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APPENDIX E

Dissenting Opinion - Official Opposition
(Reform Party)

The Official Opposition will be expanding on all of our budgetary recommendations in our complete pre-budget submission to the Finance Minister next month

Introduction: Canada's declining productivity levels are the direct result of a generation of largely Liberal government policies that resulted in high levels of spending, debt and taxes. Even their balanced budget was achieved at the expense of our productivity as a nation. A full 76.7% of the balanced budget was achieved through higher tax revenues, 14% from slashing health and social transfers, 7.2% from cutting transfers to persons, and a tiny 2.1% from cuts in their own spending. The net result is sinking productivity levels that have been only temporarily masked in recent years by our plummeting dollar.

By cutting deeply into our health care system instead of getting their own spending in order, the government demonstrated a willingness to put their own interests before those of our most vulnerable Canadians.

In their pre-budget report the government has skated over obvious solutions to our productivity problem. Solutions such as deep reductions in employment insurance premiums, personal income taxes and capital gains taxes. Instead, ironically, they have called for a new government program, ostensibly to be staffed by bureaucrats who will decide whether government initiatives contribute to making our workforce more productive. So convinced are they of the importance of the initiative that they have used biblical language to describe it. While the Official Opposition congratulates the government on their apparent conversion experience, we remain highly skeptical that the Liberal government can teach the private sector anything about productivity. We oppose the idea of a "productivity covenant" and opt for a more direct solution, joining Canadians who say we must "cut taxes now."

HEALTH CARE: A nation can't expect to be productive when it's labor force is waiting in a hospital line for a hip replacement or heart surgery. One hundred eighty-eight thousand people are on hospital waiting lists - a direct result of the government slashing billions in health care transfers. This government deliberately chose to balance their books by hiking taxes and slashing health care transfers. It is urgent that the damage they inflicted is immediately reversed in the health care sector.

The government should move immediately to restore health care services by reallocating out of existing expenditures a minimum of $2 billion in new health transfers to the provinces.

TAXES: The Official Opposition believes the government has run out of excuses for not giving taxpayers significant broad-based tax relief now. Their six-month surplus of $10.4 billion betrays their position that the cupboard is still too bare for major tax relief. Any government that claims to have Canada's productivity concerns at heart has to understand the damage done by tax levels that are so high they've become a disincentive for investment, innovation and economic growth.

Canadians suffer from the highest personal income tax burden in the G-7. Since 1993 federal income tax revenues have increased 38%, and corporate tax revenues have gone up by 139%. Today Ottawa takes 17.2% of GDP for itself, up from 16.2% in 1993. No wonder Canadians are suffering from sinking disposable incomes. To find the cause, they need look no further than their own government in Ottawa.

Productivity is not improved by just talking about it, even in biblical language. Productivity will be improved by lowering high taxes. But lowering one tax and raising another cannot be regarded as a tax cut. This was the government's position when they lowered employment insurance premiums last year for employees by 20 cents/$100 and raised CPP premiums by 20 cents/$100. In the coming year, we will see employment insurance premiums lowered by 15 cents/$100, while CPP goes up again by 30 cents/$100, so the overall payroll tax burden has increased. They again assumed this stance in arguing that reducing the 3% surtax would leave $900 million more in taxpayers pockets, while failing to mention that bracket creep would remove $1.1 billion from their pockets. Instead, Canadians need sweeping tax relief that leaves them with more money in their pockets.

Speaking of across-the-board tax cuts, Mr. Chrétien said: "I don't think it is the right thing to do in a society like Canada." - Globe and Mail, October 22, 1996

Unlike Prime Minister Chrétien and his government, the Official Opposition believes that lowering the tax burden for overstressed Canadians is precisely the right thing to do in a society like Canada. And unlike this government which talks a lot about the issue but has delivered very little in real tax relief, we're prepared to make it a top budgetary priority by dedicating 50% of any budgetary surpluses to immediate tax relief.

The Official Opposition believes the government should immediately commit to a substantial across-the-board reduction in tax levels for Canadians, starting with:

FAMILY-FRIENDLY TAX CHANGES: This government continues to maintain a tax system that discriminates against families. If this government were truly committed to improving the productivity of our future labour force, they would stop maintaining a tax system that discourages the most stable social program there is - a strong family.

As an interim measure, the Official Opposition recommends removing some of these discriminatory practices in our tax system by converting the child care expense deduction to a credit and extending it to all parents and equalizing spousal exemptions to the personal exemption.

In addition, some witnesses put forth ideas for family income splitting and independent RRSPs for homemakers. The Official Opposition would like the government to examine these proposals and others in order to develop family friendly tax policies.

PERSONAL INCOME TAXES: The growing brain drain in our country is a stinging indictment of how our high tax levels are damaging Canada's productivity as a nation. This government's high income tax levels are directly responsible for turning an entire generation of our best, brightest and most productive workers into economic refugees fleeing for the lower tax regime of the United States. Just as it is important to educate and train our future labour force, it is equally important to keep them here when they enter their productive years in the workforce. That requires tax levels that encourage people to stay in Canada and businesses to grow and innovate.

The Official Opposition recommends that the government examine the following options:

• Reducing statutory rates - the Canadian Taxpayers Federation recommended a 2% drop in each of the tax rates to 15%, 24% and 27%, effective for the 1999 taxation year.
• Increase the basic personal exemption for all taxpayers to $7,900.
• Reinstate indexation of the income tax system. Bracket creep has taken over $14 billion in extra taxes since 1993 - something the OECD has identified as having been directly responsible for pushing a full 18% of taxfilers either onto the tax system or into higher tax brackets.

CAPITAL GAINS: Evidence is clear about the dampening effects of high capital gains taxes on a nation's economic growth - particularly in areas of innovation. If this government was truly committed to improving the productivity of our nation they would move quickly towards significantly reducing this productivity killing tax.

The Official Opposition recommends that the government explore options for an immediate reduction in the effective capital gains tax and provide the over 800,000 Canadians (59% of whom earn less than $50,000 a year) with an incentive to continue investing in the Canadian economy.

CORPORATE TAXES: Small businesses are the engine of job creation in this country, yet this government still maintains a tax system that makes it increasingly difficult for this engine to operate. The Official Opposition recommends that the government make a real commitment to labour productivity by creating a tax environment that does not discourage businesses from growing, innovating and creating the high-value jobs that contribute to our wealth as a nation.

We recommend that the government increase the small business deduction so that small businesses have more capital availability for expansion and job creation and consider the many recommendations of the Mintz report, with an eye towards an eventual reduction in corporate taxes.

PAYROLL TAXES:

"We believe there is nothing more ludicrous than a tax on hiring. But that's what high payroll taxes are. They have grown dramatically over time. They affect lower wage earners much more than those at the high end." - Finance Minister Paul Martin, October 17, 1994.

The Official Opposition agrees with the Finance Minister's comments and wonders why he continues to kill jobs by keeping EI premiums 33% higher than his own Actuary says is necessary. Combined with the massive CPP premiums hikes, Canadians are now paying higher and higher payroll taxes. The Finance Minister has already recognized that payroll taxes are a cancer on job creation, which is why the Official Opposition recommends that:

1. the government follow the recommendations of the Chief Actuary of the EI fund and significantly reduce EI premiums next year. The government should abide by the current EI legislation and cease using any excess monies in the EI fund to finance other government priorities.

2. the government hive off the EI account from General Revenues and have the fund independently run by contributors so as to avoid future governments using these monies for purposes other than ascribed by the legislation.

OTHER ISSUES:

RRSPS: As an interim change, the Official Opposition recommends that the government increase foreign content limits on RRSPs to 30%. We would also like to engage the public in a further debate towards the complete phase out of these limits. At a time when Canadians are asked to take more responsibility for their retirement security, it is counterintuitive to arbitrarily limit their ability to maximize their investment returns in their RRSPs.

Affordable Housing: We have heard a lot lately about the scarcity of rental units for low- and medium-income Canadians and how important affordable housing is in maintaining a stable workforce. While the government talks around the issue, they refuse to acknowledge how their own tax system has dampened development in this area. The Canadian Federation of Apartment Associations suggested a number of tax changes that would stimulate private sector development in housing, such as allowing investors to defer CCA recapture and capital gains on the proceeds from the sale of rental property when the proceeds are reinvested in another rental property within a reasonable time. This is currently allowed in the United States. A second suggestion was to allow a 50% rebate on construction of new rental projects and on major renovations to existing rental projects under the federal GST and HST. This treatment would treat private rental projects the same as social housing. The Official Opposition believes these two suggestions are worthy of serious consideration by the government.

Agriculture: The subsidy war sparking today's agricultural crisis is just the latest example of what happens when governments distort and interfere with the marketplace. They limit the natural development and innovative change necessary for maintaining a productive economy. So too does a tax system that takes more money out of farmers' pockets with every passing year. While changes in international trade policies may require a longer timetable to resolve, the government can act immediately to lessen the punishing tax regime under which their farmers now suffer:

The Official Opposition offers a number of recommendations where the government can use the tax system to assist farmers:

1. Make NISA contributions tax-deductible. This is money not available to farmers in the present year, and it is an undue hardship to require taxation on this money in a year when it is earned but not available.

2. Make it possible to roll over a farm to the next generation without penalty - over and above the existing capital gains exemption.

3. Review the issue of cost recovery and fees. This issue showed up in various presentations, but most importantly in the agriculture presentations where it has been a very large factor in increasing cost for our farmers.

4. Reduce "built-in" federal taxes that are part of the purchase price of such farm inputs as fertilizer and diesel fuel and transportation. These premiums are passed on through all that farmers buy (i.e. machinery, etc.).

5. Reductions to federal transfers have made it impossible to reduce the education portion of property tax - a huge burden on farmers.

Accounting/honest bookkeeping: Canadians need to feel they can trust the budget figures that the Finance Minister gives them. Recent signs give cause for worry. First, we learn that billions have been borrowed from the EI account to reduce his deficit, making his much-lauded "balanced budget" largely an illusion. Second, we learn that he plans to confiscate most of next year's multi-billion dollar EI surplus to finance other programs, even though the legislation expressly prohibits him from doing so. And finally, for the third year in a row the Auditor General of Canada has refused to sign off on Canada's books because he believes the Finance Minister's accounting trick of pre-booking future spending gives a false and misleading account of our true financial state.

The Official Opposition believes that, in reporting the government's finances, the government must follow the standard public accounting principles agreed upon by the Auditor General of Canada.

DEBT: Canadians continue to be very concerned about the high level of debt carried by this country. The government's continued refusal to set up a legislated debt repayment schedule - beyond their tepid promise to apply whatever's left over in the contingency fund at the end of the year - has reasonable Canadians questioning the government's true commitment to debt reduction.

The Official Opposition recommends that the government demonstrate their true commitment to improving productivity through debt reduction by introducing balanced budget legislation and creating a legislated schedule for debt reduction with clear, manageable annual targets for significant debt retirement.