FINA Committee Report
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During the pre-budget consultations for 2007, the Committee asked Canadians to respond to the following questions: what criteria do you believe should guide federal decisions about changes to taxes, fees and other charges, and should the changes be broadly based or targeted to a specific group of residents or business sectors?
Moreover, Canadians were also asked to comment on the relative extent to which federal revenues should be derived from individuals and corporations and the degree to which the federal government should ensure that individual and corporate taxation are competitive with other countries.
A. What Criteria Should Guide Decisions About Changes to Taxes, Fees and Other Charges?
In general, witnesses told the Committee that there are several main reasons why governments impose taxes, fees and other charges: to fund the range, quantity and quality of public goods and services desired by residents and businesses, to influence behaviour by supporting or discouraging actions that are felt to be socially desirable or undesirable, as the case may be, and to attain public policy objectives.
In speaking from their own perspective, a number of the witnesses suggested that the level of taxes, fees and other charges must be sufficient to fund such public goods and services as the environment, education, health, infrastructure, affordable housing, child care, heritage buildings, museums and science centres, among many others.
The Committee was told by some witnesses that tax reductions — whether personal or corporate — jeopardize the ability to fund public goods and services, which can have harmful effects on the economy and on the extent to which opportunities can be equalized for everyone. From the perspective of these witnesses, refundable tax credits and targeted tax changes are preferred to non-refundable credits, deductions or broadly based changes, since they do relatively more to ensure equal opportunities.
In addition to the criterion of ensuring that changes to taxes, fees and other charges do not harm the ability of governments to fund public goods and services, witnesses also supported other criteria that should inform federal decisions when changes to taxes, fees and other charges are contemplated. Within that context, they mentioned such criteria as fairness, simplicity, predictability, equity, efficiency, transparency, neutrality, progressivity, adequacy, competitiveness and economic growth. Also noted was the need to ensure that tax policy decisions reinforce government policy decisions in other areas.
Witnesses also suggested that taxing authorities should minimize their reliance on taxes that are, in some sense, more damaging. Some supported a relatively greater focus on consumption taxes, arguing that they allow individuals some choice, are neutral with regard to investment, encourage saving and capital formation, provide fewer opportunities for tax evasion, and are relatively more equitable and economically efficient since they rely on a broader base. They also noted, however, that consumption taxes are inherently regressive.
A number of the witnesses observed that there is a fiscal imbalance; as a consequence, taxpayers are unable to hold the three levels of government to account in any meaningful way, since they are unable to assess whether the range, quantity and quality of public goods and services delivered to them by a particular level of government is commensurate with the taxes paid to that level of government. From this perspective, jurisdictional transparency in taxation was supported as an important consideration.
Finally, some witnesses commented that broad consultation with residents and businesses should occur before changes to taxes, fees and other charges are implemented. The appointment of a task force to review the Canadian tax system, and the release of discussion papers to facilitate public debate and dialogue about proposed changes to the system, were supported by witnesses.
B. Should Changes Be Broadly Based or Targeted?
Witnesses provided the Committee with a range of views about whether changes to federal taxes, fees and other charges should be broadly based or targeted to particular groups of individuals or sectors, and about whether tax reductions are needed.
Some witnesses suggested that federal tax changes should be as broadly based as possible, since changes that favour a select group of individuals or sectors are funded by taxpayers as a whole and require the government, in some sense, to choose among groups and sectors and to pick “winners” and “losers.” They also commented that broadly based changes enable tax rates to be as low as possible, thereby providing benefits to more people with fewer economic distortions, better efficiency and fairness, reduced administrative and compliance costs, and less tax avoidance. A number of witnesses argued against the existence of tax measures that are unduly targeted at specific sectors.
Other witnesses supported targeted federal tax changes, and the Committee was told that evidence should be provided in order to justify the policy effectiveness of broadly based tax changes. We were also informed that targeted tax incentives are needed in order to influence different sectors of the economy in different ways.
Finally, a number of witnesses commented that some changes to taxes, fees and other charges should be broadly based while other changes should be targeted. According to this perspective, no single approach will necessarily achieve the intended policy goal, and changes to taxes, fees and other charges should reflect the requirements of particular situations and circumstances. The Committee was told that no group of individuals or sector is like any other, and targeted tax changes may be able to achieve a level of precision and an attainment of objectives that cannot be achieved by broadly based changes alone.
C. What Should Be the Relative Tax Revenue Contributions of Individuals and Corporations?
Witnesses provided the Committee with their views about the appropriate relative contribution of corporate taxes and personal taxes to total tax revenues. In general, witnesses supported a fair balance between individual taxation and corporate taxation. We were told, for example, that individuals should benefit from an increase in their disposable income, while businesses should have the ability to make the investments needed in order to be globally competitive. That being said, some advocated a shifting of the tax burden from corporations to individuals, while others supported a shifting from individuals to corporations.
D. How Important Is Tax Competitiveness With Other Countries?
Witnesses presented the Committee with differing opinions about the extent to which taxation in Canada, whether for individuals or businesses, should be competitive with other countries.
Regarding competitive corporate taxation, witnesses argued that the taxation of businesses must occur in a fair, generative and rational manner, with incentives and disincentives as needed; however, it must occur with due consideration of the overall taxation regime faced by companies in peer-group countries. The Committee was told that international fiscal competitiveness may be especially important because of the mobility of capital, and that it may be more important for some sectors than for others.
Witnesses also made particular mention of the competitiveness of the Canadian taxation system with that in the United States. Some argued that the Canadian system must be competitive, while others suggested that Canada requires a significant tax advantage in order to secure investment in a marketplace where investors are seeking the best returns and foreign governments are reducing their taxes.
A number of witnesses commented that personal taxes must be internationally competitive. Some suggested that relatively higher personal taxation in Canada may result in a brain drain that the country cannot afford; as well, it may impede the ability to attract and retain the skilled immigrants that will help the nation meets future labour force challenges and productivity goals. The mobility of labour was seen as an important issue that should be considered when changes to personal taxation are contemplated.
In respect of both personal and corporate taxation, however, witnesses indicated that taxes, fees and charges are only one consideration when decisions are made by individuals about where they wish to live and work, by businesses about where to locate and undertake operations, and by investors about where to allocate their financial resources. In particular, the Committee was told that quality of life — which depends, in part, on the range, quantity and quality of public goods and services — is a more important consideration than is taxation; for these witnesses, competitiveness should never be reduced to a simplistic comparison of tax rates. As well, we were informed that the ability to find work in one’s field is an important consideration for individuals.