Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 52 - Evidence, May 6, 1999
OTTAWA, Thursday, May 6, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the state of the financial system in Canada (equity financing).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Our committee has been doing a study on equity financing for small business. We are essentially looking at the fact that all government programs have historically been loan and debt programs. In other sets of hearings -- for instance, those in relation to corporate governance provisions of the Canada Business Corporations Act, and some of our hearings on the MacKay report -- we also heard from a fair number of small business community members. We heard anecdotal evidence that the issue facing them was not access to debt and that, therefore, whether banks were lending to small business or not was not a pivotal issue but rather that the real restraint in Canada was the lack of equity financing. That was the background that led to us to looking at this issue in more depth.
We have heard from a number of small business organizations, such as the Canadian Federation of Independent Business. We have heard from a significant number of young entrepreneurs who have created their own businesses and done very well at it. In the course of that discussion, a lot of the evidence that various witnesses have raised relates to the issue of business taxation.
A wonderful chart from the Canadian Federation of Independent Business shows how the share of income taxes has been declining versus the share of taxes paid by business -- employment taxes and so on. It was as a result of looking at this information that some of us said we might as well go to the fountain of information that created the database in the first place, namely you. We want to get your views on the more narrow question of small to medium-size business, especially as to how critical an issue the taxation of small and medium-size business is. What can you tell us about what ought to be changed? We did not call you at the beginning of our study, because frankly we did not appreciate how critical an issue tax policy is. Please proceed.
Professor Jack Mintz, Faculty of Management, University of Toronto: I have concentrated my comments today on equity financing and taxation, particularly with respect to the smaller and medium-sized businesses. The handout that I provided to you provides a little background on the kind of comments that I would like to make on the relevant issues that you have just outlined.
I will divide my comments into four parts. I will deal with relevant facts -- things that we do know -- and maybe point out some of the things that we do not know very well in terms of issues related to equity financing of small businesses.
I also wanted to outline the major items in the tax system that do provide support for small business financing. I will review some of those. I will then turn to the question of whether equity financing is inadequate, and why that may be so.
With regard to equity financing, I will concentrate on two separate issues, one dealing with the way financial markets operate vis-à-vis the small business sector, and another with respect to taxation issues and how that might impact on equity financing.
Finally, I will turn to some very specific tax issues and make some comments on them. I would like to comment on the good ideas, and I would like to say some things about the bad ideas. You will hear some of the frank remarks from me about some of the latest ideas that I have seen expressed in Ottawa.
It has been widely acknowledged that many small businesses have been created in this country since 1985, and people understand that very well. The number of self-employed individuals as a percentage of private-sector employment has risen from 14 per cent of total private-sector employment in 1976 to 19 per cent in 1995.
In fact, Canada has a pretty large small business sector compared to the United States. A study by Porter and Monitor back in 1991 showed that, if you look at the amount of output that is produced by manufacturing companies in Canada, 60 per cent comes from companies with less than 500 employees. In the United States, less than 20 per cent of output is produced by companies with less than 500 employees. In other words, Canada has a much larger small business sector in that sense.
In Canada, one third of corporate taxable income is accounted for by small business -- that is, Canadian-controlled private corporations. These are the ones with less than $15 million in assets. That is an interesting number. I was surprised when we found that number in the work that I did on the Technical Committee on Business Taxation. It really does illustrate that the small business sector is very large in this country.
Senator Austin: Does that take into account the lower tax rate for small business corporations?
Mr. Mintz: This is corporate taxable income, so it is not the rate as a portion of total corporate income.
The Chairman: It may not be corporate tax.
Senator Austin: I wanted to be clear on whether you were talking about income or tax.
Mr. Mintz: It gives us a sense of how large that sector is. If you do look at employment, 20 per cent of total private-sector employment is in the unincorporated business sector, and 50 per cent is in the Canadian-controlled private corporations. Canadian-controlled private corporations can be very small, or they can be very large. In fact, in Canada we have some very large private corporations. I will say a few things about that later, because it relates to some of the tax incentives we currently provide in Canada.
The balance of employment in Canada in the private sector is public corporate employment, and that is about 30 per cent of the remainder of that number.
One of the things that was pointed out by the Technical Committee on Business Taxation, as well as by studies that have been done by Statistics Canada and a group at the University of British Columbia, is that, while we have created a lot of small businesses, there has actually been very little growth.
I took these numbers out of the Technical Committee on Business Taxation Report. For example, if you turn to page 4 of my handout, you will see that, of the companies that had less than five employees in 1985, only 1.1 per cent grew to have more than 20 employees eight years later. In other words, not very many small businesses became large businesses.
Also, if you look at those companies that had 5 to 19.9 employees in 1985, by 1993 only 12 per cent grew to have more than 20 employees. As you can see, there is very little growth, and this has been substantiated in a number of studies. One of my main concerns, in terms of what we are doing in Canada, is that we may have a system that provides lots of incentives for the creation of small businesses, but we have a system that is biased towards the growth of small businesses.
Senator Kroft: I would find it very helpful if you could provide us with numbers that allow us to compare this with the U.S. You have mentioned it once or twice.
Mr. Mintz: I could not provide such numbers to you. I wish I could, but I have not seen a study that has done it on a comparable basis. This data was based on Statistics Canada data. It is the longitudinal employment data, and it actually gives a history of where people are in firms over a long period of time. It is a very useful set of data for analysis.
Let me say a few other things in terms of some of the facts, because there are different interpretations of what these facts mean. First of all, it is fairly well known and well accepted that small businesses face higher borrowing costs than do large businesses. The argument that could be made is that this is to be expected because there may be more risk involved with lending money to small businesses.
Some people argue that there actually is a problem of insufficient credit available to small businesses and that, as a result, interest rates are higher than they would be in a more competitive market, one that would allow for more lending to small businesses. There is some disagreement to what that fact means, however, most people would agree that a higher interest rate is charged on lending to small businesses than is charged to larger firms.
Second, most people would accept the idea that access to equity financing is more limited for small businesses. Small businesses generally do not go public and therefore do not have the same easy access to equity markets in Canada. In addition, they certainly do not have the ability to easily go out to international markets to borrow equity funds, and these two factors alone would signal that small businesses face some limitations.
Some financial studies suggest that the pricing of securities of smaller firms would suggest that they tend to rely more on Canadian capital markets, and the pricing does reflect some differential between the amount at which they can issue shares compared to larger companies. There is some evidence to suggest that there is some limitation there.
Finally, with respect to venture capital firms, there have been a couple of very good studies done, and they are contained in a book published and edited by Paul Halpern. I would particularly like to mention a study done by Amit and Brander, and another one done on venture capital by Jeffrey MacIntosh. The Amit and Brander study showed that, although only a small number of venture capital firms are successful, such firms have very high returns on capital when they are successful. This suggests that venture capital is very risky. At the same time, however, the right firm with the right success level can have very high returns on that capital.
Senator Austin: Could you define high returns?
Mr. Mintz: Actual ex-post returns, what you see as the income being earned over time by the investment. In other words, many venture capital firms do not succeed. They undertake investments from which they do not receive any profits because they have not succeeded. The ones that do succeed, however, seem to have extraordinarily high rates of return on their investment.
Senator Austin: Which you would define in what area of ROI?
Mr. Mintz: Unfortunately I did not have the book with me last night, otherwise I would have checked it, but it is about 60 per cent, a relatively high number. The book has been published and the study is easily available if you wish to see the actual data.
Senator Kenny: From the way you and Senator Austin are talking, it almost seems as though they fall into two categories -- either they bomb or they are huge successes. Is there not a bell curve or something? Surely there are some companies in the middle. Are there some that just stagger along for awhile, or are they all either huge successes or bombs?
Mr. Mintz: A bell curve would be the wrong depiction of the distribution of firms according to their returns, but you are right to say that some firms are in the middle. The Amit and Brander study suggested that the number of successful firms is small but that those that are successful do earn, on average, quite high rates of return on their investments. There may be some firms that fall in between. It would be inappropriate to consider the bell distribution, because that is based on what is called a "normal distribution" in statistics, which would be the wrong way to describe this.
Senator Kenny: Can you describe the sort of curve you might see?
Mr. Mintz: It would probably be log normal or a cradle distribution, where you have a very large tail. I am giving you the technical terms. Now I will explain it.
The greatest proportions would be firms that would be losing money or not doing well. It would be heavily weighted to that end. You then would have firms that do succeed and have rates of return, and then a number of firms with very high rates of return -- well above 60 per cent or 300 per cent, extremely high returns. There is a distribution, but the numbers would be much smaller at the winning end.
Another point shown by the Amit and Brander study is data comparable to the United States. When firms cash out in Canada, there are fewer initial public offerings by venture capitalists compared to the United States. In other words, in the United States when a manager or an entrepreneur cashes out, there is more likelihood of undertaking an initial public offering and having the firm go public. In Canada, however, there are more management buyouts and other types of arrangements whereby there are not as many initial public offerings.
When this paper was presented, there was some discussion about why this was happening, and I do not think a good answer was given. Perhaps that might come up in some discussion.
Let me turn to the types of tax support for equity finance. It is important to outline these. First of all, in Canada, two aspects of our system try to integrate corporate and personal taxes so that you avoid double taxation of equity income, where you have a tax at the corporate level and tax at a personal level. Income could be taxed twice as it is earned by the corporation and paid to individuals, either in the form of dividends or to the extent that profits are reinvested in the firm and capital gains are earned on the shares.
In Canada, we have a dividend tax credit, which is established on the presumption that the firm has a 20 per cent corporate tax rate. That is basically the small business rate. The total tax on income earned in the corporation would be a 20 per cent corporate income tax and then a 30 per cent personal income tax on the dividends received, net any credit, including the credit, for a combined tax of about 50 per cent.
If the person received wages, salaries, or bonuses from the corporation, they would be subject to about a 50 per cent tax, at least in Ontario. We roughly integrate corporate and personal taxes through the dividend tax credits on dividend income so that dividends are treated in a manner similar to the treatment of other forms of income paid to individuals.
I have always liked to make the point that the same argument can apply to the capital gains exclusion of 25 per cent. Effectively, when a corporation earns $100, and there is a 20 per cent corporate income tax rate, $80 remains, which could be reinvested in the corporation. To the extent that that resulted in $80 capital gains in the hands of the individual, 25 per cent is excluded, so therefore only $60 is taxable. Therefore, with the 50 per cent personal tax rate, about $30 in capital gains tax would be paid on that income. The total combined corporate and personal tax on capital gains, then, would be about $50 on $100, which is roughly equivalent to the way we treat dividends and to the way we treat wages for small businesses.
I want to emphasize that we do not fully integrate corporate and personal taxes for large companies. I will cover this when I discuss stock options, because, in the case of large corporations, their corporate income tax rate is not 20 per cent but, rather, 44 per cent. Although I am not talking corporate taxes today, I would like to point out that that is the third highest corporate income tax rate in the world, after Japan and Germany. We do have a much higher level of taxes on dividends and capital gains on income flowing from the corporation. That is taking into account both corporate and personal taxes on that income when the income comes from a large corporation.
A large corporation is not necessarily a huge corporation. We are talking about a corporation that would be over $15 million in assets, because at that point you lose the small business deduction and the lower corporate income tax rate on small businesses. When you talk about companies that have much higher levels of tax on equity income through the corporate and personal income tax system, you are not necessarily talking about very large companies.
As we have also noted, there is a small business deduction at the federal level. That deduction effectively means that the federal corporate income tax rate is about 13 per cent for small businesses, and many of the provinces have lower corporate income tax rates on small business. They average roughly 6 per cent now, for a total of about 19 per cent. There have been some recent decreases in the small business rate, but it is about 6 per cent or 7 per cent, so we will say roughly 19 per cent to 20 per cent.
The small business deduction has been given on the presumption that small businesses have difficulty growing and need to have some ability to reinvest profits. It is really another form of equity finance for the small business, to help it grow. The small business deduction is meant to try to encourage small businesses to grow through reinvested profits that are put back into buying machines and other kinds of capital goods needed for them to remain in production.
I will have more to say about the small business deduction later.
Senator Tkachuk: What happens when a small business has a profit of over $200,000?
Mr. Mintz: I did not mention the limitation. The small business deduction applies to the first $200,000 of active business income -- income earned from actual business that is undertaken by the small business. It does not apply to investment income. When more than $200,000 is earned, that income will then be subject to the top corporate tax rate, which for non-manufacturing companies would be 43 per cent or 44 per cent in Canada.
There is a real penalty when you start earning higher income. Small businesses will try to get around that by "bonusing out" their profits to the manager, the self-employed owner. As a result, they will be able to bring the income below $200,000 in order to avoid the corporate income tax penalty. I will say more about that later, but it means that the income must be paid out. The owner could lend money back to the corporations in order to put the money back into investment, but bonusing is quite common and has been tolerated by Revenue Canada.
There is also the $500,000 lifetime capital gains exemption for shares held in Canadian-controlled private companies or farm property, but I will not cover that one. The $500,000 lifetime capital gains exemption applies not only to small businesses, but also to large businesses.
Recently, a number of large corporations have restructured themselves so as to create private holding companies. For example, a management company would sell management services back to the operating company, and the management company would then be a private company owned by all the managers in the corporation. Of course, each manager would then get a $500,000 lifetime capital gains exemption. The exemption can therefore be used for many things beyond providing an incentive for smaller firms.
Senator Austin: Is the exemption applied to the shares in that private corporation?
Mr. Mintz: Yes. It is specific to the shares in the corporation.
Another area is the labour-sponsored venture capital credit, which is also referred to as "rent your union in order to receive the credit." The idea is that venture capital financing businesses that have been able to sell shares are basically open-ended funds, and the money is then lent to venture capital firms. There are regulations that a certain portion of the money must be paid out as investments in venture capital over time. This has been a problem in the past because at times there have not been enough venture capital firms, with the result that they have had to put most of the money into government debt as opposed to investing in venture capital. When the federal government lowered the credit -- it is a federal credit -- a few years ago, there was a reduction in the amount of funding that went to labour-sponsored venture capital firms. As a result, they had some difficulty at that point in trying to meet both the demand and the cashing out by individuals. Remember, these were open-ended funds.
Finally, there are provincial stock savings plans or equity tax credits in a number of provinces. These are often particular incentives for smaller firms -- they provide larger incentives for smaller firms where individuals will receive a tax credit for the ownership of equity in smaller firms. These businesses, usually under the provincial schemes, must be located in the province, which is an interesting comment about economic union and what we are doing in terms of these provincial stock savings plans.
The Chairman: I know that some credit unions are working on getting around that problem. Take the case of British Columbia where, under the credit union rules, the loans must always be in British Columbia. What is happening is that you create a company in British Columbia whose business is actually investing in companies outside British Columbia, but the loan is made to a company that is based in British Columbia, so you can get around the rule.
Your comment on the economic union is dead-on. Creative people are finding a way around the rules, which makes one really question the legitimacy of the rules in the first place.
Mr. Mintz: I will now turn to the inadequacy of equity financing. First comes the economic problem, which has been discussed very well in the literature. It has to do with the "lemons" problem -- that is to say, projects that are not necessarily good ones. The way of thinking -- and this applies to all issues in financing -- is that projects will be undertaken by investors, and investors, who you might think of as the insiders, will know a lot about the project.
There are some good projects and there are some bad ones. The individuals running the project have a good idea whether or not it is a good one. The outside lenders, however -- those who are being approached to provide funding for these projects -- are not sure which projects are good and which are bad. Therefore, they try to look for a signal about the firm to indicate whether it will be a good or bad investment.
One of the signals often used by investors is the degree to which the firm may go to the equity market and try to receive outside funding. Stronger firms are able to develop more internal cash flow and are able to use that internal cash flow to invest in their projects. Weaker firms, however, tend to go the market more often. This is called the "lemon premium" in equity financing. As soon as a firm goes out to the market, it may be interpreted as being a lemon, and therefore it will face the higher cost of equity financing.
The implication of the lemon problem is that bad firms end up squeezing out the good firms in the market. The implication of this, of course, is the under-investment problem, which arises when the cost of equity financing is too high and firms therefore give up good, worthwhile investment projects that they would otherwise undertake if they had sufficient internal cash flow to do them. As a result, a market failure arises where there may be too little investment in markets. This is a common argument in the literature.
What is the appropriate policy response for this problem? My view comes from investigation of these issues by people in the field. When you think of research and development and venture capital, it is appropriate to have some sort of investment tax credit to encourage investments by both the good and the bad firms.
It is also appropriate, however, to tax the equity financing of the firms, because that makes it harder for bad firms to mimic good firms when they move out in the market, and will discourage bad firms from coming into the market. The investment tax credit encourages the good firms to undertake the investments that are needed.
Senator Meighen: Are you talking about a certain size of firm, or about any firm?
Mr. Mintz: This is in a category -- let us say venture capital and research and development projects. I am not talking about the really large firms but about the smaller firm area. Both good projects and bad projects could be undertaken by entrepreneurs, and you are not sure whether they are good or bad quality. When you provide a financing subsidy towards these markets, you end up encouraging too many bad firms to come into the market. They then end up squeezing out the good firms even more.
It is more efficient to tax the equity financing, and to tax it more that you would otherwise do, in order to discourage bad firms from coming into the market. At the same time, however, you need to provide investment tax credits as a way of encouraging more investment because of this under-investment problem.
Senator Meighen: Are there more bad firms coming to the market than good firms?
Mr. Mintz: It is not a matter of ratios. It does not matter how many large firms there are relative to poor quality firms. There is an average, and some are above it and some are below it.
Senator Austin: My problem is understanding the categorization of what is good and bad. The market generally has its own behavioural methods of determining viable projects. The one thing that seems certain is that the ones you are absolutely sure of go belly-up, and the ones that you cannot believe in land in the range of high rewards. That has been my experience with my investments in this venture capital area.
How would your concept -- the one you are about to introduce on the tax equity -- help sort this out?
Mr. Mintz: I am just describing the implications of the lack of equity financing, which is the problem people talk about.
Senator Austin: As an investor, I would love to have help sorting out what will win and what will lose. How would this help?
Mr. Mintz: If outside investors have full information about what the good and bad projects are, there is no "lemon" problem and there is no inadequacy of equity funding. It should be no problem. It is a perfect market. What is the problem? I am trying to explain what people argue to be the problem in equity funding, particularly the case of venture capital and some of these other areas.
Let us consider an example. I have an invention that will do fabulously well in the market -- a new method of calculating taxes in order to evaluate projects that businesses do not know about. I will come to you and ask you to invest $20 million into the development and marketing of this project.
In a lot of these situations, of course, the trouble is that not all investors will know about this or will be able to judge. I could be right -- I may have something that could be a terrific seller, or it could be a lousy thing. I might have an idea that it will be a lousy thing, or that the probability that it will be successful will be pretty low. However, I may be able to get you to invest.
Senator Austin: So you are looking for a job in a few years?
Mr. Mintz: That is the problem that comes about. We do not always have full information about projects, and some people have better information than others do. That is the difficulty that outside investors have in fully appreciating how successful a project may be.
Senator Austin: How does taxing equity help us separate good from bad?
Mr. Mintz: The problem here is that the firms that tend to go to the market for equity funding often are the ones that have few internal resources or that, in earlier projects, have not developed enough internal resources to go to the market. That forces them to the market. The investors start using signals to interpret what is a good firm and what is a bad firm.
What often happens -- and this has been empirically found in a lot of pricing of equity -- is that some sort of lemons premium is often associated with small firms. At the initial public offering, these equity securities are perhaps priced lower than they should be because people see the firms coming on to the market as lemons. They fear that too many lemons are coming to the market.
The idea behind taxing equity is really to make it more difficult for the bad firms to come into the market, because then the good firms will not be affected as much. They have more internal resources, and with the investment tax credit they will be encouraged to undertake the investment financing.
An efficient credit would be one that is activity-based, based on investment. It would not be one that goes towards financing.
Senator Austin: I would like to discuss this more, but it is not possible in this context.
Mr. Mintz: Perhaps we can come back to it.
There are some tax penalties on equity funding, which is the other reason that equity financing may be inadequate. One problem is that governments really do not share risks with investors through the tax system. Governments are always there to share the profits. If it is a 50 per cent tax rate, then they will take 50 per cent of the income away; but if there is a loss, the government is not there to refund 50 per cent of the loss. In other words, they do not share the loss fully. There may be losses that can be carried back or carried forward, but it is not full refundability of the loss. As a result, you end up with a tax penalty on risky investments because of the lack of full refundability in the tax system.
I am not suggesting that you should go to full refundability. In fact, the problem you have in an open economy like Canada's is that, if Canada were the only country to give refunds for losses, the multinational firms would be very quick to shift their losses into Canada in order to receive credits from the Canadian government. We must live with that lack of refundability. It does suggest, however, that if you have very high tax rates, you do tend to penalize the risky projects and firms.
Senator Kroft: Under the American model, a consolidated return can be filed, and losses and profits can be pulled across different entities. Is our strict treatment of associated firms another way of giving you back your losses?
Mr. Mintz: It is another way of bringing in more refundability of losses. It will not do it entirely, but it will help towards improving refundability by bringing in consolidation where losses and profits in companies could be combined when they are in different entities. That is a whole set of issues in itself.
I can tell you that the Technical Committee on Business Taxation spent some painful hours on that issue. It is difficult to define when a company is and is not part of a group, and how this will deal with changes in control rules -- where a company may be bought and how those losses will be transferred under change of control. It is a very murky area, and it needs a lot of thought and development. There are ways of doing it.
Senator Kroft: The Americans do it quite well.
Mr. Mintz: They also do it in the U.K., where they have a loss transfer system. In Canada, we have tolerated more loss transfers from loss companies to profit companies. In 1988, the Minister of Finance issued a regulation that effectively allowed companies with at least 50 per cent ownership to undertake certain transactions that would shift losses from one entity into another. There are some transactions that may be involved with those, however, and in some cases it cannot be done at all. There are some restrictions involved.
What would happen if Canada were to consider moving to some sort of consolidation or loss-transfer system, which is done at 70 per cent or 80 per cent thresholds? Would that mean that we would want to tighten up from where we are vis-à-vis the companies that do transfer losses at the 50 per cent threshold? That brings about a whole set of issues, in terms of the revenue costs of moving to consolidation.
Another aspect is that Canada has partial integration of corporate and personal taxes for large companies. Therefore, there is some double taxation, or at least some excessive taxation on equity income relative to interest income or other forms of income earned in financing companies, as long as that income is deductible at the corporate level. There is some deterrent in the tax system for that.
Another point is that there is a lack of indexation for inflation for capital income, including capital gains. With 1 per cent or 2 per cent inflation rates, however, we may not be as worried about that today as we were in the 1970s, when we had inflation rates in the 8 per cent to 10 per cent range for a number of years. Still, that can accumulate over time. If you were to index the original cost of the assets or the shares for inflation, you would want to increase the value of the original cost by about 10 per cent over the last five years, even with our low rates of inflation.
The Chairman: I am not disagreeing with the theoretical idea of that proposal. However, the reality is that it raises the issue of indexation in a whole variety of other places in the tax system. You could not deal with it only in capital gains. It is a much bigger policy question than a lot of your other suggestions deal with.
Mr. Mintz: I am not making a suggestion here. What I am saying is that we have to recognize this inflation hit. However, I do agree with you that indexation is a very complicated area for capital income, which is why I made the point that we do not index inflation for capital income, including capital gains, because the one problem you particularly have is with respect to borrowing money.
We can deduct interest unadjusted for inflation. As a result, if you index capital gains for inflation but do not make any adjustment for borrowing, you can actually end up providing a subsidy towards equity to the extent that people borrow money to buy the equity shares. That raises the issue of whether you really want to move to full indexation and capital income.
It is not a suggestion; it is an issue. Perhaps the suggestion is to try to keep rates somewhat lower than in that particular case.
Even though these are three particular tax penalties associated with equity financing, there are some good things that provide incentive to holding shares. The most important is that investors can defer paying taxes on capital gains until they sell their assets. In an income tax system, usually you would like to tax people on their income as it accrues, or as they earn it each year. In principle, you would like to tax capital gains on an accrual basis; in other words, on the market value change in the value of the assets from one year to the next, whether or not the person sells the shares. That would be equivalent to the way we treat interest income and other types of income earned by individuals.
People can avoid paying taxes on capital gains by deferring them until they want to dispose of the assets. This has also been referred to as the lock-in effect, where people may hold assets for a longer period in order to avoid paying capital gains taxes that would arise on disposal.
Canada has a number of rollover provisions in the tax system to provide some relief.
The Chairman: Any thoughts on the U.S. rollover provision, whereby if you have a small business and sell it, provided you reinvest the money within 60 days in another small business, you do not pay the tax until you sell it the next time? Any views on that?
Mr. Mintz: This gets into the lock-in effect. We do not have a perfect system. The lock-in effect may cause people to hold assets for too long, and if you want to change management and things like that, then you want to allow for rollover. We do have a number of rollovers in our current system.
If you have certain types of mergers, amalgamations or whatever, there are rollover provisions so that the capital gains taxes can be deferred if there is some change of ownership in a company or some rearrangement in companies. In principle, I do not think it is wrong to look at that in terms of small businesses. The bigger concern would be to make sure that we can measure the value of the shares correctly.
Senator Kroft: If there were any consideration of taxation on accrued gains and value of assets, would that ever be considered in a practice with recognition of unrealized losses?
Mr. Mintz: There is actually right now in the Canadian tax system some accrual taxation in capital gains. This is what is called the market-to-market rules in financial institutions, where they will actually pay tax on the change in the value of their assets. They would get full losses written off against that under the market-to-market rules. This is really accrual taxation of capital gains.
Senator Kroft: Where does that happen?
Mr. Mintz: For financial institutions and insurance companies.
Senator Austin: You are talking of institutions with liquidity.
Mr. Mintz: That is other the shoe. We do not do accrual taxation for two reasons. I do not know of any country in the world that does. The first reason is that there are many assets for which it may be difficult to measure the values. This particularly applies to private company shares, land, real estate. There is a certain judgment that is required to measure the value of those assets at a certain point of time. Imagine doing that year to year. It could be quite difficult.
The second reason is the liquidity problem for some investors. They may own assets that go up in value, but they do not have much other income. If they must pay capital gains taxes on the value of the increase in the value of their assets, they would have to pay up and not have very much income to cover the tax liability. This forces them to dispose of some of their assets, which of course could be difficult if you have a farm or something like that. You cannot sell an acre here and there.
Therefore, for those reasons we do not do accrual taxation on a general level. We have been able to do it for financial institutions only.
There is also a lifetime capital gains exemption, which provides an incentive for owning equity. There are also some other special tax incentives, and they have already been discussed. Let me go through some tax policy solutions.
The small business deduction is worth about $3 billion at the federal level in annual support to small businesses because they face a much lower corporate income tax rate. As mentioned earlier, if businesses grow beyond $50 million in assets, they lose the whole small business deduction. There is a special feature in the corporate income tax law that claws back the value of the small business deduction. Once a firm hits $10 million in assets, and as it grows up to the level of $15 million in assets, there is no small business deduction available at all to the business.
The small business deduction can be viewed as being a penalty on growth, in terms of those firms that try to convert from small to large size. I have a significant concern about the lack of growth by the small business sector. The Technical Committee on Business Taxation recommended that the small business deduction be in part made sensitive to the level of employment of the firm. That could be accomplished by giving a larger small business deduction if the firm has more employees. You do that by giving a credit; for example, what we recommended for employment insurance premiums paid by the employer, that a certain percentage of that could be credited against the corporate income tax, up to a 3 per cent reduction in corporate income tax rates faced by small business. As a firm grows through more employment, it would be able to achieve a lower corporate income tax rate as a result.
Senator Meighen: Does your work show any other reasons that small business in Canada tends to stay small business, other than the small business deduction disappearing at a certain level? We have had some evidence to the effect that, for whatever reasons, in Canada owners of small businesses are loathe to share ownership. That may be a sociological problem.
Mr. Mintz: A lot of small businesses are incorporated with the intent of deferring or reducing the level of tax on active business income earned by the self-employed person. For example, Jack Mintz Incorporated earns consulting income. If I were incorporated and I did not need the money brought out of the firm, wanted to leave it in the firm and avoid paying 50 per cent personal tax rates, I could do that and instead pay a 20 per cent corporate income tax rate at the small business level.
Senator Meighen: Does this same situation exist in the U.S? Why is it so different?
Mr. Mintz: I will comment on that later on. However, there is a difference in thinking in the United States compared to what we do in Canada. We must look at all our policies.
Senator Austin: Let me tie small business deduction to employment. That may be a useful social and economic growth policy objective for a certain type of small business, where employment is critical to its growth, but in the information technology world, growth is not an employment-size connected business. I get into the difficulty of policy using the tax system to create incentives and unintended consequences. The argument would be: All right, if you can grow employment, that is good, but it will not have a huge net effect on revenues. However, this other company may grow a great deal more quickly, will not receive this deduction, will pay a penalty, so tax equity becomes an argument. Your view of that issue is that it does not matter?
Mr. Mintz: You have a relevant point, in that this would favour the more labour-intensive-type firms. The difficulty is if you try to tie it to assets; for example, capital taxes on assets. However, small businesses do not pay capital taxes on assets; they get relieved of that as well.
When we made the recommendation, it was based on the fact that we saw already a lot of incentives in terms of capital income and capital, but we did not see much in the way of payroll taxes, which small businesses were quite concerned about. We thought we were evening up some of that difference.
Senator Kenny: If you worked on the assumption that eventually firms want a dividend out their profits, have you done any studies on the sensitivities for government revenues if they had lower rates of taxation? I am working on the assumption that sooner or later the money will leave the company, and when it leaves there is an opportunity to tax it.
If you had a lower income tax, presumably there would be a greater incentive to grow the company, which would have a series of benefits. The argument always seems to be that the government cannot afford the deferred revenue. I do not understand how great the deferred revenue might be, how long it would take before the government would recapture that, and how much the growth that the lower tax rate would generate would compensate for the deferred revenue. How much of a hit does the government take earlier on? How much benefit would it receive later on, at varying levels of taxation?
Mr. Mintz: It depends on the way you compare it. There is a hit, and the hit is because the taxes are deferred. There is a value, of course, that is associated with that.
My bigger concern is this, however. If you were trying to look at the impact on the amount of taxes that are raised by the government, you must remember that, in providing special preferences for one type of industry, governments have a certain revenue requirement and thus must make it up by raising taxes somewhere else. You must take that into account in terms of any revenue calculation. The question then becomes: Is giving the small business deduction an efficient mechanism of growing the economy?
Senator Kenny: I am going further than that. I am saying, why have a corporate income tax at all? If you said, do not have a corporate income tax at all, the government will get its share eventually and a whole lot of benefits will accrue to the country because of the lack of the corporate income tax, then the questions become: How long do you have to wait? How big is the hit? How will it work out?
Mr. Mintz: The general corporate income tax issues would be an important question to discuss at another time. If you do a corporate tax study, then I will give a more full answer as to why at times you need a corporate income tax. Let me give you just one quick argument, especially since I have already covered this.
You need a corporate income tax when you are running a personal income tax system because we cannot tax capital gains on an accrual basis. What we can do is use a corporate income tax, like a withholding tax, where you put the corporate tax on the business. If an individual tries to put investment income into the corporation, to avoid paying personal tax on it, he or she will be hit by the corporate income tax. Of course, with full integration methods, like dividend tax credits and things like that, when the individual takes the money out of the corporation, he or she will pay the same level of tax as if they earned the money directly.
You need the corporate income tax to backstop the personal income tax. That hat is why you cannot get rid of it entirely. Therefore, I would never recommend eliminating corporate income tax entirely.
But it does come to the question of the level. Presently, what we have is an integration system, which is based on the corporate tax rate of 20 per cent in this country. In reality, large corporations pay a corporate income tax rate up to, in the case of non-manufacturing, 43 per cent. That begs the questions: Should that be as high as we are assessing it? That would be a topic I would love to get into, but I will continue.
Regarding, equity finance credits, they are inefficient incentives, and a number of studies have shown that; for example, a study on Quebec stock savings plans. It is fairly simple to look in the newspaper and see how labour-sponsored venture capital credits are doing, in terms of their returns on equity. Studies have been done on flow-through shares for non-renewable investments. I have not mentioned them earlier on, but these are ways of providing more financing and refundability of losses for junior oil, gas, and mining companies.
A lot of these studies have shown that on an after-tax value basis, these incentives are good for the investors, or at least provide sufficient returns. However, when you look at the economic returns by the investments, the returns have been not very good. They have not performed particularly well. This raises an issue of whether these equity financing incentives are perhaps encouraging too many poor projects and subsidizing too many poor projects in the system.
Provincial equity credits do interfere to some extent with the mobility of capital in Canada's economic union, because these credits are given for investments made by individuals in the provincially based companies. Of course, that starts breaking up capital markets in the country. Therefore, I am not particularly enamoured with equity incentives.
Capital gains taxes. The lifetime capital gains exemption does encourage private ownership of businesses but does not encourage public ownership. It can be used by investors of any size, CCPC, Canadian-control private corporation. As a result, the lifetime capital gains exemption has not necessarily achieved what one was hoping to achieve.
There have been studies done by the Department of Finance, an evaluation of the capital gains exemption. Those studies have found that the exemption did not encourage the investment and risk-taking that was hoped for, in part because there is a limit. You can only go to a certain amount. As soon as you earn any income beyond $500,000, you end up being fully taxed. Therefore, it does not provide as much incentive as one might expect.
The partial exclusion of capital gains is appropriate. If we wanted to improve integration in the country, to bring it closer to the large corporate tax rate, or if we had a single corporate income tax rate in the country, one would probably end up setting integration, the dividend tax credit and the partial exclusion capital gains, at a higher level.
The Chairman: A while back, capital gains was not limited only to Canadian-control private corporations; they were the exemption. It started out at $500,000 and then eventually worked its way down to $100,00, and then disappeared. Given the number of Canadians who are now investing for their retirement in mutual funds, for example, what are your views on the question of the capital gains issue? Forget for the moment whether $500,000 is the right number, but being available for investment in public companies as well as private companies.
Mr. Mintz: Actually, what the studies looked at particularly was the public companies. There was another study on smaller businesses. However, on the public companies, that is the best data you can find. It showed that the capital gains exemption did not have much impact on equity pricing. The reason for that is that large corporations, public corporations, borrow not only in Canada, but also in other parts of the world. As well, there is a limit on the capital gains exemption. A lot of people also own tax-sheltered savings, such as through pension plans.
So when you combine these impacts, the impact on equity pricing is minimal, and therefore very little on investment. I would not recommend it.
Senator Austin: In trying to grasp your own tax policy attitude or ideology, what I hear in the solutions you are presenting to us is a concept of actively using the tax system to achieve social and economic goals that are outside a tax-neutral system. Yet, I have a note that says that, in 1998, you headed a report of the Technical Committee on Business Taxation which did not favour differential taxation of capital gains. You are not a tax-neutral person, you are a tax interventionist.
Mr. Mintz: I am not a tax interventionist. I have said that we have problems in the small business section. I could come out and say, "Get rid of it." Actually, I would like to have a single corporate income tax rate at a lower rate than the current general one.
If we are to have the small business deduction, then we should gear it more towards growth, or at least not have a penalty in growth.
The equity finance tax credits are bad ideas. Do not do them, period.
Regarding capital gains taxes, I am not enamoured with the lifetime capital gains exemption. It is being used by large businesses to drive a truck through the corporate income tax and personal tax system. It is not at all well targeted. Partial exclusion is appropriate. If you really wanted to match the dividend tax credit and partial capital gains exclusion to the actual corporate income tax rate paid in the country, it would be at a higher value than what we have today.
I would like to bring the general rate down to the small business rate, and I would like to have full integration at a single corporate income tax rate in this country. That is my optimal solution for Canada, which is really what you find in many countries.
Senator Austin: I wish to refer to an issue that is reported in today's paper, and that is the question of the possible flight of younger people who are highly trained in the information technology field and the advocacy of companies like Newbridge that are asking for a form of tax shelter for those people, to encourage them to stay. This would be a highly interventionist use of the tax system. I wonder, not getting to the detail, as you are trying to seek a pragmatic form of tax neutrality, could you accept that type of intervention for any period of time to achieve a specific result?
Mr. Mintz: Let me turn to page 12, which will help to answer your question. That page deals with employee stock options. What is being proposed is, while not a dumb idea, not a good idea.
In Canada, we treat employee stock options like a distribution of shares. It is not deductible for the corporation when the option is issued. The employee will pay capital gains tax on the difference between the exercise price of the option and the strike price, and that will be on three-quarters of the capital gains.
If you look at the U.S., they treat stock options like a salary payment. The value of the stock option is deducted from the corporate income tax. However, an individual will pay full taxes on the difference between the exercise price and the strike price of the shares. It is fully included in income; therefore, it is not treated as a capital gain.
In the U.S., that puts salary and stock option payments on an even basis. In Canada, if you are a small corporation, given we have full integration, the treatment is almost equivalent. However, if you are a large corporation -- and remember, once you get past $15 million in asset size you are large in Canada -- our tax system discourages employee stock options. An individual is much better off receiving a salary payment.
I teach this, in Canadian tax practice, to my MBA class. I have gone through the numbers with them. There may be other reasons for having employee stock options, but from a tax point of view one is much better off to receive a salary or a wage payment. There is some argument to going to the U.S.-style system and changing the philosophy underlying employee stock options. It would be neutral, and it would make sense from that point of view.
What is a dumb idea is to say that we will eliminate capital gains taxes on some types of employee options in some industry for some type of workers. Why is that so dumb? Why is it that a particular industry should be the favoured industry? We have a problem with brain drain; I agree. I work at an university, and we see it all the time. We must educate the engineers, the computing scientists, who are being demanded by industry today. We are having trouble getting professors to do that teaching in the university because of the wage explosion in the United States in those fields.As a result, why do we only worry about the high-tech industry? Why should they receive favourable treatment as opposed to anybody else? In my view, that is the wrong way to go.
What would make sense is to rethink the philosophy of employee stock options in Canada, and maybe think of something similar to the U.S. system.
Senator Hervieux-Payette: There should be a difference in treatment between a start-up company giving stock options and a full-grown company that is in the stock market and the secondary market. We treat capital gains with respect to the two in the same way, even though the risk is certainly not with the well-established company.
I know you do not agree with double standards., even though I agree with you on the deduction of the stock options for the company. Instead of being taxed at 75 per cent, perhaps the rate should be 50 per cent for start-ups, and then continue with a 75 per cent tax on capital gains for well-established and secondary markets. At least help the small company, when it is private and has more at risk.
One of the arguments I have heard is that the government does not want to encourage that because smaller companies are higher risk and the employees might lose. My thought is that, should they lose by having stock options, not in lieu of salary but as an incentive, if they are willing to take a risk and stay in Canada, there should be some advantage for them. They should be rewarded for taking the risk. When they cash in, because they are at the level of a secondary market, they should at that time be subject to the general rules.
Would you see that as being one way of at least removing the concerns of the Finance Department?
Mr. Mintz: We already do something for small business vis-à-vis employee stock options that I did not mention. When an individual who is working for a public firm gets an employee stock option, that individual will pay capital gains taxes as soon as the stock option is exercised. For small businesses, no capital gains tax is paid until the shares are disposed of, which could be at a much later time than the stock option is exercised. As a result, we actually give a deferral advantage under the employee stock option to small businesses. Therefore, they receive a more favourable treatment. I am not totally convinced that that is appropriate, but if you wanted to keep your difference, in a sense we already have it in the system.
The U.S. has an interesting tax incentive for initial public offerings by corporations where the owners of the initial public offering will receive a lower capital gains tax as long as they hold the shares for at least five years after the initial public offering. In fact, I read a paper recently that suggested that there is some impact in helping initial public offerings in the United States with that. I am not suggesting that that is a good idea, but I am struck by the difference between the U.S.-type of incentives and the Canadian incentives.
The Chairman: Incentives to do initial public offerings?
Mr. Mintz: In the United States, when they do an incentive, they do it in a way that would encourage the growth of firms, such as encouraging initial public offerings. When Canada offers incentives, we do it to keep firms small. That will be the challenge.
Senator Kroft: I wish to clarify how the calculation is made on a stock option in a public company. Let us assume that the stock is $10 today and that it is issued at a strike price of $20. Take me through just how the calculation is made.
Mr. Mintz: This is one area that, in preparing last night to be here, I would have liked to have gone through, to remind myself of the details again.
When the option is sold to buy shares at a certain price, for example, $20, and the shares are actually exercised at $50, my understanding is that the income that would be treated as capital gains would be the difference between $50 and $20. However, I would have to check that.
Senator Kroft: At the time that the option is exercised.
Mr. Mintz: That is right. One thing I know for sure is that we do it at the time the option is exercised. Then you get the shares. If you hold the shares for a longer period, when you dispose of them you will be required to pay capital gains tax on the increase in the value over the exercise price.
Senator Kroft: That creates another problem, because it discourages the exercise of the option and leaves large accumulating amounts of options hanging over markets that have all other kinds of options.
Mr. Mintz: As I recall, there is an incentive to exercise it right away, as opposed to waiting, but I do not remember the details now.
Senator Kenny: I wanted to take it from a different optic. When you were comparing the U.S. and the Canadian options, it seems to me that, by providing for full deduction by the corporation, you are encouraging people to issue options, and you are encouraging people to dilute.
Take a look at it from the optic of a shareholder as opposed to an employee, and run through it for us.
Mr. Mintz: From a shareholder's points of view?
Senator Kenny: Yes.
Mr. Mintz: The dilution effect is there, that is true. Remember, when you get the deduction as a wage payment, that will save on corporate income tax.
Senator Kenny: I am talking about a shareholder who thinks that this is terrific, you are compensating all these people; that it appears to be at no cost, but in fact it is not.
Senator Meighen: He sees all these options to directors and employees.
Mr. Mintz: Through a lower price on the equity shares. That is a dilution effect.
Senator Kenny: When you are comparing the two, you describe to us a situation in which I can see the benefit from the optic you have chosen. I am asking you to look at it from a different point of view. Would you arrive at the same conclusion if your position were that of a passive shareholder in these companies?
Mr. Mintz: Maybe. If you pay the wage, it reduces the dividend to be paid to the shareholder. That will lower share value as well, to the extent that dividends are being reduced. If you issue a stock option, it will cause a dilution in the value of the shares, and that will cause the price to fall. What I must think through is that, if you have equal rates of taxation on dividends and capital gains, the impact is neutral, vis-à-vis the shareholder.
Senator Kenny: Your attitude would depend on whether you thought you had a mature company or you thought you had a growth company.
Mr. Mintz: That may be a good point. I have not thought that through.
Senator Kenny: That is what we are talking about here, that is, companies that you are hoping will explode and you have shares that you want to see as significantly different. If it is GM, it is probably neutral; but if it is .com something, then maybe it is very important.
Mr. Mintz: When you are in a high-tech situation, a growth company, you may not have any corporate income at that point. The value of the deduction that you might receive for salary will depend on when in the future you can write off your losses. It may be a long time, so it may be close to zilch or perhaps 10 cents on the dollar. As a result, they would particularly like to see a reduction in the tax at the individual level, because they do not need the corporate tax deduction. There are indeed tax credits driving their corporate income tax down to zero.
Senator Austin: The conventional wisdom in growth companies is that you want your management to be invested in growth, not in their income. You generally want them to take a lower income and promise them jam tomorrow through the performance of their own skills as growth. Is that a valid concept?
Mr. Mintz: Yes. The other issue is to what extent do you want the tax system to provide some particular bias to that or not? I like neutrality.
Senator Meighen: Leaving aside the selection of particular industries, and you have a bias against that, and I understand that, what about the U.S. rollover for qualified industries? Do you see rollover as a slightly less egregious policy?
Mr. Mintz: I do not like the "qualified industry" part. That means that you are picking certain industries and certain types of firms and saying that they should receive more favourable treatment than someone else.
There was a very interesting study done by Arnold Harberger at the University of Chicago on growth of industries. That study showed that in every decade there has been a different growth industry. It changes from one decade to the next. One decade it was automobiles; currently, we are in the high-tech era.
What was also interesting about Harberger's analysis is, that when you actually looked at firms within the industry, there was a wide variety of who were winners and who were losers. There were a lot of losers and just a few really good winners. That led me to the conclusion -- in fact, it led Arnold Harberger to the same conclusion -- that government policy, as it tried to pick winners and losers, will often get it wrong. It is very hard to pick winners and losers, even if you knew which industry would be the growth industry.
Senator Meighen: Agreed. What about the spin-off effect if you had a rollover provision, in any industry? It would keep capital working and keep successful companies spinning off newer companies, into which someone could roll the profits from the first company.
Mr. Mintz: It goes back to the lock-in effect issue. We must look at it from that standpoint. The problem with capital gains tax is that you only pay the tax when you sell the asset. What countries have found is that there are certain egregious cases where people will hold assets for a very long time. It was difficult to bring about a change in the way a particular firm would function because the owner would hold the assets for a long time, not bring in new management, or not sell off the shares and let someone else come in. Hence, they brought in rollovers to allow for dynamic changes in industries.
That made sense in the case of mergers and acquisitions, for which we have rollover provisions. Amalgamations and liquidations is another example. There are a number of cases in the system for which we do have rollovers that will allow for the deferral of tax. It is not a perfect world, and there may be some arguments in those situations that it would make sense to allow for rollover.
My argument is that the rollover should be provided to the extent that we feel there is some serious obstacle to growth, as a result of lack of turnover of management or changes in the organization of the firm, that is impeded by capital gains taxes in that case.
The Chairman: One last question, which is almost political-philosophical in nature. It stems from your discussion with Senator Austin, who, I believe, said that you are an interventionist, to which you replied that you were a neutralist. I am not sure what you mean by interventionist. You and I are in different spaces. I think you and Senate Austin are in the same space.
It does seem to me that incentives are policy tools used by governments to achieve public policy objectives. Those tools are, in the current type of political thinking, much more desirable than the historical methods, which were largely brute force and coercion. Rather than go into deep regulations, what is currently done is to offer to people incentives to behave the way you want them to behave. If I am right on that, then what you call tax-neutrality I am not in favour of. If in fact one of the things I want to do is encourage small business, I will put incentives into the tax system to encourage small business. If I want to encourage employment, I will put in tax incentives to encourage employment.
My sense is that you would not favour that or that use of the tax system to achieve broader social and economic policy objectives. Why not? If you do not allow the tax system to do that, have you not taken away from government a very significant means of achieving broad public policy objectives?
Mr. Mintz: I do accept the argument that at times governments will want to intervene in the economy and will want to undertake some social or economic policy objective. They do it all the time.
The Chairman: It is what governing is all about.
Mr. Mintz: It becomes an issue of what is the most efficient means of undertaking those policies? There are differences between grants and tax incentives. Grants that are given by governments through the expenditure side are subject to more accountability and review by Parliament.
Senator Austin: As well as being visible.
Mr. Mintz: They are visible. They also go to firms that are losing money or earning money. Tax incentives only help those firms that actually have taxable income, unless you make it refundable, as we have in a few cases in Canada, for example, the R&D tax credit for small business. We have made it partially refundable for small businesses, because the companies that did not have the income would not be able to use the tax incentive. Grants are superior, in the sense that they are given in that way. Those are the arguments in favour of grants.
The other thing about grants is that the program could be closed-funded, where you say, "Here is the maximum we will give out." There would be an application procedure. A tax incentive is not a closed-funded program; it is an open-funded program. As long as one qualifies in certain ways, one will qualify for this tax incentive. The government must pay out whatever people claim.
The argument in favour of tax incentives is that, to some extent, it takes the political process away from the awarding of grants. A lot of people in the private sector prefer tax incentives because they do have that impact.
Perhaps I have come on strongly in the neutrality argument today. However, if you read most of my writing from the past, I would argue that there are sometimes cases where you may provide tax incentives, because they may be superior to grants, however, you must evaluate those. It must be done in a way that ensures that they will be effective and that there is some accountability associated with them.
There is a case, for example, in providing incentives for research and development. It has to do with the fact that when a firm undertakes R&D there may be a benefit to other firms that copy the R&D. The original R&D firm may not receive enough private reward as a result of undertaking that activity; that the social returns are more than the private returns. Therefore, you would want to increase the amount of innovation that is undertaken.
So there is an argument for having some sort of support. It becomes a question of whether you want to use a grant system or a tax credit system, as we have in Canada.
To properly run a tax credit in Canada, Revenue Canada has had to depend on scientific committees to evaluate different projects, to see whether they actually qualify for the tax credit. Therefore, under a grant system, you would need to go through some sort of procedure in order to achieve that. A lot of companies will complain that there are high compliance costs associated with getting those R&D tax credits. What do you expect? There must be some sort of monitoring and control over the system.
For example, firms will try to dress up an in-house procedure as some new information technology project. Unless you have a scientific evaluation of whether this was truly R&D, you will have that problem.
I recommend caution. I always look first to the biases in the tax system that might go against certain types of activity, and try to remove those. I recommend removing those obstacles, rather than trying to put more differentiation into the tax system.
Senator Austin: If you take the answer that Professor Mintz has given us, I stand exactly in the same place. I found it an answer that says, "My ideology is neutrality, but my behaviour is pragmatic."
The Chairman: Senator Austin's position is interventionist, if necessary, but not necessarily. The wonderful pragmatism of the Liberal Party!
On behalf of the committee, I wish to thank you, Professor Mintz. It has been a terrific two hours.
The committee adjourned.