. It's like a Pavlovian tax policy: it encourages some behaviours and discourages others and that sort of thing.

Are you suggesting that we have a flatter tax code that is designed solely to raise revenue and then we would have social investment, for instance, where society needs social investment and then perhaps have user fees or charges on certain behaviours that may not be, for instance, environmentally sound to in effect internalize those externalities? Is that what you're saying in a nutshell?

Mr. Jack Mintz: First of all, our committee was not charged to look at the personal income tax, so I don't think what we recommend on the business tax side necessarily carries over directly to the personal income tax side. If the government should want to bring us back to look at the PIT we could probably look at the personal income tax as well. But I think what we did say is the following.

First of all, under the personal income tax we did recognize that if the government were going to try to redistribute income this would be the important instrument to use, not the business tax structure. The business tax structure is not a good instrument to try to redistribute income among individuals. That's because if you tax a business you might be affecting both lower-income or high-income individuals; it depends on who owns the shares or who works for the company or who buys services from the company or products from the company. You can't really use a business tax structure as a way of trying to redistribute income in society. That's really the personal income tax.

We didn't try to comment on which would be the role of the personal income tax. It would be another forum or another group that would have to do this.

Mr. Scott Brison: I'm sure you have an opinion on it, though.

Mr. Jack Mintz: Right. But on the business tax structure, yes, lowering rates, broader bases is very sensible. Neutrality is good for several reasons. It's good in terms of making the tax system more efficient and making the economy operate more efficiently. It's good in that by getting lower rates you end up making it more attractive to put income into Canada and to get some of those costs out of Canada; so governments have more revenue and there's less base erosion as a result.

By having a lower rate and a broader base, by making the corporate income tax more neutral, you can actually disengage federal and provincial policies better, because if the federal government and the provinces want to help particular industries—and they will always want to do that—we suggest to do it through tax credits rather than affect the base, because the base could be used as a principle for how you want to allocate income across all the provinces, and neutrality would be consistent with that.

Mr. Wilfrid Lefebvre: The crux of the report was that neutrality should be the rule, non-neutrality the exception, and therefore any tax preference should be fully explained as to why it exists. Two come immediately to mind. The smaller rate for small businesses exists, it's non-neutral, and we think it can be justified. It's the same for research and development. Why should there be such generous tax credits for this? It's because they can be justified. But unless we can come up with a strong reasoning as to why a tax preference exists, then neutrality should be the rule.

Mr. Scott Brison: I'm looking forward to seeing what we actually do or what the government does do with this report. It's very interesting. I'm also looking forward to the Mintz report on personal income tax.

The Chairman: Thank you, Mr. Brison.

Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

Thank you, Mr. Mintz, for the work you've done. You've certainly provided some useful advice and raised some important issues. Certainly the underlying message also in this whole exercise is to ensure that there is cooperation among the federal government and provincial governments in order to bring about the change you are advocating.

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You also mentioned at the beginning of your presentation that these changes would in fact increase economic growth and job creation. That's the thrust of why we're making these changes. It's also been said that those two results may in fact occur after an adjustment period, with some significant sectoral or regional transition costs.

Can you comment a bit about this, about whether you agree that in fact there would be a transitional cost to this where we may in fact experience some higher unemployment rate?

Mr. Jack Mintz: Actually, the opposite will occur, and the reason is twofold.

First of all, we make a number of recommendations on transition impacts. For example, our recommendations to reduce the write-offs in the resource and manufacturing industries would be staged. They would be done over time, with reductions at the same time in the corporate income tax rates being done over time. This way the government's revenue can balance as well.

Now when you do that, it's very well known in all tax literature that actually, if anything, you create a boon to investment, not a transition cost at all, and the reason that happens is that firms will still be able to get their write-offs at the old rules, which are, let's say, relatively generous, but then the income that is going to be taxed, which is later on down the road, will be subject to a lower corporate income tax rate. So many of the tax reform exercises that were done in the late 1980s actually caused a boon in investment. They didn't cause a transitional cost, and the transition that we would recommend in our report would actually not result in any transition costs at all.

Mr. Tony Valeri: The other question I have is with respect to the small-business sector. We all agree on the importance of small business in the country, and I know that the Canadian Federation of Independent Business did comment that they were somewhat concerned about the replacement of the lifetime capital gains exemption with the RSP. Can you give the committee some insight as to your thinking behind that, and why in fact it makes more sense?

Mr. Jack Mintz: One of the working papers that will be coming out very soon for the report is looking at the small-business sector in terms of what's happened in terms of its growth in employment, and some of those numbers do appear in the report in chapter five. We were concerned about two things.

We've noticed that the small-business deduction helps small businesses finance their capital: by having a lower rate then they can have more cashflow and therefore be able to use their retained earnings to finance their investment. But what struck us in the work we did was the fact that when you actually look at the data on what has happened to the small-business sector, we've had a huge creation in the number of small businesses in this country over the past decade, and part of that is for many reasons. Part of it is out-sourcing, part of it is people wanting to work independently rather than for a large corporation, and part of it is tax-motivated to basically get a better treatment at the small-business level.

But what we noticed is that once the small business is created, there's very little growth after that. There's very little growth in employment. In fact, of the businesses that were created in 1985, only about 12% actually grew in any significant way in terms of employment. Let's say they'd start with zero to five employees, and only 12% would actually grow beyond that. In fact many of them stayed the same, or a number of them went out of business. In fact for most of them that's really what happened. And part of that is because of some people, like myself, who will have a small business for consulting income with really no intention to grow at all.

So we were very concerned that we weren't getting enough medium-sized businesses in Canada. This is the reason we had recommended that the small-business deduction be restructured where more generous rates would be given to those businesses that actually have employees. That was one part of our sets of proposals: to induce more growth by the small-business sector.

Our proposals, generally, on the small-business sector were revenue-neutral, because we didn't want to say let's increase taxes on small businesses to pay for cuts in taxes for large businesses. So we tried to keep revenue neutrality between the two.

There are a number of items on the small-business side that would affect them. The most important was the lifetime capital gains exemption, where we suggested that studies have shown that the lifetime capital gains exemption has not improved investment and risk-taking by businesses, generally. Part of that is because you get a certain limit on how much the exemption is given. It doesn't help in terms of marginal decisions or incremental decisions once you've used up the exemption. And secondly, it was also given to people who had already accumulated their capital gains from past decisions and were basically cashing in on the lifetime capital gains exemption.

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We have suggested that there is an important motivation for providing treatment for small business owners and farmers in trying to allow them to accumulate retirement capital, because the RSP system is based on the idea that you get a deduction relative to your earned income, and your earned income does not include capital gains and dividends and other forms of capital income. So there is a discrimination against small-business owners and farmers, because a significant part of their income is of that sort.

So we suggested turning the lifetime capital gains exemption into an enhanced RSP system for small-business owners and farmers, and allowing an intergenerational tax-free transfer to their children for the small business. We think that would improve fairness between small business owners, farmers and other businesses, and as a result we would have a better system.

I should point out that the lifetime capital gains exemption is no longer a small-business item. It's become a large business item. There are many large corporations today that are being restructured where you have large management buy-outs or some other type of configuration where a private holding company—let's say of managers—sells services to a large corporation, and each of the managers has a share of a Canadian-controlled private corporation and will qualify for the $500,000 capital gains exemption.

It's the same large business, but we're getting an increase in the amount of the small-business lifetime capital gains exemption because now large businesses are able to take advantage of it as well. Our proposal will basically eliminate the potential base erosion that we believe is arising with the small-business lifetime capital gains exemption. So it's an issue that I think the government will have to carefully consider.

Mr. Tony Valeri: I have one last question, although I'm sure my colleagues have a number of questions as well. I want to make sure that I understood this in your discussion. I believe one of the things you indicated was that there is still a role for non-neutrality in the tax system, but it's how we deliver that non-neutrality that is at issue. Can you explain that a little more so that we're clear on what you're saying?

Mr. Jack Mintz: I think Mr. Lefebvre picked up a main point. Neutrality is a sensible idea in the sense of saying that you want to have people treated fairly. In the case of businesses, they should all pay similar amounts of tax relative to some measure such as income that they are earning as a business. It makes sense to have that kind of evenness in the way we treat businesses because then the tax system wouldn't impair what the market could provide in terms of generating economic growth or job creation.

There are certain circumstances—and this is where we did state it—in which markets do have problems in delivering particular types of activities, for example, because there are problems in mispricing in markets. An example of that is research and development. If a business undertakes research and development and creates a new idea, even though it may have some patent protection, other businesses will benefit and not have to pay for the cost of that R and D. There's too little R and D, so that's an argument for maybe having a more generous treatment for R and D. The same argument applies to small business. They have difficulty raising equity capital, so the idea of a small business deduction is to offset a particular problem they have in terms of raising that equity capital.

We suggested that we should first look to grants or expenditures by governments as a way of dealing with some of these non-neutralities. The reason is that grants are not open-ended, and they are more carefully monitored by governments. There is also more accountability to Parliament through the expenditure process, so they're generally a better way to look at some of these issues.

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On the other hand, we also know that grants can be subject to a lot of bureaucratic red tape, because there is a lot more monitoring by governments. In certain circumstances you may want to have a more open-ended type of system, and that's when tax incentives are a better way of going about correcting for these non-neutralities.

I would go back to the first basic case, which is that any non-neutrality one would like to accept in the tax system first has to be justified by some economic argument. It shouldn't be given just because somebody says we need a tax incentive. It should be based on a strong economic argument. And it shouldn't be based on the argument that we're major contributors of employment to the rest of the economy, because every industry makes that argument—even though we employ 500,000 workers, for example, we create four million jobs in the economy. If you add up across every sector in the economy, we'd be one billion people in this country. You have to remember that if you give somebody a break, you're going to have to tax somebody else more, and that causes a cost to the rest of society.

So you first must justify the economic rationale, and after that you have to decide what's the better way of doing it—through the tax system or through the grant system. We're advising the government to at least do a careful evaluation of that issue before using the tax system. It's not good to pollute the tax system with a whole bunch of write-offs and breaks, because it makes the whole system more complex. It's better to try to keep it simple and more efficient.

Mr. Tony Valeri: So the underlying message is to keep the system simple, and if it makes sense from an economic perspective, then investigate and perhaps pursue the grant system. And avoid pollution.

Mr. Jack Mintz: Right.

The Chairman: Thank you, Mr. Valeri.

Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman.

I have two questions that I would like to ask. About 10 years ago the Mulroney government went through a substantial income tax reform. They used words like “broad-based” and “low rate”—some of the language I'm hearing today. I'd just like to hear from you why we're looking at it again. Did the previous reforms not go far enough? I know they dealt with the personal as well as the corporate tax system.

Mr. Jack Mintz: There are two answers to that. First, I think we would suggest there are some areas where the reforms did not go far enough and there is further work that might be needed. The economy has changed so much over the past 20 years. The growth of the service sector and the importance of international competitiveness for the service sector, the importance of the knowledge-based economy and the contribution of the service sector toward that knowledge-based economy, the potential base erosian of having a very high corporate income tax rate—all of those things suggest that we really need to bring down our corporate income tax rate. We found some areas of base-broadening that in an international framework would make a lot of sense in terms of making the system more neutral, while at the same time taking away the discriminatory taxes on services. That is where our jobs will be created in the future in this country.

Mrs. Karen Redman: Second, the government is proposing a national collection agency. According to Revenue Canada, a single revenue administration would result in a saving of about $193 million in reduced compliance costs. How do you feel about that? Have you examined this proposed agency?

Mr. Jack Mintz: We didn't examine the agency. Given the discussions going on, we decided that was one area we wouldn't contribute much to. Going back to the report, the thing we want to emphasize in terms of any gains associated with having the Canada customs and revenue agency is the fact that if you do improve harmonization of taxes in Canada, if you make it easier for businesses and individual taxpayers to comply with the system, and you improve the administration of the system, then clearly that will be a gain for everybody in the economy.

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Through our comments in the compliance chapter of the report, where we do talk about the importance of harmonization and easing the compliance burden for businesses, if CCRA ends up being consistent with that view, I think we would applaud it.

Mr. Wilfrid Lefebvre: The same holds true for allocation issues between the provinces. If the provinces got together and made certain arrangements, the problems we face today in allocation of income between Ontario, Quebec and Alberta would be much simpler. These are all harmonization issues that could save a lot of cost and duplication to a lot of people.

Mrs. Karen Redman: Thank you.

The Chairman: Thank you.

Mr. Szabo.

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

I wrote a whole page of questions. I wanted to see if I could synthesize this stuff into some of my thoughts about this process.

There's a commercial about getting an oil change. They tell you not to add fresh oil and keep the old filter, because you have some bad oil in there. The parallel to what's happening here seems pretty striking. Ostensibly we're keeping the same corporate income tax system, but we're proposing to make some modifications to achieve certain objectives.

The fairness one—hey, manufacturing and processing gets a big credit, but maybe that's not the area we want to be investing in any more. Maybe now is the time to get that level playing field.

The other part I hear you talking about reminds me of what they do in the health care system. There's a thing called resource intensity weights in which they determine who uses what resources of the system, and that the costs more fairly reflect your use of the services provided outside of the tax system, in effect. Corporate taxation and corporate rates on their own—you've mentioned very clearly that profit sensitive and non-profit sensitive all have to be taken into account.

So when I look at this and I see these charts that say let's compare corporate tax rates, and we're lower than they are by so much—I want to ask your opinion on this, my first question. Can you simply compare corporate income tax rates and professionally assess the equity between one jurisdiction and another or one country and another, in the absence of looking at the non-tax, non-cost, non-benefit, non-tax considerations?

Mr. Jack Mintz: First, in the report we have a discussion of alternative taxes to the current ones. The most interesting one we mused about was the cashflow tax, which some people might call a flat tax. It is consistent with recent proposals in the United States, for example, where you might put a tax on the revenue from the sale of goods and services of businesses and allow a deduction for their wage costs and capital expenditures, but no deduction for interest expense. You'd have no depreciation and no capital gains that would be taxed under that system.

Basically, that is what we do with the GST. That's effectively the same base.

Given the way the world operates today, which is on an income base, you will have significant problems trying to do something completely on your own, where you do a radical reform like that. So we did look at that very carefully. I think the committee had a certain sympathy for some of the simplification one can achieve with the cashflow tax, but we had a number of concerns about doing a wholesale reform where you eliminate one tax and substitute another.

You are right, we didn't blow up the whole system. We didn't say let's replace it completely with a new tax. That debate would be an interesting one to have. It's happening in the United States right now, and so far nothing is happening. Part of that, I think, is that tax reform is often an incremental process. It's something where you try to move toward something better over time. It's very difficult to do radical tax changes, because in the end people compute how much more or less tax they pay, and ultimately that's what they're interested in.

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In terms of the corporate income tax rates, I don't want to give you the impression that the corporate income tax rate is the only factor that's important for investment decisions in Canada. However, the corporate income tax rate is very important to the issue of base erosion, because the decision of where you're going to locate your debt in the world will be based on the corporate income tax rate. It's not based on the other provisions of corporate income tax, and it's not based on the benefits of government programs. Those things aren't relevant to where a company might want to put its debt. What is relevant is the corporate income tax rate and the tax value of taking interest deductions in Canada.

When you're at the top of the ladder in terms of corporate income tax rates, a company would rather put debt into Canada than into the United Kingdom or some other country, for example. We're suggesting that we get down the ladder so that we're not the ones who are going to be the patsies for interest deductions in Canada, and for transfer pricing and other things that result in base erosion.

When you're looking at investment decisions, there are many factors to take into account. It's not just the rate of corporate income tax. You also have to look at the base—things like depreciation deductions, inventory cost deductions—and all sorts of other things that will influence how much corporate income tax is going to be paid. Then you have to look at the other taxes that are paid by corporations, which are especially relevant to investment decisions such as capital taxes and sales taxes and capital inputs. And if you look at the production decisions of businesses, what will be relevant are payroll taxes and other things. And then there are other factors that will affect investment, such as the expenditures of governments and the general investment climate of a country.

What we're saying is that moving to a more neutral system with a lower corporate income tax rate will not only counteract base erosion, it will also improve the ability of Canadian businesses to compete in the international world, because we'll have a more neutral system.

Mr. Paul Szabo: The chart on page 17, “The impact of recommendations on federal and provincial revenues”—this is where we get the analysis of the revenue neutrality of the whole exercise that you've gone through. One of your major points is simplification and harmonization and all of these good things. That doesn't impact revenue totally or exclusively. It also impacts expenses of businesses and of governments, but I didn't see that here. So I would like you to comment on that.

I'll tell you where I was disappointed. We could sit here and tell you how great you all are, but maybe we should throw something back at you because it will hopefully stimulate continued dialogue on this thing.

The people of Canada have this perception that corporations aren't carrying their weight and they feel they should. You're saying that corporations just have a flow-through system. Whatever it is, you get it in the price of the goods and services that you get, so it doesn't matter where the taxes are. It depends on how many changes you can make. But what we didn't take into account is the fact that corporations, particularly large corporations, are always one step ahead of the Income Tax Act. The Income Tax Act is reactive by its very nature.

I was hoping to see something in here on critical issues on tax expenditures, those funny little things in our tax system that could blow the relevance of this right out of the water. We used to have an individual capital gains exemption of $100,000. It ducked in real quick. We made a fundamental error there, and that was that it wasn't grandfathered for future gains, it was available to holding gains. It never had to be dedicated to risk equity investment in small businesses or something like that. It could have been Florida condos or something like that, or artwork. Those were stupid decisions, but you didn't say anything about the stupid decisions that past governments have made. They gave significant benefits to certain individuals, and then it was gone, it was cut away.

I thought this committee, by dealing with the business side of things, was going to address Canadians' questions about the equity of sharing the real tax burden, corporate versus individual, and set the framework about whether we were going to change the bloody oil filter, so that when we deal with personal income tax reform the corporate model will tell us how much we really should be looking at in overall tax reform in Canada.

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It's time to do it. I think it's time to do it, and I don't think what I see here is much more than tinkering a little bit and making sure that people in my profession, the CAs, are going to have a little more business. Some of these things are going to add a little more explaining to clients about why you've pitted one group against another, one region against another.

I've ticked off manufacturing and processing. I've given the small business a little bit of a tickle. I've given large business a little bit of a hit, but they don't care because they're so big and they can shift their dead equity ratios to manage the bottom line in terms of the tax. That's how they stay a step ahead of you: If you change the rule, I'll make a change. I can have a higher dead equity ratio. I can do a higher distribution of profits or a lower one. I can set up subs, I can be offshore. I can do a whole bunch of things you can't keep up with, because it's going to take years for the parliamentarians to make changes.

I thought and I was hoping, and I'm not sure whether we've got it in here or whether we still can have it— there has to be a fundamental call for change in the damn oil filter. We really have to seriously look at corporate tax reform, which will give at least some signal that it is necessary to amend personal income taxes if in fact what you're saying is it doesn't matter how much you charge corporations because it all gets down to the individual.

There's an important dynamic here, and I guess we need your words of wisdom on how we get to the other part of it, which is convincing the Canadian people that there's proper equity in sharing the tax burden.

Mr. Jack Mintz: My colleague might want to add some comments on compliance costs, but let me get to your point. It is an important one.

At the beginning of chapter 4, on corporate income tax, in our report, we talk about what would happen if we went to a really neutral system, not this one but one that had an even lower rate—18% federal rate, 12% provincial rate, 30% total rate.

Let's see how people feel about it; this is really the debate, and people may want to debate it. If you want to go the whole way, you would move all the depreciation deductions close to economic depreciation. You would eliminate all tax credits, including the R and D tax credit. You would move to deductibility of royalties. This way you get this difference between what a gas corporate tax rate or a mining corporate income tax rate is relative to everybody else's, because we have the resource allowance instead.

We do talk about what would happen if we went to a really neutral system. When our committee evaluated it, we saw that there would be these really big hits on certain regions and on certain industries relative to others. Even though there are many positive aspects to having a completely neutral system, we then went back and said we were a little worried about research and development, because there are some non-neutral arguments about having a credit there and things like that.

In a sense we backed off, but we did put it in the chapter. We wanted people to see the thinking in our mind as a committee when we had the debate and proposed the structure we did. We took a structure we hoped both industry and provinces would buy into and we suggested it as a good way of going.

It's a pretty dramatic reduction in corporate income tax rates, I would say. It's a very dramatic reduction in corporate income tax rates.

We think it would be a great thing, and we could get another three, four, or five points under our proposals if we went even further. But then you end up creating the bigger impacts across regions and industries in Canada.

As you can see, you had some sectors arguing against it and others in favour.

The other issue is the overall tax paid by businesses relative to personal income tax. It was not our mandate to evaluate the question. We were not given the mandate to do that. But we did remark that if people did not like the idea of increasing taxes in certain sectors because of our revenue neutral reconfiguration of the corporate income tax, maybe one would like to look carefully at the balance between the personal income tax and the corporate income tax systems.

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As a committee we were very worried about job creation and economic growth. We believe this package is good for job creation and economic growth. It could be even better if one wanted to consider reductions in taxes on business. At the same time you could do even more base broadening with the lower rate, not less, unlike what some businesses here think. They'd like the government to back off on some of their favourite gimmicks.

What we suggest is if you want to spend some money on it as a government, there could be some good argument to do it. I think maybe with today's fiscal surplus and debate over the fiscal surplus, one can consider what you want to do for the personal income tax relative to the business tax.

Mr. Wilfrid Lefebvre: I have two very brief comments.

I think what the report attempts to do is to recommend the doable, not the impossible. The focus was on job creation. We think the recommendations on base broadening would go a long way in ensuring fair competition in the market and at the same time protect the Canadian base.

That's the focus of the whole report. The recommendation, for example, to disallow an interest deduction on foreign investment is a substantial recommendation in the present environment.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you. I apologize if this has already been asked. I had to do some House business.

One of the things you mention in your report, and I gather from you, on the issue of where companies chose to assume debt internationally, that would have an impact in the provinces with high taxes as well. Is there a different distribution of debt across the provinces?

Mr. Jack Mintz: No, it was Canada relative to other countries, but the actual rate at which you deduct the interest expense, which would include the provincial rate, will depend on where your economic activity is in Canada. Right now we allocate corporate income depending on the distribution of the payroll costs and the sales of the company across the country.

If you're located only in Ontario and have no other business in the rest of the country, it will be just the Ontario corporate income tax rate, which is 15.5% on top of 29%. It's actually close to 45% in Canada, which by the way is relatively high. It's even worse the 43% we talk about. This is kind of an average rate for all Canada.

Ms. Paddy Torsney: You mention in your report that there are benefits for the provinces in terms of additional revenues and that your recommendations will not go ahead unless provincial governments come on board. Have the provincial governments— You say:

Without a substantial level of cooperation by the federal and provincial governments concerning our recommendations, the Report's objectives will not be achieved.

What has been the response so far of the provincial governments?

Mr. Jack Mintz: Well, I'm not entirely sure how the provinces are responding, because I haven't seen any official positions taken. I should say that during the process of the committee's work I had bilateral meetings with each of the provinces. All the provinces came to the University of Toronto. We had a meeting with all the provinces and explained to them the importance of getting corporate income tax rates down.

In some of my discussions with a few provincial officials, they said they found aspects of the report very interesting. They do find some interesting things in it, but I really don't know the overall reaction at this point and in fact I may never know.

Ms. Paddy Torsney: With regard to the disentangling of tax policies, you suggest that it would reduce interactions between levels of government—that was interesting—and facilitate the free-flow of goods, services, capital, and language.

Some of these recommendations would then serve to remove some of the interprovincial trade barriers.

Mr. Jack Mintz: Well, they'd be not trade barriers. What we conventionally call trade barriers are related to regulations and maybe certain expenditures, but it would be trade barriers relevant to the tax system. Yes, I think there are several barriers. One of them is the fact that some provinces may have a particular regime, which will affect the flow of capital and labour in the country.

A particular concern we had is that if provinces do not agree to a common corporate income tax base and a common formula for apportioning income across the country, you could make the system very complex. That in itself could be a significant barrier to movement. That's why we had recommended more harmonization and maintaining the kind of harmonization we have in Canada. We've been a very successful federation, especially on the corporate income tax side, as a result of that harmonization. We're much better than what you'll find in Switzerland and the United States, for example.

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Ms. Paddy Torsney: In your synopsis on page 14 of the brief, it says that your proposals would neither increase nor decrease the level of federal-provincial business taxes in the mature post-transition system. Does that suggest there might be a decrease in the transition or an increase in the transition?

Mr. Jack Mintz: Our revenue calculations, such as those you find on page 17, are based on the idea that it's a mature system, that everything has been put into place.

We weren't doing a budget for the federal government by showing year-by-year calculations and how you would stage in every recommendation. You could bring in the recommendations slowly over time, with the idea that the federal government could balance at every time. That's a matter of how you handle the transition.

Ms. Paddy Torsney: So you haven't made those suggestions.

Mr. Jack Mintz: We did suggest for transition periods the reductions and some of the write-offs be staged over time, and we suggested the reductions for the corporate income tax rate be staged over time. Since the former would increase taxes and the latter would decrease taxes, you can do it in a way that would roughly balance.

Ms. Paddy Torsney: Okay, thank you.

The Chairman: Thank you.

Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you. I have two questions, one perhaps theoretical and the other substantive. They return to the question of tax on gasoline.

I'm from the province of Manitoba. I've had several discussions with provincial people on this whole question, and you have probably had several representations with respect to roads and the problems and so on.

In some of your analysis you touch briefly on the policy intent of the gas tax in terms of the roads. My thinking on this is that the federal government has no role in provincial highways and in particular in municipal small roads, on which most of the damage is now occurring. Given the change in western Canada in the agricultural economies and so on— it's a mess, frankly.

Isn't the purpose of the federal government's collecting the tax to earmark it for roads rather than putting it into a consolidated fund? That's another whole argument we get into. Could it not be said that the role of the federal government is interprovincial trade and that if we are collecting this surtax on gasoline, perhaps it should be earmarked for a separate fund for a national highways program? That's the first question.

I remember you talked about the environmental issues, but there's an immediate need given a couple of things that have been going on for the last three years with the capital expenditures in this country on trucks. There's an element of productivity— and I'll touch on that other aspect.

There are going to be significant public costs at all levels of government for that area, and I'm trying to pinpoint where the federal government can come in. It's unlikely that we're going to vacate those areas of taxation, but perhaps a more broad-based policy on a national highways program would be important.

This leads to my second question, on technological change, capital cost deductions, and allowances.

In some of your methodology and framework in the last ten years, we've seen a tremendous change in the kind of capital we're investing in. In the last three years we've seen probably unprecedented investment in productivity, and we hope to see those benefits in three or four years from now. The Americans are slightly ahead of us.

In terms of our taxation policies, have we as a government given long-term thought to how we're going to deal with these deductions and capital cost allowances? For a company to be productive you can spend half a million dollars on new technology, and 18 months later, depending on the nature of the business you're in— Some of our friends from the banks are here. Just two of the banks keep telling me they have to spend $600 million a year on technology costs and that 24 months later they have to redo it.

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Given this is going to increase over the next 10 or 15 years in a very dramatic way for the country as whole, do you think the federal government is well positioned with its own policies to respond to those kinds of deductions? Should they be there? Ought they to be there? Should they be more? Should they be less because we're turning it over quickly? Who should pay the cost of the change in the productivity?

Those are essentially my two questions.

Mr. Jack Mintz: On the gasoline tax, you raised the issue of the gasoline tax being a source of revenue to help fund highways and roads. You can think of it as an imperfect user charge, whereby people travelling over the roads more will end up paying more as a tax.

It's not the same as a toll. A toll you could adjust. For example, trucks do cause a lot of expense in the use of our highways. One may find when looking at a gasoline tax we may not be paying sufficient gasoline tax. With a toll you could have differential taxes between trucks and automobiles for the use of the highways.

I think the critical issue is this, and the government will have to deal with it. In our own work we took the federal-provincial responsibilities on highways and roads as a given. The provinces are responsible for the highway and road expenditures today, and there isn't a federal national highway transportation program, unlike many years ago, when there was a conditional grant for highways and roads.

If one ends up creating a new federal expenditure on highways and roads, let's say through a transportation network, one could then start thinking the federal excise tax on gasoline relevant to the federal government's role in assessing a user charge for the use of the network.

Our point was that the federal government is not involved in highways and roads today, and so you can't look at the federal excise tax as basically a charge for the use of highways and roads. It's really the provincial gasoline taxes— they're the ones that have the role.

On technological change, yes, we would agree with you that there's been a significant change in capital. Obsolescence is an issue. We do discuss it in detail in chapter 4 of the report. We do suggest that because we don't actually know how some of the economic depreciation rates have changed for a number of assets, there is a need for a careful review of the capital cost allowance system.

We started doing some work on it during the process of our own work, but it would need a lot more time and effort than we could provide. It was therefore a recommendation to the government to undertake the review of capital cost allowances and see whether there are some areas where they may be inadequate or too high relative to the actual economic depreciation rates today.

I should also mention that one of the comments we do make in the report about technology is that in government policy today we have to think of not just creating technology, as in research and development, but also making sure our businesses are going to use technology in Canada. Our incentives for R and D, for example, aren't as helpful to us if you just simply create the R and D in Canada but then transport the R and D to the United States. That creates jobs through better production in the United States for the world market.

It's very important to get a balance: have incentives for research and development in Canada, but at the same time try to get more application of the use of that R and D in Canada. We believe getting the effective corporate income tax rates down, especially in the service sectors, as we suggested, we will actually create that better balance. That's why we have recommended as we have.

The Chairman: Thank you, Mr. Iftody.

This is the final question, Mr. Riis.

Mr. Nelson Riis: I have two short questions.

The Chairman: Okay, go ahead.

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Mr. Nelson Riis: Mr. Mintz, you mention with interest the comments on the small-business sector and the fact that only 12% of the newly created small businesses actually expanded employment.

Mr. Jack Mintz: That was in 1985 to 1992.

Mr. Nelson Riis: Yes. I suspect something similar continues today. I would assume so.

In terms of dropping the tax rate, do you think this would encourage people to go out and expand these businesses that haven't been expanding in these periods?

Mr. Jack Mintz: We didn't drop the corporate income tax rate per se. We said let's restructure the small business deduction. Our recommendation was that there be a federal rate of 20%. Small businesses would have a 14% federal rate. I won't talk about the provincial ones.

The small businesses can buy a further three-point reduction if they employ people. We would credit 20% of their employment insurance premiums against corporate taxes paid for a total maximum reduction in corporate income taxes by three points. This would be a way to restructure the small business deduction so you would provide a benefit to the firms that actually grow in employment.

Mr. Nelson Riis: I forgot that about the report. You're right. You really addressed that issue.

You seem to be a very cheerful fellow for a tax—

Some hon. members: Oh, oh.

A voice: I can vouch for that. He is.

Mr. Jack Mintz: Okay, are you going to drop the other shoe now?

Some hon. members: Oh, oh.

Mr. Nelson Riis: You and your team are obviously excited about the work you've done. I think we all reflect that excitement ourselves.

The other reality of it, however, just to throw a little splash of cold water on it, is that this is a time when we as elected representatives face problems in funding health care, education, training, and God knows what else. There's a perception that there's a shortage of funds these days to do important and necessary things. Then there's also the impression that everybody is over-taxed. I think you'd be hard put to find a single person who doesn't really believe that in his heart and therefore does all kinds of things that I suspect border on tax evasion. That's just the way they feel these days.

You're suggesting a 25% corporate tax cut. You would broaden the basis, but that would be the headline. It's going to be a little time before we get to that, I suspect. Don't be disappointed that we don't act quickly, but I can see the headlines now: “Minister of Finance's priority a 25% corporate tax cut”. I can't imagine it will come about in the near future.

The Chairman: Mr. Riis, I thought you were stating the NDP policy on this.

Mr. Nelson Riis: No, it's not. I just thought I should mention it, because it seems we're getting— It was just a point.

Mr. Jack Mintz: Let me respond to that in two ways.

First of all, we look at our report as being important for job creation and economic growth. If you look at what other countries are doing— Look at Sweden. It has a 28% corporate income tax rate. They have R and D private expenditures that are twice the level of Canada's relative to GDP, and they don't have tax incentives for R & D. There's something going there that we don't fully understand.

Look at the United States. It lowered its corporate income taxes and broadened the base in 1986. It actually raised the level of taxes on businesses in the United States, which had a negative impact to some degree, but with the pure efficiency of neutrality it had a significant impact on where the United States is going today.

I think we have to look at what we're doing with our business tax structure today. I think we've got to look at it very carefully relative to what we can do in enhancing economic growth and job creation today. I can tell you that by having a high rate relative to the world's and doing all these other things, we're shooting ourselves in the foot. We are hurting ourselves in terms of what we can do.

By moving to a more neutral base—and this is what has happened in a countless number of countries in the past number of years. They've had a tremendous spin-off in job creation and economic growth.

While I agree with you that the broad public will just look at the rate cut and forget about all the base broadening, and even though our proposal doesn't reduce the amount of business taxes per se— It's really a reordering, a restructuring of business taxes. I agree with you that most people will perceive that differently, but—

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Mr. Nelson Riis: To add to what you're saying, we've had various questions about the evidence that tax cuts result in jobs being created, which I guess is one of the bottom lines that we're concerned with. If we had clear evidence of that—I know you say it exists and the quantitative studies are there. I remember, for example, in British Columbia recently Premier Clark said he's prepared to lower corporate taxes, but he wanted a commitment from the corporate leaders that they'd go out and create jobs. I don't think they're prepared—they didn't seem prepared to meet that commitment. They said they'd do their best, or give it a good shot, or whatever. I think there's a bit of a suspicion that perhaps this won't work and a lot of people will just make a lot more money and the jobs won't be created.

I guess I'm suggesting that if there were some really good studies that you could help us with that would make that linkage very clear, it would certainly make our job in terms of selling this a lot easier.

Mr. Jack Mintz: Just going back, one study is done by Jason Cummins, who looks at U.S. investments in Canada. He shows quite dramatic impacts on both employment and investment when you change the level of tax in Canada relative to the United States for a number of firms. We also have a study done on outbound investment by Canadian multinationals. Again, it's the same story. It's Jason Cummins and Rosanne Altshuler, but it's the same story as the other one.

We also have a study done by Ken McKenzie and Aileen Thompson that I think has already been released, which shows that the differential impacts on investments in Canada over time relative to the United States has had an impact on investment and job creation that would be induced by that.

So there is evidence there that we've done— The committee was convinced that certainly there is an impact.

Going back to the tax cut, we did not recommend a tax cut. We recommended a rebalancing, a restructuring, of the business tax structure. Based on those three studies, I think one would see that there is a lot of value to the kind of approach we suggest, maybe even spending some of the fiscal surplus—and it doesn't have to be a big amount; it could be a small amount—on some business tax cuts. I think there is some value to doing that, and it would be good for the Canadian economy.

When you look at Britain, for example, the latest government started off with a 33% corporate income tax rate, already 10 points lower than our own, and over two budgets they've lowered the corporate income tax rate by three percentage points. They've done some base broadening. They've hit the utility companies, and they did a whole bunch of other things, but they certainly do have a system that is more neutral than ours and better for the service industry, so they can attract them in Great Britain. As a result, economically their growth has been very good.

I think the evidence is out there. It's been put together by many people, and I think our committee was very persuaded by that.

Mr. Nelson Riis: —

[Editor's Note: Inaudible]— by a Labour government.

Mr. Jack Mintz: Oh, yes, that's right. It was a Labour government. I forgot about that.

The Chairman: Thank you, Mr. Riis.

Mr. Solberg.

Mr. Monte Solberg: There's not a politician in the room who wouldn't say unemployment is not one of the biggest problems in the country and one of their top priorities. You've pointed the way to dealing with this through experience rating, to some degree, saying half a percent cut in unemployment, up to 2% if it were fully implemented— What are the impediments that stand in the way of introducing experience rating today? Is it just a lack of political will?

Mr. Jack Mintz: I'm not going to comment on political economy. I don't think that's the role of an economist, who is usually not a person who participates in that kind of evaluation. You might want a political scientist here for that.

The two negative things with experience rating—and one doesn't want to ever oversell it. First of all, it is more complex than the current system, because you're asking firms to keep an account. We did an assessment of that and found that the gains to the economy would swamp the cost of complexity associated with experience rating. That's one thing.

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The other thing about experience rating is that you do have a problem where some firms do face more seasonal factors than others in terms of what happens to the world economy. Through no fault of their own they will tend to have more turnover, which is why we recommended only going part-way to experience rating. We do recognize that some cyclically based industries cannot be fully blamed, let's say, or given full responsibility for how they lay off their workers.

I think the thing that really struck us about the analysis and the work that's been done is that because there's so much firm-by-firm variation, even within a seasonal industry like forestry, there are some very significant gains to even going one-quarter of the way to experience rating.

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

We're going to be studying your report as part of the pre-budget consultation, and we're going to be taking into consideration the fact that you believe it's a balanced package. I think you believe this package would in fact create new opportunities for economic growth and job creation. In fact, a lowering of the tax rates toward international norms would provide greater incentives for businesses to invest and create jobs. At the same time, you feel it's going to maintain and protect the revenue base.

One of the things that is also important in your summary is the fact that the report, you feel, requires further consultation, of course, which essentially will result in a better business tax structure that will benefit Canadians.

I also want to tell you that during the pre-budget consultation we will be listening to individuals and representatives, for example, from the manufacturers, petroleum producers, pulp and paper makers, who have been critical of your report, to get a balanced view of the issues at hand.

I simply would like to tell you that we're going to review your report in a very serious way in relation to our pre-budget consultation. We may also in fact invite you to appear again, if the members of the committee feel that is necessary.

So on behalf of the committee, we would like to express to you our sincerest gratitude for your work and also for the input to the pre-budget consultation hearings. Thank you.

The meeting is adjourned.