Thank you very much. It is a pleasure to come back to the House of Commons finance committee. I have been involved many times in various sessions over the past number of years.
I find the question-and-answer period particularly useful, and I am sure useful to the members. I am going to be as brief as possible about several things, to leave more time for discussion with the committee.
Let me, first of all, start by saying that since 2000 a considerable effort has been made in Canada to reduce the impact of taxes on investment and savings that are critical to ensuring that Canadians can enjoy economic growth and provide resources for their retirement as our population ages. Both Liberal and Conservative governments have achieved much in the past eight years.
Federal-provincial general corporate income tax rates have been cut from 43% in the year 2000 to 32% today and will be further reduced, to 28%, by 2012.
Capital taxes have been or are being phased out. In this, I am referring to both federal and provincial capital taxes. The federal one has already been phased out.
Capital cost allowances are being matched better to economic depreciation, although some tax preferences have been scaled back and others enhanced.
Income taxes have been reformed to remove the tax penalty on savings, for example by broadening contribution limits for RRSPs and pension savings and introducing the new tax-free savings account, which I thought was a terrific idea, in the last budget.
However tax reform is a process that continually reacts to new changes. Given the state of the U.S. economy and global imbalances and the continued concerns over productivity, Canada should keep moving the agenda forward.
Tax issues that should get some attention are the following.
First, while Canada has made tremendous strides in reducing business taxes, personal income taxes should be reformed, especially to remove high rates induced by high marginal tax rates and clawbacks of income-tested benefits and credits. It might make sense to cut down the number of tax brackets to three—15%, 20%, and 25%, as examples. We should also consider that various approaches can be taken for removing clawbacks, based on RSP asset sales, or by pooling benefits to reduce overlapping clawback rates.
Second, Canada should consider the demographic trends, which in the long run are quite important in terms of labour shortages, even though in the next couple of years we will be challenged by a contracting U.S. economy.
The separation of employment insurance into a separate fund, which the last budget has introduced, I think gives opportunities to rethink EI reform to put it more on an insurance basis. Employment insurance provides important insurance to help people cope with job loss, but also gives them an opportunity to adjust to new jobs, and that is where retraining programs could be useful.
It should also be changed to reduce contribution rates on businesses that do not lay off workers as much. This has been referred to as experience rating and is used quite well in worker compensation programs at the provincial level. In the case of unemployment insurance worldwide, the United States has practised experience rating for many years now.
Third, Canada should look at the tax treatment of small businesses, which undermines growth and job creation. Incentives such as the lifetime capital gains exemption and the small business deduction tend to impose a penalty on growth, since incentives are lost above a threshold or when the small business becomes public. Instead, small business incentives should be developed to improve growth prospects, such as the U.S. half capital gains tax reduction for investors holding initial public share offerings, for a certain number of years.
Fourth, the federal government could encourage provincial tax reforms by providing a grant for those provinces that undertake sales tax reforms through adopting a value-added tax similar to the GST. This was done more than ten years ago for the Atlantic provinces, and it would be good if Ontario, British Columbia, Saskatchewan, Manitoba, and Prince Edward Island all fixed up their antiquated sales tax systems, which are distortionary and less elastic with growth in the economy.
Fifth, many of the above proposals suggested will cost money at a time of a slowing economy. The finance minister would like to avoid deficits and should do so, and to help pay for tax reforms, the federal fuel excise tax should be converted into a true broad-based environmental tax that would be comprehensive and affect all regions of the economy in a fair and neutral manner. The revenues could be used to reduce corporate and personal income tax as well as being used to support investments to new technologies needed by businesses to deal with environmental costs.
And that, sir, is what I would like to mention as the main issues that I want to cover today.
Thank you very much, and thank you for the invitation to speak to the committee.
I'm pleased that the committee has a really broad mandate, because while details are important, it's also useful to maintain a focus on the long-term target, which is a tax system that raises revenue in the most efficient and equitable way possible.
I'm going to start my presentation with five quick suggestions and then move on to a broader proposal.
First, on the GST, strong efforts should be made to harmonize the GST with provincial retail sales taxes in provinces that have not done so. Evidence strongly suggests that business investment would grow.
Second, on capital gains, the proposal to allow deferral of capital gains needs really careful consideration. As the income trust experience has shown us, problems can arise when one type of capital income is taxed differently from other types.
Third, the extension of boutique tax credits for expenditures such as sports and transit passes should stop. While these might be popular in some circles, I don't think they're a good tax policy.
Fourth, I urge you to consider a role for environmental taxation. Environmental taxes are supported by a very broad spectrum of economists. The recent initiatives of the government here in British Columbia in this area should provide some encouragement to our federal politicians in this area.
Fifth and finally, I would like to address the issue of deductibility for registered education savings plans. I understand that legislatively this has been killed. Good. As tax policy, this idea of RESP deductibility is folly, and as education policy, it is farce.
While I believe all five of these items deserve careful consideration, I'm going to defer further comment on them until the time allocated for questions. I'm very happy to speak in more detail about those. But for the rest of my time, I'd like to talk about more fundamental reform that could be considered.
The income tax system that we have today in Canada was built on the recommendations of the royal commission on taxation from the 1960s, commonly referred to as the Carter commission. The backbone of the Carter commission was the idea that income from all sources should be treated equivalently. Whether it's a capital gain, earned income, social benefits, scholarship income, it should all go in the same pot. Economists call this comprehensive income taxation, but it's often distilled down to the phrase “a buck is a buck”.
In theory, there are two principal merits to this type of system. First, there's a sense of equity embedded within it. No matter what is the source of one's economic power, it is treated equally. Second, in theory, it can generate efficiency gains because it avoids preferential treatment of certain types of income, so there's no incentive for individuals to rearrange their affairs and decisions in order to channel their incomes through preferred income categories.
Whatever the merits in theory, the complexity of implementing such a system has proven difficult, especially with respect to capital income. Moreover, the greater mobility of capital that has arisen since the 1960s brings into question whether the Carter framework still resonates with Canada's needs in 2008.
An alternative is available. One alternative is referred to as the “dual income tax”. A dual income tax combines a progressive schedule for the taxation of labour with a separate flat schedule for capital income. Corporate income, capital gains, interest, and dividend income could all be taxed at the exact same rate.
A dual income tax has been in place in Sweden and other Nordic countries since the early 1990s. Aspects of this system are also in place in Belgium, Ireland, the Netherlands, the United States, and elsewhere.
What are the advantages of a dual income tax system? I see three. First is simplification. The complex rules for the taxation of capital income create vast administrative challenges as inventive accountants and lawyers find ways to avoid taxation. By taxing all capital income at the same rate, much of this waste can be avoided.
Second is neutrality. A primary goal for tax policy is to avoid changing decisions about how and when to invest. By taxing all capital income in a simple and equal way, neutrality in investment decisions can be achieved.
Finally, it allows some freedom in the setting of the tax rate on capital income from concerns about equity. With comprehensive income taxation, any attempt to make Canada more attractive as a location for investment dollars by lowering tax rates runs into the problem that tax rates on labour income must be lowered as well. By separating the taxation of labour income from that of capital income, an appropriate rate for each can be chosen.
Let me close by giving you two concrete examples of how a dual income tax system could make the Canadian tax system better. First, consider the income trust episode. At its root, the problem originated in the lopsided treatment of interest income compared to corporate dividend income. The recent changes to the dividend tax credit and corporate tax rates have restored some of the balance for now. But under a dual income tax such a problem couldn't occur, because all types of capital income are automatically going to be treated equally. This might well put an army of tax accountants and tax lawyers out of work, as it renders the search for tax advantage less fruitful, but that's a good thing for our economy, because we can put those minds to more productive use.
For the second concrete example, consider income inequality. In work with my colleagues David Green and Marc Frenette, of Statistics Canada , we have documented a sharp increase in pre-tax and transfer income inequality since 1980 in Canada. The greatest source of this continued increase in income inequality is from labour income. The labour earnings of the highly paid are increasing very quickly. But taxing these big earners at higher rates is difficult, because it means we will also increase the tax on capital income and potentially scare away investment.
So a dual income tax can solve this problem by freeing the tax system to continue to tax labour incomes progressively, without having the fear of scaring away capital investment. Of course a dual income tax would raise several problems in implementation. Potential difficulties might arise in the treatment of the self-employed, pensions and savings, federal-provincial concerns, and various international tax issues, to name just a few. I admit that today I don’t have the answers for all those problems, but I do know that the potential gains of a dual income tax for Canada make it worth while to consider such a change. If it is good enough for a progressive, small, open resource-based economy like Sweden, it might be good enough for Canada. I therefore advocate serious study of a dual income tax.
Thank you for your time and attention. I'm happy to answer your questions.
Thank you both for your presentation.
I have three questions, the first to Professor Milligan. I found your suggestion of dual income very intriguing and on the face of it a rather attractive idea. The working premise is that you can make a distinction between capital income and labour income. The sanctity of the idea, if you will, rests on that distinction.
In the latter part of your paper you talk about the problem with the self-employed but also with those who are in the upper margins, say basketball players and CEOs and individuals of that nature, who have enormous economic clout in the marketplace.
If capital is taxed at a flat rate and income is taxed at a progressive rate, at the intersection of rates is where the labour income will want to become capital income. So I'd be interested in your thoughts as to how you would curb that rather obvious and potentially excessive abuse of those who are probably the most privileged in our society.
First of all, tomorrow is the tenth anniversary of the report of the technical committee on business taxation, which did recommend experience rating, and it was recommended on an individual firm basis.
Let me say first of all that Statistics Canada has done a number of studies, and while it's true that in some industries you have a higher incidence of layoffs, there's actually quite a differential experience across companies, even within the same industry. Therefore, in my view, experience rating—if we ever move in this direction—should really be done on an individual firm basis and not on an industry basis, which is an alternative approach.
With respect to compliance costs, this approach is often remarked to be more expensive, perhaps, but in some of the studies I've seen for the United States, the cost of complying with the unemployment insurance system, even with experience rating in some states, like Washington, is actually less than what we have in Canada. So I think we must ask some questions about what we are actually doing here in Canada, in terms of the administrative and compliance costs of running the system.
I would agree that there could be some additional expense, but then we have to remember the economic benefits associated here, because, effectively, EI is being used as a way of really helping companies to avoid making their own payments to keep individuals available to them when they're laid off, and then to bring back those individuals at a later time.
Really, what we're doing now is that we're imposing a significant tax on many sectors in the economy, including service companies. You mentioned banks, but you didn't mention a lot of the small companies that really have very little experience with unemployment and yet are paying very high premiums too.
The studies have actually shown that you could reduce unemployment rates by almost a percentage point if you did introduce at least some, or partial, experience rating for the EI system. That's why many economists are actually very favourable to the concept of experience rating, because it would have some significant economic benefit, especially at a time when we're worried about labour shortages.
I must say that one of the things that would need to be addressed is the way we handle regional benefits under the employment insurance system, which is particularly important for the Atlantic region.
Good morning. My question is addressed to both of you; you could answer it in turn.
I expected that you could talk to us about some ratio. The day before yesterday, we looked at the proportionate amounts in the aggregate revenues of the Government of Canada... There is some sort of ratio between income tax and consumer taxes. I may be wrong, but I believe that you have not talked about this.
In terms of our study, this is still a concern. Should we at some point increase consumer taxes in Canada in order to decrease income taxes so that at the end of the day the revenues remain the same? This is another aspect of our study.
There are some aberrations within the fiscal system. During the same presentation, we have seen that couples, individuals or single-parent families earning between $35,000 and $40,000 were not really being encouraged to earn an additional amount of $5,000 because then they would only keep $1,500 of that money. One must admit that it is a problem. We will have to correct this eventually.
I would like to hear you both on this.
Let me add a number of comments.
First of all, to me, putting a lot of weight on what's consumption versus income taxes could be a bit of an exercise, because under the income tax today, there are elements of what you would call “consumption taxation”. That's because we have brought in provisions that allow people to avoid paying tax on their savings income, or effectively, in the case of the RRSPs and pensions plans, you're able to deduct your contributions from the income base. In other words, you deduct your savings, so you're only paying tax on your consumption at that point. Then, when you withdraw your money from the RRSP account or receive your pension, you're being taxed on your consumption.
With the introduction of the tax-free savings account, that's another way, actually, of doing consumption taxation. Of course, our tax treatment of housing in Canada is very much based on a consumption system. You don't get a deduction for the contributions, but you don't pay any tax on the imputed rental income you get by owning the house and renting it to yourself, or capital gains taxes on the ownership of that house. Therefore, all these elements, once you take them into account, are equivalent to an RRSP-type system, as long as you have similar tax rates over time when doing the treatment of this type of asset.
As a result, many Canadians actually are on what's called a “consumption-based system” under the income tax, because all their assets are being held in either owner-occupied housing or in RRSP pension accounts, and they now have available to them the tax-free savings account. Effectively, to the extent that everything is in those kinds of assets and they do not pay any tax on their return on savings, they are really being treated as one would have as a consumption tax under the personal income tax.
There are other ways that I think you can bring in consumption taxes and increase the weight. Clearly, one of them is to encourage provincial sales tax reform, to eliminate the retail sales taxes in favour of value-added taxes. Currently, retail sales taxes collect about one third of the revenues on businesses' intermediate and capital good inputs, and that actually has an impact on their competitiveness.
If we move to a value-added tax, which has now been adopted in more than 150 countries around the world today, and of course we have it at the federal level with the GST, and we have the Quebec sales tax in Quebec and the harmonized sales tax in—
Okay, I'll be very brief on that.
First of all, there is a principle with insurance that if you don't have the issue of what's called “moral hazard”—where people will take undue risks, including deciding to take more unemployment—you would like to have full insurance, and you could make an argument for a no experience rating in that case, because all the unemployment is due to cyclical changes.
On the other hand, if the system of insurance encourages people to take more layoffs than they normally would—and of course businesses may actually participate in that as well.... For example, I know of teachers at private schools who only have a one-year contract and then go on unemployment insurance over the summer. That allows them basically to collect insurance, and that saves the private school from having to pay higher salaries as a result.
If you get those situations, you could argue for partial experience rating—not full experience rating, but partial—with the idea that those businesses that tend to have a higher layoff experience would end up paying more. So they would try to avoid some of the actions they take that lead to layoffs when it's not just a matter of cyclical effects.
Just to start out, I know that both you gentlemen have a broad depth of understanding of the issues we're challenged with here and are trying to work through. I guess my only request would be that you shorten your answers just a bit. That might allow us to get a few more questions in, if that is possible. I mean that with the greatest respect, of course.
One of the questions I had, Kevin, was on your approach. I guess I'm trying to get a handle on the direction most of you who have appeared before the committee have taken with respect to income tax versus consumption tax. It seems, from all your perspectives, that you would prefer a consumption tax to an income tax .
I wouldn't mind getting your comments on that very quickly. The reason I note it, especially with you, is that in the opening of your presentation you talked about the fact that you're not a big supporter of boutique tax credits.
Clarify this for me, because I may not see this as you're seeing it. You're supportive of a consumption tax, but you're not supportive of a consumption tax credit. I do not see the two as mutually exclusive. In fact, I see them very much working hand in glove with each other.
Sure. Let me address that briefly.
There are a couple of issues I have with what I refer to as the boutique tax credits. One is that you're eroding the tax base. The government is giving you credits and costing revenue in that way, which means that the tax base is getting smaller. In order to raise the same amount of revenue, rates must go higher.
The general preference, which I think many of the people in front of the committee have likely expressed, is a system that has low rates but a broad base. So that's where part of the concern comes in.
The other part of the concern ties in with the other part of your question. With these kinds of tax credits, the difference between that and more general consumption taxation is that you're picking and choosing which types of expenditure are eligible for these tax credits, whereas with the general consumption tax, it's neutral across different types of expenditure.
As an example, for the fitness tax credit, I remember reading last year a presentation by the representative from the Federation of Canadian Archers, who was worried that archery wasn't going to be considered to be enough of a physical activity to qualify for the fitness tax credit.
So you have meetings and lots of interest about how you define where you're going to draw the line and what's enough fitness. My point is that you're picking and choosing what's good for kids and what's not. I'm not sure if archery is good or bad for kids, but I'm pretty sure that having a system that treats archery the same as the chess club the same as hockey is actually a pretty good system.
Thank you, professors, both of you. I appreciate your taking the time.
Professor Mintz, I believe it was you who raised the experience rating, and that was fine until you got to the part where you made reference to Ontario's WSIB. That caused me to generate this question. The experience rating at WSIB right now is a nightmare. In fact there was just an acknowledgement by Steve Mahoney, a former member of this place--and I served with him in the Ontario legislature--who is the chair and who has acknowledged that the whole system is just a nightmare. There are companies that are finding it cheaper to have employees who are injured sit in the lunchroom and pay them their wages rather than have them make a claim because a claim affects this rating. The downside for the workers is that without a claim going in, if they have a problem down the road, particularly as they get older and the problem becomes a debilitating injury or illness, for that matter, they're out of luck.
There is more money paid out--unless it has changed since I was there, which is going on five years ago--in experience-rating benefits than there were benefits to injured workers. So I'm just trying to understand how, given that experience in Ontario, you're seeing it as a real plus nationally. Maybe you can help clarify that for me.
I'll take that one. Thank you for the question.
You're right in saying that one way to affect outcomes they might want to see is through the tax system. Taxes can affect people's decisions and are one way to get things done, but taxes aren't the only way to get things done. You can also spend money out of the budget directly on the expenditure side of the budget, rather than doing it through the credit side, the tax side.
My argument is perhaps a bit subtle.
Certain types of things might be better done on the tax side--for example, those affecting equity concerns that are raised by the GST through the GST tax credit, as Professor Mintz mentioned. Other things might be better done on the expenditure side. Take the example of the fitness tax credit. To go further on that, an issue with the tax credit approach is that an awful lot of families don't have taxable returns at all. They don't see any benefit at all from a fitness tax credit, so if you're trying to focus, say, on lower-income families, they're not going to see any benefit from that at all. On the other side, some kind of expenditure program that helped local community centres or something like that would be something you could perhaps use to improve the outcomes for all families.
It comes down perhaps to a case-by-case basis, but in general the broader the measure is, the less likely it is that you're going to have to worry about these kinds of small distortions and changes we've alluded to.
Okay. I'm still not sure I'm convinced, but I hear your argument.
I have one more question, Chair, if I have time.
On the dual income tax, one of the things we're seeing over the last 30 to 40 years is that more of the overall revenue for the country is coming from personal income tax and less from the corporate side. In fact, over the last.... Obviously you're the professors, and you'll correct me if I'm wrong, but over that time period there's been a dramatic shift away from having the majority of it come from the corporate side. The personal income tax has long surpassed that now.
I won't get into the politics of what current governments are doing, but when you suggest this system, can you give me some assurance it would go toward rebalancing that, or do you not see the rebalancing coming? Are you prepared to defend that it's right for so much of our revenue to be coming from personal income tax rather than from the corporate side, which is the reverse of what it was as early as the 1960s?
You can tell I'm getting old.
Thank you for the question.
I will pick up the last point that you made first. I think you're right that there might be some differences in a place like Canada, where there's a lot more bilateral investment with a larger partner, than in Sweden, where it's more of a multilateral, within-Europe situation, but it's not necessarily the case that that makes it harder to think of why a dual income tax would be good. The reason is that in a case like Canada it might even be more likely to be the case that capital flows freely across the border because we're in the NAFTA agreement with the United States, and the more freely capital flows, as Professor Mintz was just saying, the less likely it is that capital income taxes will actually be borne by those who are investing in the country. In other words, what you're going to do when you're taxing capital income is you're just going to decrease the amount of investment in a world where capital flows very freely.
So part of what the dual income tax is trying to do is to recognize that fact, that capital is flowing freely, and to design a tax system that accounts for the fact that by taxing capital income more heavily, we're not actually doing ourselves any favour. For the most part, what we'll be doing is just scaring investment across the border.
Thank you, witnesses, for appearing before us today.
Professor Mintz, one of the things I've been talking about a lot, and something I've been studying and working on, is the harmonized sales tax or value-added tax and the benefits of transitioning toward that. I note that it's one of the points in your presentation today.
We've had some discussion here before the committee, which I happen to agree with, that it's often not a matter of the tax rate even, but where you're generating the tax revenue dollars from. So where you're applying it would often determine how you're positioning your economy productivity-wise and whether you're optimizing your tax system.
I do know our government has put in place some incentives for harmonization of taxes, and one of the things we keep coming back to is that we should come up with perhaps a larger subsidy, or create an impetus for that to occur. But one of the things I don't really understand is why this change can't be made revenue-neutral for the provinces. Why can't they transition to a value-added tax without taking an enormous economic hit, especially considering that most tax revenues in the provinces are generated—as with the federal government—by personal income taxes, not through value-added taxes or corporate taxes? It would seem to me that this transition could be made, with the exception of administrative changes, fairly revenue neutral for the provinces.
First of all, I think you're right that it can be revenue neutral. In fact, there's going to be a paper coming out on Ontario value-added taxation, which I've done with a couple of colleagues at the University of Toronto, where we've gone into this in detail.
First of all, let me say that if Ontario converted its retail sales tax into a value-added tax, whether fully harmonized with the GST, or maybe with some deviations from the GST, like the Quebec sales tax, it could levy the tax rate at about 8% without losing revenue—but it wouldn't gain any revenue either.
There is one virtue, though, which is what we found out. Retail sales taxes in Ontario have only grown 3% per year in nominal terms—not when inflation is taken out—over the past five or six years, while value-added tax collections in Ontario of the federal GST have actually been more buoyant with the economy and have actually increased 5% per year. In a sense, Ontario is hurting itself by maintaining a retail sales tax that actually is not growing very well with the economy, and that's because of the way it operates.
Now, there are some things that Ontario—
Professor Milligan, I want to come back briefly to what I guess we've been tied up about--that is, your comment about boutique tax credits, that environmental taxes are good and boutique tax credits bad. But then you expanded on that a little bit and said that one of the other things that could be done is spending money, versus creating a tax credit to encourage a behaviour.
As a Conservative, I actually look at it the other way. If I look at public transit, for example, I would rather encourage people to ride public transit and have the transit system become economic, and actually be able to provide for itself, than the other way, which is to pour money into a system and have a whole bunch of empty buses with nobody riding in them.
Do you see how that might be a better approach—which is where the government has gone with it?
Several years ago I gave a major speech on regional development programs in Canada and went into a lot of the literature about what people have found around the world with them. There was a comment made by the World Bank that just about every regional development program that was ever tried didn't work, in the sense of really doing anything.
But there were two things I found that were quite effective in trying to improve more depressed regions. One of them was to link them better with the urban areas in terms of both communication and transportation networks. That allowed people more easily to trade from the outlying regions with the major urban centres. It was found in Europe and in a number of other studies that these things did tend to work.
The other type of regional development effort that was successful was getting over jurisdictional boundaries, and in particular, when you get to smaller regions, enabling a sharing of the costs of major expenditures by getting several communities to share the costs rather than each, let's say, building their own centres. If you could get some economies of scale and efficiencies that way, that actually succeeded.
I was quite surprised that one of the jurisdictions was a Canadian jurisdiction that actually put some significant effort in that direction. That was Alberta. With its regional development policies, it was trying to get smaller towns to share resources more, so that they could have better facilities available to them.
None of these things is on the tax side, and so I think maybe we have to go back to trying to recognize what we are trying to achieve and how best to achieve it. I think those are interesting directions to think about anyway.
Let me first of all say that this kind of proposal really was made ten years ago by the technical committee on business taxation, which I chaired. I was appointed by Paul Martin when he was Minister of Finance.
In fact, we recommended taking the federal fuel excise tax, which really lost its rationale.... It was introduced in 1975 to reduce imports of oil. That's really irrelevant today. There's a question of why it even exists at the federal level, since the federal government really doesn't fund highways and roads, as the provinces do, and one could argue that it's a user-related tax. Can't the federal government do something better with that tax? We recommended at that time a broadening of the federal fuel excise tax into a tax either on energy or on toxins. It would effectively take into account these things.
Today I presented a paper and gave a speech at the Economic Club of Toronto. In that presentation Nancy Olewiler and I developed in more detail some of these arguments, taking up the report's recommendation from ten years ago. We looked at what would happen if you kept the gasoline tax at 10¢ and then decided to apply a broad-based environmental tax on other fuels. It could be on carbon; it could be on sulphur and NOXs or on some combination of these things. That's a choice that could be made, but we worked through the carbon case because it actually was easiest in terms of the data.
A tax of 10¢ a litre, which is currently existing under the federal excise tax, is equivalent to a carbon tax of $42 per tonne. If you apply $42 on everything else, what would happen in our calculations is that instead of raising $5.1 billion under the federal fuel excise tax, one could raise $17 billion under a full-blown carbon tax that would be based on consumption. In other words, you try to exempt exports and tax imports, although there's a very significant problem in trying to do that beyond the fuel combustion stage.
The reason is that if you bring in a toy from China, it may not just include lead; it will include carbon, but it may not be carbon in China, because it could have been assembled from components produced all over the world, including the United States and Canada. Then you want to know the price of carbon in all different parts of the world in measuring that carbon and everything else. Putting tariffs on manufactured goods would really be quite a challenge, but as we've seen with the B.C. carbon tax, it is possible to consider that.
I think there is some room at the federal level to take a restructuring of the existing federal excise tax and maybe use it for a better purpose than simply grabbing revenue.
I was very brief in my comments. But first of all, the lifetime capital gains exemption is available for anyone who owns Canadian-controlled private corporate shares.
In fact there are many large companies that have restructured themselves so they might create a private management company, in which the managers--who could be people quite wealthy, actually--end up claiming the lifetime capital gains exemption for their shares, because it's a Canadian-controlled private corporation, when they sell off their shares within that private corporation.
But the problem that I have with the lifetime capital gains exemption is that it only is available for private corporate shares. So if you become public, you can crystallize and fully claim your exemption, but effectively, sometimes if you haven't built up enough capital gains yet, then you may want to keep the company private.
What I'm suggesting is that I think we need to start thinking about incentives for small businesses that would allow them to grow. An example I was always struck with was in the United States when they gave a half capital gains tax treatment for investors holding initial public offerings of small companies, and small companies were defined as up to $60 million in assets, the last time I looked at the rules. There was a study done at Harvard that indicated that investors actually got about half the benefits of that and the company got half the benefits in terms of a lower cost of capital. But it was interesting, as it was an incentive to actually encourage companies to go public, as opposed to what I see as an incentive to keep small.
Right. First of all, one thing I would disagree with Professor Milligan on is that, even if you try to lump capital gains and dividends and interest together, you're not going to simplify the system. First of all, capital gains are only taxed on a realized basis, when people actually sell assets. That already creates an important differentiation, and a lot of tax law is built on trying to cope with that differentiation from other sources of income.
Also, for dividends, and in the case of capital gains too, we know that if a company is paying corporate income taxes, it's actually reducing its value and in fact the capital gains and the dividends. The reason we've had dividend tax credits, especially for small firms, and lower capital gains taxes on shares has been as a way of trying to recognize that the income the owner gets has already been subject to one layer of tax, and that's at the corporate level. So you're going to have those kinds of differentiations.
In the case of small business, I think there is an issue of building a company and of people having sufficiently low costs of capital to grow their company. Taxes, especially capital gains taxes, can impede risk-taking, because governments are there to share the gain, but they don't necessarily share the loss entirely, although we've tried to deal with that in the tax system.
But because we don't have a perfect system of capital income taxation—we will never get there—sometimes you have to do some offsetting incentives. That's where I think we need to rethink this, but what I'd like to do is rethink incentives by which we can actually encourage growth and not have very high marginal tax rates, such that if a company grows, then they're facing much higher levels of taxes on their income, should they grow.
It's very similar to low-income people trying to—
Thank you to our witnesses here with us today.
Thank goodness we have BlackBerries. I just got a note about the Manitoba budget, and I see that they have also cut their capital tax. That's encouraging. We're hoping to see that happen all across the country.
I have a couple of things. You have both talked about a fuel excise tax, a carbon tax, or an environmental tax. I just wonder, blue-skying here, how, if we ever decided that was going to take place, we would make it fair. My colleague across the table from Toronto, who seems to think it's a no-brainer, doesn't have quite the travel challenges, the distance challenges that many of our rural residents have in this country.
I'm not sure how we would do this to make it fair and equitable. It would drive up costs, if every item of food that is shipped to the city has this extra cost added to it as well. I think it's going to impact everybody. How on earth would we do it fairly would be my first question.
I've asked this question before and I think John was alluding to it, but it was a little bit contradictory, Professor Mintz, so that's why I want to ask it.
There's no doubt the government needs x dollars to run the government, to provide the services. Whether it's $200 billion or $300 billion doesn't really matter. We talked about the idea that payroll taxes should go for certain benefits; we talked about unemployment perhaps going for benefits. At what point should they no longer go for benefits?
The airport taxes came out a couple of years ago. All of a sudden it was a tax grab, and the government got addicted to it. Probably the same amount of money was not invested in security for airports, but they seem to have just generated endless amounts of revenue.
I'm using that example because it was brought to light, but you brought up another example with the excise tax. Should governments be all over the place? In a sense you say the excise tax should go into general revenues, but then you turn around and say that perhaps the excise tax should come down--that we should introduce a carbon tax and that some of that money should go back to the people who are paying it. At what point should we do that for personal taxes? What should we do in terms of corporate taxes?
The question is, when should we be using dedicated tax, and when should we skim a little bit off the top to really get the taxpayers for whatever we can?