I hope that the government members will support this motion. I already tried to have one adopted in order to invite the , as well as several Canada Revenue Agency officials, but the motion was rejected by the Liberal majority.
I sincerely hope that we will have an opportunity sooner rather than later to welcome the to ask her questions. I heard her answer in the House yesterday loud and clear, that she would appear before us “eventually”. I think we should set a date, as early as possible.
The Liberal motion initially mentioned that Ms. Henderson would appear on April 12, a date that has passed. I will suggest an amendment to that motion to propose Thursday, April 21. Obviously, the will need to be consulted, but the intention was to have her appear as soon as possible. So let's discuss Mr. Liepert's amendment, and then I will propose my own afterward.
I agree with Ms. Raitt. A substantial element was removed from the original motion and is not part of the new one. We need to discuss it.
I think there are two elements that are important and that are not part of the motion put forward. The first is a date. It's fine to know that the is willing to appear with Ms. Henderson, but when?
The original motions, the Liberal one and ours, mentioned a date. It would be relevant to insert a more specific date in the motion. The Liberal motion initially mentioned April 12, which has already passed. We know that we are sitting next week and that we will be in our ridings the week after. So I would like us to have , Ms. Henderson and other officials from the Canada Revenue Agency ideally next Thursday, given that we are welcoming the Governor of the Bank of Canada and the Parliamentary Budget Officer on Tuesday.
The second thing missing from this motion is the fact of holding a meeting to discuss a report about what will have been discussed. Currently, the Liberal motion focuses on a meeting with the , Ms. Henderson and other officials, but without follow-up, without another discussion. I don't understand why. Unless we get an appropriate response, I would like to propose amendments on this.
Thank you, witnesses, for being patient, and we will tighten up the time a little. We will have 50 minutes for discussion.
We have Mr. Alexander with us from the C.D. Howe Institute. From the Canadian Centre for Policy Alternatives, we have Mr. Macdonald. By video conference from Toronto, we have Ms. Morris from the Canadian Association of Retired Persons, and also by video conference from Toronto, from the Chartered Professional Accountants of Canada, we have Mr. Ball.
Thank you for appearing, and we are now discussing the related order of reference of Bill , an act to amend the Income Tax Act.
We will start with you, Mr. Alexander. My apologies for the delay.
Thank you, Mr. Chair. No apology is required. The business of government precedes the business of witnesses.
Thank you very much for the opportunity to speak to you today about the proposed amendments to the Income Tax Act. I can look at each of the measures in terms of the pros and cons, but I also would like to provide a couple of comments about the efficiency of the items in terms of fostering inclusive economic growth in the years ahead.
I'm really going to focus on three items. The first one is the cut to the middle-income tax bracket, the second one is the introduction of the high-income tax bracket, and the third is the reduction in the contribution limit ceiling for TFSAs.
In terms of the middle-income tax bracket cut, the estimated revenue impact to the federal government is $3.5 billion. That's a tax saving that will go into the hands of households. As an economist and a former forecaster, I have little doubt that the bulk of that tax savings will in fact go into expenditure and will be stimulative to economic growth. To the extent that some of the money is saved, although it won't add to economic growth or real GDP growth, it will come at a time when Canadians are carrying an awful lot of debt. I think, then, that there is a strong economic rationale for providing tax relief to middle-income households.
As for the introduction of the new income tax bracket, there are really two different dimensions that have been discussed or focused on. The first is the revenue capacity of the tax revenues that will be generated by the high-income tax bracket. There was a suggestion that the middle tax bracket cut could be paid for largely by the implementation of a high tax bracket. The Department of Finance's estimate on the revenue generation from the high tax bracket is roughly $2 billion, so there is a revenue shortfall.
However, analysis by the C.D. Howe Institute suggests that there is a downside risk to the amount of revenues that will be generated by the high-income tax bracket. This fundamentally has to do with what you estimate will be the behavioural response of high-income earners who are facing the higher tax rate. There's a sort of economic jargon expression, the “elasticity of taxable income”. You fundamentally have to make an assumption as to what the reaction function is going to look like.
Alexandre Laurin of our institute did work on this. He looked at 11 different studies, some from Canada, some international, and what he found was that the response of high-income earners could be more pronounced than the Department of Finance is currently anticipating. As a consequence, his estimate is that the high-income tax bracket could generate perhaps only $1 billion in new revenues. This is not to suggest that the Department of Finance is wrong; it is really about what assumption you make with respect to the behavioural response. As a consequence, what I want to flag to the committee is a downside risk to the revenues that might be generated.
However, you might argue that the introduction of the high-income tax rate is not just about generating fiscal revenues. You could argue that it is about increasing the progressivity of the tax system. We really should ask questions about whether this will create more inclusive growth and whether it will actually reduce income inequality.
If we think about it from this point of view, one big risk related to the behavioural response is the level the tax rate is going to get to by way of a combined federal–provincial tax rate in various provinces. It will be above 50% of income in a number of jurisdictions. This can lead to distortions, and in fact it could lead some provinces to cut their high-income tax rates. As a consequence, what you have to wonder about is whether this creates an environment in which we end up with a transfer of tax points from the provinces to the federal government, when in actual fact I'd argue that given the fiscal pressures on provinces to deal with education and health care priorities, if anything, we should be seeing a transfer of tax points going in the opposite direction.
Nevertheless, there is no question that when you look at the empirical data, the high end of the income spectrum has seen more income growth over the last decade or longer. This is a reflection of a global trend. It represents a global competition for talent, as a consequence of which labour is now being marketed in the global arena, and this is putting pressure on high-income earnings.
From a financial capacity point of view, one could argue that the high-income tax bracket is reflecting the fact that high-income earners have more capacity to contribute to tax revenues, but there are a few potential unintended consequences I would like to flag to the committee.
The first one is that Canada is in a war for global talent. We are competing to attract and retain talent, and the high-income tax bracket may deter that—
Second, the earnings also reflect risk-taking, and as a consequence, while the government wants to promote increased productivity and innovation, we need to be sensitive to the fact that higher taxes on high-income earners are basically a tax on success and are also a deterrent to taking additional risk.
In point of fact, I think the government is absolutely right to be focusing on trying to create more inclusive growth. I would argue that the tax system is not the most effective way of achieving this. I think removing barriers to opportunity from low-income Canadians, from aboriginals, from youths, from immigrants and others would be a more effective way of having an impact on income inequality.
Lastly, on the TFSA limit reduction, the two points I would make are that TFSAs are used across the entire income spectrum. They aren't just used by high-income individuals. Many lower-income households are actually pushing up against the contribution limits, and I would be happy to discuss that further during the Q and A.
Lastly, I would flag the complaint that the government will face large lost potential tax revenues from the TFSA as a bit of a perverse position to take on the TFSA. Basically, you're saying that if it's successful in encouraging Canadians to save, we should effectively take measures to ensure that they don't do that. I think that the opportunity cost revenues that are being estimated to the government from the TFSA are probably overstated, because if the incentive isn't there, Canadians won't save as much.
Thank you, Mr. Chair. I timed it to five minutes. Hopefully I can keep it to that this time around.
I'd like to thank the committee today for their invitation to speak. There are certainly a great many interesting topics that emerged from this year's budget. The focus on on-reserve infrastructure, particularly schools, clean water, and housing, is very positive and long overdue. The improved child and senior benefits will both reduce poverty rates among those groups by several points. I was surprised to see this fact was not better highlighted in the budget, actually.
However, today I'd like to focus on the tax bracket trade, specifically the creation of a new top income tax bracket whose proceeds are used to pay for a cut in the second bracket.
Now to be clear, we've advocated for a new top bracket for some time, particularly given the large income gains enjoyed by the wealthiest over the past two decades, although to maximize revenue from this new bracket, two additional measures are necessary. One is the prosecution of illegal tax evasion, and the other is the closing of tax loopholes.
Successful prosecution will be substantiated by new auditors budgeted for in this budget, and hopefully this committee will also examine and close tax expenditures or tax loopholes that allow the richest to avoid paying the statutory rate, a rate which most Canadians pay.
While I am in favour of a new top bracket, using its proceeds to reduce the rate in the second bracket is in effect an upper class tax cut, as I show in more detail in my paper “Real Change for the Middle Class”, which I believe you have a copy of.
I should point out that there's no official definition of the “middle class”, but undoubtedly it is going to have some relationship to the middle of the income spectrum, or median income, which is just over $60,000 for families or just over $30,000 for individuals.
Now, the second bracket doesn't even start until one makes at least $45,000, or 50% more than the Canadian median individual income. Without being in the second bracket, there can be no benefit from the rate cut proposed here. However, the full benefit of that rate cut isn't available until one makes $90,000 individually, or three times the median income, and that full benefit will be available to those making up to $200,000 when the new bracket kicks in.
I'd like to call your attention to Figure 2 on page 5 in my report, which shows quite clearly that the largest benefits go to the top 10% of families, who are making over $170,000, excluding, of course, the top 2% of families, who are making over $300,000 and will pay substantially more due to the new top bracket.
The upper-class 10%, excluding the very top, will see, on average, almost $800 more per family after the bracket trade. Families making between $170,000 and $300,000 are, I hope, no one's definition of the middle class, but they are by far the largest beneficiaries of this bracket trade.
However, the middle deciles that you can see better in Figure 2 on page 5 see surprisingly little of the benefit of the bracket trade. For instance, the lower middle class, the fourth and fifth deciles, see an average benefit of only $30, compared to the richest's almost $800. The upper middle class of deciles 6 and 7 do better, making about $175 a year, but again this is only a quarter of what the wealthiest make, at $800 a year.
The paper examines four other possibilities that use pre-existing tax transfer mechanisms to spend roughly the same amount, or roughly $3 billion, while attempting to better target the middle class.
The options examined are dropping the rate in the lowest bracket, increasing the basic personal exemption, increasing the GST credit, and increasing the working income tax benefit, or WITB. Any of these measures provides more benefit to middle class families. For instance, the WITB option would provide $350, on average, to lower-middle-class families, or 10 times more than the $30 they would make with the cut in the second bracket.
I'd encourage committee members to examine these alternative possibilities as more effective options than a rate cut in the second bracket, as described in the budget.
It is worth pointing out that roughly $3 billion raised by the new top bracket is a fair amount of money. I'm not sure that money should be spent on a tax measure. For instance, $3 billion annually would be sufficient to eliminate undergraduate tuition. It would also be sufficient to halve the fees for long-term care for the elderly or dramatically increase home care and caregiver respite supports, measures that will likely have more visibility than changing how much is deducted at source for most Canadians.
Thank you very much. I look forward to your questions.
With respect to the provisions in the change, our members are very pleased with the concept of tax relief. We polled them about the different parties' election promises, and a quarter of them said tax relief for the middle class was their highest priority. That was second only to increasing funds for home care.
In terms of how effective the budget has been in achieving that goal, we didn't poll on those specifics. Where we have some concerns about the proposed changes is with respect to the reduction in the TFSA limits. Before the limits were increased, we polled our members to see if they were supportive of the increase, and fully two-thirds of them were. With the announcement of a potential reduction, we polled again, and about 54% were opposed. Possibly the gap there may be attributed to people who anticipated using the higher limits and weren't able to do so. Approximately 81% of our members have a TFSA, so this is a proposal that is near and dear to their hearts.
Our concern is primarily about an ad hoc approach to changing the retirement framework for Canadians. What we know right now is that there is much poverty among Canadians, particularly seniors, particularly single seniors, particularly female single seniors. What we would prefer to see the government do is to take an overall strategic approach to look at retirement savings as a whole, rather than tinkering with one particular element and reducing the relief available.
CARP is a strong advocate for an enhanced Canada pension plan. We see movement happening in Ontario for a made-in-Ontario solution. There's a strong preference for a Canada-wide solution that covers all Canadians.
We're also deeply concerned about the way that registered retirement income funds are currently structured. Even with the changes that have been made in the past years to lower the mandatory rates, they are not low enough. Seniors are very vulnerable to changes in the market under the current structure. The assumption of a 5% real return, which the current rate seems to be based upon, does not reflect the reality of a low-risk portfolio, which seniors want and would be wise to adopt.
We cannot support a reduction in TFSAs as a stand-alone measure. We are aware that there are over a quarter of a million Canadians right now who are aged 90 and over; that number is projected to increase, particularly among women, again, a group very vulnerable to living in poverty as they age. We think that the RRIFs are falling far short of meeting their needs, so reducing an alternative vehicle that might offer some relief doesn't have the support of CARP.
All right, thank you. On behalf of the Chartered Professional Accountants of Canada, I wanted to thank you for the opportunity.
As a bit of background, I'm a member of CPA Canada's tax policy committee, I'm a national tax partner of BDO Canada, and I'm also a chartered professional accountant.
I did want to point out that the CPA designation is now, with the amalgamation, the single accounting and business designation in Canada. This was accomplished by the merger of the three legacy designations: CA, CMA, and CGA. We have over 200,000 members now.
One thing I wanted to make clear is that we do recognize that the government was elected in terms of a fairly specific platform, and the main tax changes I'm going to focus on were part of that. We do respect that and we do recognize that they received a majority.
Bill has three main important tax changes: the reduction of the middle-class tax bracket that's been discussed, the new top bracket, and the decrease in TFSA contribution room. From a more general point of view, what we really wanted to point out and talk about was the fact that when you do change the tax system it can have various effects, positive, negative, and maybe some unintended effects as well.
We wanted to talk at a more general level, I think, and reinforce that the tax system is a key lever in terms of ensuring that we have a business environment that remains competitive, that we attract and retain the best and brightest minds, and that we also achieve economic growth and prosperity. Our main message today is that it is difficult to talk about three pretty specific tax changes in isolation without considering the tax system as a whole.
Going forward, our key message today really is that before any other tax measures are introduced or changed, we'd like to see a review from top to bottom of the tax system. The review should focus on a number of important factors, with reducing complexity, improving efficiency, effectiveness, and competitiveness being some of the key factors.
We think such a review would actually benefit taxpayers, businesses, and the government as well, the goal being to make Canada the most attractive place possible in terms of a place to live, invest, and do business in. We think that this is squarely in line with the government's agenda for growth. We also think there's no better time than now to do it, for a few reasons, the main one being that there hasn't been a real review of the entire system for over 50 years. The last one was the Royal Commission on Taxation in 1966. Clearly things have changed a lot since then.
The other thing, and I think this has been recognized, is that the tax system now is actually very complicated. It's complex. It's difficult to understand. It's very labour-intensive to deal with, and there are inefficiencies and costs associated with that. In our summary we point out that the compliance cost, according to the Fraser Institute, is probably somewhere around $25 billion for taxpayers and businesses, and perhaps almost $7 billion for the government.
The third reason, really, is that we think there's a lot of support right now for a significant review of the tax system as well. We note in particular for four years now this committee has called upon the government to explore ways to simplify the Income Tax Act and the tax system. Just this past February, it was recommended that the government initiate a comprehensive review of Canada's tax laws with the objective of making the country's taxation system simpler, fairer, and more efficient.
We just can't support that enough.
We were also encouraged that there was reference in the 2016 budget to the government's intention to review the tax system, and we wanted to recognize the chair's recent comments as well that there's a need to look at taxation as a whole, including everything from consumption taxes to income taxes, and corporate taxes to boutique tax credits or tax breaks. Again, that's exactly where we sit and I think a lot of other experts do as well.
Getting into how such a review would work, we believe there should be a panel and it should be guided by the following principles: to keep tax rates as low as possible, the tax bases as broad as possible, and eliminate inefficiency or ineffective tax preferences. We also echo the comment made earlier that the rate is exceeding 50% in a lot of jurisdictions and that is getting fairly high to levels that haven't been seen for some time.
The next key thing when reviewing the tax system is to take a look at the tax mix, especially between income taxes and consumption taxes. We believe that Canada is out of step with the other OECD countries in terms of that.
We don't have specific comments on the TFSA, but we do have the comment that the tax system should not tax personal savings. There should be some sort of enhanced incentives to make sure that Canadians are saving properly for their retirement.
Another key objective, we believe, is to try to keep corporate rates as low as possible to maintain Canada's competitive edge, attract new investment, and create jobs. We also believe that a review should focus on a pro-growth approach that encourages innovation, productivity, and prosperity.
Finally, with regard to working with the provinces and territories, a lot has been done, but we still think more could be done in terms of a more coordinated approach that will benefit everyone.
Just to sum up, Canada needs a tax system that is built for the 21st century, not what, we think, is a patchwork of original rules, amendments, and fixes that have accumulated over time and can cause uncertainty and unintended results. With a four-year mandate, we believe that now is the best time to deal with this, to work on a tax review and possibly tax reform. We would call on the government to have the vision, commitment, and focus to move forward to it.
I would be happy to address any questions on these issues.
I would like to thank all the witnesses. It was very interesting, even though there was some contradiction.
Mr. Ball, I was a business student a very long time ago, too long ago. I remember that one of your predecessors, Lyman MacInnis, who was the president of the Chartered Accountants of Canada at the time, spoke to us about the duty or the need to simplify the tax code. I am taking this opportunity to acknowledge the reforms that have taken place in your profession. You have the merit of being consistent across the decades, and I salute that.
You made a comment and I would like you to expand on it, if possible. You said:
“Canada is out of step with other OECD countries.”
Could you tell us about the OECD countries that you think are models when it comes to simplification or efficiency of their fax system, and I'd like you to go more into the principles that you touched on in your testimony.
There is a large body of academic research that has been done on tax efficiency internationally, an awful lot of it looking at OECD countries and comparing the various tax systems and the effects. One lesson from the review of that literature is that consumption taxes are the least economically distortionary taxes to the economy. You see this across countries.
The United States is unique in not having a consumption tax. As a rule, economists prefer consumption taxes over personal income taxes and business taxes, although you have to address the aggressiveness of the impact of consumption taxes, in terms of the income distribution. You need to be sensitive to those issues.
Beyond that, however, the literature basically argues that the next least distortionary economic taxes are personal income taxes, and then the most distortionary are business taxes. Beyond that, it's a matter of figuring out not just what the tax mix is going to be but also the simplicity of the system, because there's a lot of economic cost to abiding by a very complex tax system.
It is here that we get into questions about whether.... I was encouraged that the budget eliminated some of the boutique tax credits, simply on the basis of simplifying the overall tax system, but I think that's where you end up, over time. The tax system incrementally tends to want to become more complex.
I would echo the comment that a review of the tax system and looking for ways to create more efficiencies to improve the tax mix and make it more efficient would be a very desirable thing.
Thanks for the question.
Certainly, progressivity is an important feature of any income tax system, and the more you switch away from income taxes towards other types of taxes, such as on consumption, the more you end up with less progressivity in the system rather than more. Something that we push for is more progressivity in a tax system.
That being said, you can address progressivity by switching more to income taxes, but you can also address it often by closing tax loopholes, of which there are plenty.
Unfortunately, this budget introduces another one, which is for teachers and which in some degree I'm in favour of, because my wife is a teacher. That being said, we've traded closing some tax loopholes for opening other tax loopholes. I think broadly speaking a much cleaner, progressive income tax system is going to be much easier to meet in terms of a lower bill.
The other thing I would point to are these questions. What are we doing with the taxes? What are we spending that money on? Are we spending it on something that we benefit from?
If such is the case, I think it's well worth increasing taxes to pay for programs that we can all benefit from or that certain portions of the population can benefit disproportionately from. It's very dangerous to disconnect taxation from what the money is being spent on.
To be clear, the cut in the middle income tax rate will provide tax relief. Based on the personal savings rate, which is in the low single digits, the bulk of that money is likely to end up in consumption. A small portion of it will end up in savings.
My point is that the savings aren't going to add to economic growth. It won't show up in the government's estimates of how much more boost the economy gets from the tax cut, but it has a benefit because encouraging Canadians to save more is good.
Although we are seeing many Canadians take advantage of TFSAs, I think there are still concerns about whether Canadians are saving adequately for retirement. Canadians are carrying larger debt burdens longer in life, and there are issues related to what's happening to the savings life cycle. In other words, Canadians are saving later in life, and this creates concerns, particularly among Canadians who do not have an employer pension plan.
When we look at the Canadian population, we say, “What is the at-risk population that's going to fall short of income replacement during retirement?” What we find is that it's middle-income households that do not have employer pension plans. As a consequence, this is one of the reasons why RRSPs and TFSAs are useful savings vehicles, because they provide additional incentives for Canadians to save.
What's interesting about the TFSA, which hasn't come up at this point, is that the criticism that's being levelled is that the TFSA is predominantly being used by high-income households. This isn't true. It's being used across the entire income spectrum. In fact, the advantage of the TFSA is that it's designed to help people in the lower tax bracket, because often the people with the lower income tax rates are not getting large tax credits when they save through RRSPs. The TFSA will give them a better tax return, and tax payoff, in terms of their savings. As a consequence, it's low-income Canadians and low middle-income Canadians that benefit the most from a tax point of view through the TFSA.
What should the limit be, and what should the annual limit be, or what should the lifetime limit be? We want Canadians to save more. The fact that the TFSA has proven popular is a signal that it is a useful vehicle and a useful complement in terms of helping incent Canadians to save.
I don't view any of this to be contradictory.
I'm here on behalf of the 3.3 million members of the Canadian Labour Congress, and I want to thank you for the opportunity to present our views on the changes to the Income Tax Act that are proposed in Bill . The CLC brings together Canada's national and international unions, along with provincial and territorial federations of labour and 130 district labour councils whose members work in virtually all sectors of the Canadian economy, in all occupations, and in all parts of Canada.
Personally, I think it's important to analyze these changes in terms of whether or not they will increase fairness and reduce inequality. In the case of Bill I find that the result is mixed. The first part of the bill deals with the proposed middle-class tax cut. This proposal reduces personal income tax rates on income between $45,000 and $90,000 a year and then increases tax rates on income over $200,000. As Andrew Jackson, my former boss, and the senior policy adviser at the Broadbent Institute points out, this definition of the middle class leaves out most workers. Why is this?
Most workers don't make enough money to benefit. Data from the Canada Revenue Agency shows us that only one in three individual tax filers had taxable income over $45,000 in 2013. Because of how our tax system is structured, the maximum benefit of $670 per year is only available to people who earn between $90,000 and $200,000 a year. That maximum benefit goes to the wealthy group who arguably don't need it. On top of this, we know that tax cuts are the least effective form of government spending in terms of reducing inequality or stimulating the economy. I think we heard from the last panel that tax cuts, in terms of addressing inequality, are not a really effective way of doing that.
While we are supportive of the increase to the top personal income tax rates, we think this revenue would have been better spent, for example, strengthening public services, such as health care. Public services benefit everyone and reduce inequality. Pharmacare and home care are good examples of health care spending that can increase efficiencies in health care delivery and make lives easier for Canadians.
On the second part of Bill , regarding the tax-free savings account, we think it's great that the government has reversed the previous government's changes. Returning the annual contribution limit to $5,500 recognizes that very few Canadians had the resources to take advantage of the higher limit. In fact, only about 8% of eligible Canadians had reached the maximum contribution limit during the first four years of the program. Again, as the other panel noted, it's the lifetime contribution that's going to matter in the long run, but for now this is a good move.
On retirement security, the Canadian Labour Congress feels that a much more important action to provide Canadians with real retirement security would be to double the CPP as soon as possible. In terms of what workers get from the Canada pension plan, it costs less than other ways of saving, such as mutual funds, RRSPs, or even the tax-free savings account. In a country as rich as Canada, no one should retire into poverty.
Thank you for your time.
Thank you very much for having me here today. Before I begin, I just want to say that the Conference Board is an independent, not-for-profit, evidence-based organization, and we don't lobby for any organization.
I'll speak briefly on the TFSAs first, and then I'll speak very briefly on the economic impacts of the tax changes proposed in this measure.
First, on TFSAs, why do we want to have these types of savings plans?
Tax-free savings accounts were created in 2009 to improve the incentives to save. There's sufficient evidence, we believe, that Canadians are under-saving. The share of employees with workplace pension plans is declining. Today, just 30% of Ontario tax filers who make more than $20,000 a year contribute to a workplace pension plan. Just 18% of tax filers without a workplace pension plan contribute to an RRSP, which was previously the main vehicle for saving for retirement. That means that 50% of people in Canada making more than $20,000 a year do not have a pension plan and don't contribute to an RRSP. Even for those who contribute, their contribution remains well below the average comparative contribution of those contributing to a pension plan.
Why would a TFSA be of use when so many Canadians are not taking advantage of the current RRSP rules? It makes sense basically for three groups of people. It makes sense for low-income groups, where it doesn't make sense to save in an RRSP as they face clawbacks upon retirement of government programs, such as the GIS. Also, it makes sense for young workers who could face higher tax rates in retirement as their income progresses into higher marginal rates. It also could aid seniors who try to generate income outside of an RRSP. For these groups it can eliminate very high tax rates on savings and encourage savings, which we believe is a good thing for the economy.
Have TFSAs been successful at inducing savings rates? What we do know is that they're widely used. There are almost 11 million people holding a TFSA and 18% have maxed out their contributions. One thing that really surprised me when I looked at the data is that 50% of those who had maxed out their contribution had income of less than $55,000 a year, so it's used across all income groups. That is likely to change, though, as the lifetime contribution increases over time.
Is the $5,500 limit suggested today enough? A young worker would probably be able to generate about $600,000 in today's dollars if they contributed the maximum over their lifetime. There is some question that perhaps that's not enough if they just use the TFSA, but it is significant if they use it together with an RRSP.
On income taxes, what I did is I modelled the economic impact of the income taxes, the hike on the high-income taxes and the reduction on the second bracket, and what I found is that it will boost GDP by a marginal amount. In fact, we expect it will increase GDP by just $800 million a year, adding about 5,000 jobs to the economy, so there is a marginal impact on the economy. There are a few risks, though, that people in the high-income bracket.... We have heard from our members that it makes it harder for them to attract high-income earners into Canada. We have heard that risk, but overall, there's a marginal impact on the economy.
Thank you very much.
Thank you, Chairman Easter, and the rest of the committee for giving me an opportunity to share the work of the Fraser Institute with you today. I hope you find my comments helpful and informative as you deliberate these important public policy issues.
I'm the director of fiscal studies at the Fraser Institute. We're an independent, non-partisan economic policy think tank. The mission of the institute is to help average Canadians understand the impact of government policies on their lives and the lives of future generations.
I've been studying tax policy for about a decade now and have published several peer-reviewed studies on a range of economic policy issues, including taxation and government finances. Last month I co-authored a study titled “Canada's Rising Personal Tax Rates and Falling Tax Competitiveness”. Many of my remarks will draw from the findings of that research.
I should note that my comments today reflect my own opinions and observations about the research we have conducted. I do not speak for anyone else at the Fraser Institute.
Let me start by saying that a competitive tax system is critical to fostering a positive economic climate. Empirical evidence from across the world shows that taxes can influence whether people engage in economically productive activities, such as working hard, expanding their skills, investing, and being entrepreneurial. These are all activities that ultimately drive economic growth and prosperity.
Over the past 15 years federal and provincial governments in Canada of various political stripes have improved the competitiveness of our business tax regime, but little has been done on personal income taxes. Personal income taxes are particularly important when it comes to building a knowledge-based economy and attracting and retaining highly skilled workers such as entrepreneurs, doctors, lawyers, business professionals, and engineers.
The new top federal marginal tax rate proposed by Bill , as well as recent tax rate increases in many Canadian provinces, harm our ability to attract skilled workers, and in fact discourage Canadians from realizing their full potential.
Critically the new top federal marginal tax rate of 33% is being layered on top of several tax increases by the provinces on highly skilled workers. For instance, as a result of federal and provincial tax hikes, the combined top federal-provincial statutory marginal rate in Ontario has increased from 46.4% to 53.5% since 2009. That's more than a 7% increase.
According to the latest available international data, Ontario's top combined marginal rate is the sixth highest among 34 OECD countries, and the second highest among G-7 countries, behind only France. More broadly, due to recent tax hikes, the combined top rate is now about 50% in six out of 10 provinces.
Consider that for a moment. In many Canadian provinces, including Canada's two largest, highly skilled workers can lose more than half of each additional income earned in labour income to personal income taxes. The economic evidence shows that high and increasing marginal tax rates discourage productive economic activity, making Canada a less desirable place to work, invest, and be entrepreneurial. They can also influence decisions about where highly skilled workers decide to live and work. There are many reasons why someone might decide to move to another jurisdiction, but empirical research shows that marginal tax rates play an important role in that decision, particularly for high-skilled labour.
The fact that Canada's tax rates often apply to lower levels of income than other countries further erodes our tax competitiveness. At an annual income level of $150,000 to $300,000 Canadian, every province's combined statutory marginal rate is higher than the combined rate in every U.S. state. This presents a clear challenge for Canada's ability to attract and retain skilled workers relative to our southern neighbours.
It's not just Canada's top personal tax rate that is uncompetitive. In most provinces a Canadian making $50,000 in Canadian dollars faces a higher statutory rate than they would in most U.S. states. This is despite the reduction in Canada's federal rate from 22% to 20.5%. In other words, Bill does little to address Canada's uncompetitive tax rates, even for the middle tax brackets.
The importance of a competitive tax system is not just fostering a skilled workforce. By discouraging productive economic activity, high and increasing tax rates ultimately diminish economic growth and prosperity. Indeed, because high and increasing tax rates adversely affect economic incentives, governments often do not receive the kinds of revenues they expect from these tax increases.
In closing, it is worth noting that past federal governments, both Liberal and Conservative, have acknowledged the importance of a competitive personal income tax system. For example, the economic plan of Paul Martin's Liberal government in 2005 called for lower personal taxes to “provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest” and to “encourage more Canadians to invest in their skills and to remain in Canada, where their talents will help build a stronger, more prosperous economy”.
In 2006 Stephen Harper's Conservative government made a similar point in its economic plan. Unfortunately, since then marginal tax rates on highly skilled workers have generally become less, not more, competitive.
I'll be brief. I have a couple of comments on Bill . I have a couple of points to make about the new 33% top tax bracket and its impact on government revenues and tax planning and tax avoidance.
The first comment is just to emphasize the importance of considering the differences between federal taxation and provincial taxation. In a federation such as Canada it is more difficult to tax mobile economic factors at the provincial level. For example, if a province tries to tax high earners, some of that income may shift to other provinces through the use of financial and accounting techniques. As an example, there's something called an Alberta family trust into which a high earner could put some assets that essentially shifts taxation of the income from those assets to Alberta, where it faces lower rates.
On the other hand, at the federal level it is harder to avoid taxation, because if you're going to try to engage in these kinds of techniques, it is harder to shift money out of Canada than between provinces. In research with Michael Smart from the University of Toronto, we found that high-income taxpayers are much less likely to shift their income and engage in these tax-planning techniques in response to a federal change than they are to a provincial change. When looking at these revenue implications of a high-income tax bracket, then, we should definitely pay attention to evidence on federal changes versus provincial changes.
My second point is about the administrative measures that have been put in place over the past few months. These enhanced administrative measures are critical to combatting tax planning and tax avoidance. If the Canada Revenue Agency makes it harder for individuals to engage in tax planning, then the new 33% tax bracket is more likely to reach its revenue targets.
The government has already announced several measures that move in that direction. As an example, in the recent budget there's a change in the definition of active versus passive income for small business corporations, and there's also an announcement of several hundred million new dollars for enforcement programs at the Canada Revenue Agency.
But I believe there's still more to do on three fronts. First, we should reduce the use and availability of small business corporations as tax shelters. We can do that through examining spousal dividends, by looking at the lifetime capital gains exemption for small business corporations, and considering use of an employee count or an hours threshold, as Quebec has done, for access to the small business deduction.
The second thing we can do is reopen the case for the taxation of stock options. That was taken off the table by the recently, but I think there are some merits there that deserve some more attention.
Finally, on the issue again of tax planning and tax avoidance, it's really important to consider the international angle. Much of that happens through organizations such as the OECD. They pursue multilateral agreements to curb tax planning and tax avoidance at both the corporate and personal level, and at those international organizations, Canada can and should be taking a leadership role in pushing those processes forward.
That's it for my comments. I look forward to members' questions.
Thank you very much for your comments. I think it's an important point.
We have in fact reviewed the literature on this. We've looked at studies that have been done historically in Canada, and studies that have been done around the world. Clearly the evidence does show that taxes can affect where people locate and also work.
There has been research done by Statistics Canada, for example, looking at the mobility of knowledge-based workers, including doctors, engineers, and natural scientists. I'm happy to pass along references to that study.
There's been research published by the Canadian Public Policy journal, looking at the effect of taxation on emigration to the U.S. from 1995 to 2001. It found that Canadians, those who had the most to gain in terms of a lower tax bill, were in fact immigrating to the U.S. It is the most highly skilled who are more prone to moving across jurisdictions. They are more mobile than the average worker because of the opportunities afforded them. Also, research has been done, very important research, that was published by the Institute for Research on Public Policy.
There have been major studies that have looked at this issue, studies in the prestigious American Economic Review, which I would turn your attention to. It was published two years ago. This study, very innovative in what it did, looked at the influence of taxes on mobility decisions of skilled workers. The study looked at the effect of personal tax rates, and it found that they play a significant role in attracting foreign soccer players into top leagues in 14 western European countries. The effect was particularly strong for high-quality players, defined as players who had been selected for national teams at least once in their career.
Finally, a recent study, this one done by the National Bureau of Economic Research, used a similar method of tracking migration among a specific set of skilled workers. Specifically, the authors looked at “superstar” inventors, measured by patent citation data in eight countries, including Canada and the U.S., from—
I just did a quick Google search, and I found an Industry Canada report talking about attracting global talent and the effect of taxation. Ask if he can point you in the right direction for that information.
On TFSAs, I have a general statement more than a question, because I don't want to be confrontational.
An hon. member: [Inaudible—Editor]
Hon. Lisa Raitt: No, to the witnesses. To you guys, all the time, but not to the witnesses.
Some hon. members: Oh, oh!
Hon. Lisa Raitt: Angella, you said that instead of the TFSA ceiling being raised, we should double the CPP. My argument to that would be that you don't use CPP if you're saving for your wedding. You don't use CPP if you're saving up to travel. You don't use CPP if you're putting money aside for your kid's education, or if you think you're going to need palliative or other care in the future. That's where I think the break is in terms of CPP.
I think the concept that TFSAs are only and solely for retirement is not well-founded. I think it's one where people utilize these vehicles for whatever purposes they want to. The difficulty with CPP—and you know this, and I know this, and it's unfortunate people don't want to talk about this—is that if you double CPP and you don't allow for other vehicles, people's after-tax dollars, or people's pay, will be going into a vehicle that, if they don't live long enough, they will never collect. In the case of a TFSA there is an inheritance ability for the kids or the spouse. That's an important aspect of TFSAs that we should also discuss when we talk about contributions and where people choose to put their money.
The other point I would make, Mr. Chair, and I'll be succinct, is that if you take a look around the world, when we increased our level to $10,000 we did not do it in a vacuum. In the United Kingdom they have an ISA, which is an investment savings account or an income savings account. Do you know what their limit is, Mr. Chair? I'll tell you what their limit is per year. In Canadian dollars it's $28,000 a year. That's the limit for the TFSA in the U.K.. They've had it in place for many years, and in fact they have a junior one. Clearly in their country they view it as a reasonable and meaningful way for people to save their money. It's a good program. We thought a lot of it. We increased the amount as they increased the amount. I think that was a great legacy of Jim Flaherty's.
Instead of having kids being told to put something on their credit card now, and pay it off later, I think it's worthwhile to say, “Put some money in your TFSA and delay what you want to do, and by the way, we'll give you money and it's better for you to do it than paying the interest.”
That would be my comments on the TFSA.
I have three and a half minutes, so I'll ask only one question, but it is for all four of you, if you want.
Strangely enough, there is one thing I believe you're all in agreement with when we're talking about the tax system. That would be for a review of the tax expenditures we have. I've seen some work done by the CUPE economists. I've seen some work done by Mr. Hodgson. I do believe there's some work by the Fraser Institute on the topic. Mr. Milligan, I know you're interested in the topic.
Not only is it a matter of reviewing the tax expenditures, I think it's a matter of considering that some tax expenditures are inefficient and even detrimental for the economy. We know the has announced that he was interested in reviewing tax expenditures.
I'd like to have your comments on the state of tax expenditures, the impact it has on economic growth, and if you consider that tax expenditures and even the review of the tax mix constitutes by itself a full reform of the tax system, or if it's only one component that should even be enlarged to look at the whole complexity, the administrative costs, and even the inefficiency of the current Canadian tax system as a whole.
I would like to start with Ms. MacEwen, continue with Mr. Stewart and also have Mr. Lammam and Mr. Milligan comment.
This is a very important question, and one that I agree with wholeheartedly. There is a very important need and opportunity to review tax expenditures. By my last count, there are roughly 128 of them in the federal tax system, which now cost more in terms of lost revenue than the entirety of what the federal government collects in personal income tax revenue each year.
Now, all the tax expenditures are not bad. Some of them, like the personal exemption, are worthwhile, and the same with RRSPs. We've done a study, in fact, where we've calculated that the federal government could do away with several of these tax expenditures, many of which are ineffective in terms of encouraging the desired behaviour, being regressive; that is, they're disproportionately benefiting higher-income earners.
By scaling back or eliminating many of these tax expenditures, we could in fact take out the two middle tax brackets in the old system, which would cost about $2 billion, leaving two rates, one at 15% for the overwhelming majority of Canadians, and another at 29% for roughly 2% of taxpayers. I think this is a really important opportunity to revisit tax expenditures that have grown quite dramatically, particularly since 2006, and to look towards a more simple pro-growth and efficient tax system.
I'll first comment on the tax rates. There's marginal tax rate and then your average tax rate. There's a bit of a difference there. We also need to point out that there are other considerations in terms of where people want to live and work, housing costs, proximity to jobs, transit amenities, open space.
Kevin, I believe you and I crossed paths at the University of Toronto many years ago, probably about 20 years ago I think, when we did our graduate studies. You're out at UBC now, so congratulations on living in Lotusland there on the west coast.
I'm going to throw this out there very quickly. On our government's policy to reduce the second tax rate, some have argued as to why we didn't reduce the first tax rate. I think it needs to be known that reducing that second tax rate is very important, because a lot of income earners who are in that first tax rate bracket qualify for a number of credits that the second bracket of individuals do not. The maximization of providing benefits to the middle class for the cut to the second tax rate, I think is very important, and I think it was great policy on the part of our government.
Before I let you answer, I do want to make sure we correct something that Ms. Raitt pointed out earlier. The bail-in legislation for Canadian banks was brought out by the predecessor government in response to the global bail-in regimes being brought forth by the regulatory agencies and governments around the world after the financial crisis. It is being put in place to protect depositors, insure depositors. It is to do with bonds that are outstanding and the convertibility of liability. I do want to correct that.
Now we can answer the tax question.