Proceedings of the Standing Senate Committee on
Issue No. 16 - Evidence - October 25, 2016
OTTAWA, Tuesday, October 25, 2016
The Standing Senate Committee on National Finance met this day at 9:30 a.m.
to study Bill C-2, An Act to amend the Income Tax Act.
Senator Larry W. Smith (Chair) in the chair.
The Chair: Good morning, colleagues. Welcome to the Standing Senate
Committee on National Finance. Colleagues and members of the viewing public, the
mandate of this committee is to examine matters relating to federal estimates
generally as well as government finance.
This morning, we are beginning our study of Bill C-2, An Act to amend the
Income Tax Act.
My name is Larry Smith, senator from Quebec, and I chair the committee. I
will briefly introduce the other members of our committee: Senator André Pratte;
Senator Joseph Day, former chair of this committee; Senator Richard Neufeld from
northern B.C.; the most distinguished Senator Percy Mockler from New Brunswick;
Senator Nicole Eaton from Toronto, Ontario; Senator Beth Marshall, former
Auditor General of Newfoundland.
Today, to comment on Bill C-2, An Act to amend the Income Tax Act, we have
invited three specialists of social, economic and financial issues.
First, we have with us the Parliamentary Budget Officer, Jean-Denis
Later we will also hear from the Canadian Labour Congress, Angella MacEwen,
Senior Economist, Social and Economic Policy Department. I have an excerpt on
Angella and it reads: In general, Ms. MacEwen has been a major advocate for the
working poor and inequality for women in the workforce. She has done significant
work around the area of minimum wage. Ms. MacEwen will support wage
redistribution and higher taxation at the wealthy end of the tax scale. Ms.
MacEwen has cited the work "So-called 'Middle Class' Tax Cut Leaves Out Most
Canadians," by Andrew Jackson.
We will also have, straight from Vancouver, Charles Lammam, Director, Fiscal
Studies from Fraser Institute. Mr. Lammam is an expert on tax policy and fiscal
studies. He will not be in favour of raising taxes and would favour an entire
rewrite of the Income Tax Act. He advocates higher taxes discourage economic
growth and prosperity.
Maybe we can start with an introduction.
Mr. Fréchette, can you give us a brief overview of Bill C-2?
Jean-Denis Fréchette, Parliamentary Budget Officer, Office of the
Parliamentary Budget Officer: It would be my pleasure.
The Chair: We will start with you.
Mr. Fréchette: Thank you, Mr. Chair and honourable senators, for
inviting me to appear before the committee to discuss Bill C-2, An Act to amend
the Income Tax Act.
I'm really happy to be here, and I am also happy to have Angella sitting on
my left. I don't imagine how Mr. Lammam, from the Fraser Institute, is on the
left of Ms. MacEwen, at least here in Ottawa.
Although the Office of the Parliamentary Budget Officer did not publish
specific reports on Bill C-2 as a whole, we do have some reports that analyze
certain specific elements of the bill. I would like to present to your committee
some highlights of those reports, which I hope will be helpful in your review of
this important legislation.
The document that was provided to you is bilingual, with the other language
appearing either on the same page or on the back of the page.
The first slide is on the fiscal impact of the announced personal income tax
changes. Bill C-2 would add a new 33 per cent tax rate for individuals with a
taxable income of over $200,000, which is estimated to affect about 340,000
individuals in 2016. It would also reduce the second bracket from 22 per cent to
20.5 per cent. In 2016, an estimated 7.5 million individuals with taxable income
fall within the second tax bracket.
The estimated revenue gains from introducing a new tax rate of 33 per cent on
taxable income over $200,000 falls short of covering the estimated loss in
revenues from reducing the personal income tax rate on the second bracket. As
you can see on the table, the shortfall is about $8.9 billion from 2015-16 to
2020-21, or about $1.7 billion annually on average.
In our report, we estimated that the new tax bracket would increase taxes
payable by $5,255 for persons with incomes over $200,000 and would reduce taxes
payable by $226 for persons with income in the second bracket.
The next slide is on the TFSA. Who benefits from the TFSA? What about the
change to the $10,000 annual TFSA contribution limit, which is the situation for
2016, but it will be changed back by Bill C-2 to $5,500 per year?
The TFSA is regressive. Higher wealth and older households receive relatively
higher benefits for a very good reason: older households with more wealth can
contribute to the limit of the TFSA. The TFSA program would have roughly doubled
in four years' time as a share of the economy from 0.7 of GDP in 2015-16 to 0.13
per cent in 2019-20. In other words, this will be reversed, and that's what you
see on the next slide with the incremental fiscal impact of last year's budget
changes to the TFSA program. The figures that you can see on that table show
that will reverse the situation, so instead of incremental fiscal impact of $80
million in 2015-16, this will go back to the normal situation that prevailed in
Next are the bar graphs. When my colleagues and I appeared in June, we
presented to your committee what I assume, Mr. Chair, was your favourite PBO
I assume that, of course, because we produced the report at your request. In
the report, entitled Fiscal Analysis of a Targeted Tax Credit for Taxpayers
in the Second Bracket, the PBO presents four options for the redistribution
of tax revenues to taxpayers in the second tax bracket.
I included two graphs from the report that we discussed when we met back in
June. The first illustrates how taxpayers are distributed within the second tax
bracket. It shows that the number of taxpayers is not evenly or uniformly
distributed by income. In fact, it declines, which is why the bars on the left
of the graph are taller, becoming smaller on the right side of the graph. In
that sense, the graph is quite telling because it shows how hard it is to target
a benefit to a specific category of taxpayers, if that is indeed the objective.
The second graph summarizes the four options we came up with for you. As the
title indicates, they are merely four options among others.
Thank you, Mr. Chair. I would be happy to answer your questions.
The Chair: Thank you very much. Ms. MacEwen.
Angella MacEwen, Senior Economist, Social and Economic Policy Department,
Canadian Labour Congress: Thank you very having me here today. I'm here on
behalf of the 3.3 million members of the Canadian Labour Congress, and I want to
thank you for this opportunity to present our views on Bill C-2.
The CLC brings together 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, as you might
have gathered from the introduction that Senator Smith gave of me. In the case
of Bill C-2, I find that the result is mixed.
The first part of this bill deals with the proposed middle class tax cut.
This proposal reduces personal income tax rates on income earned between $45,000
and $90,000 a year and then increases tax rates on income earned over $200,000 a
year. This definition of the middle class leaves out most workers, since 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 a year in 2013, so already
we're at the top third of tax filers when we're at $45,000 a year. Because of
how our tax system is structured, the maximum benefit of $670 per year is only
available to people who earn more than $90,000, so we're already off that chart
that the Parliamentary Budget Officer showed you, and so the maximum benefit is
available to people between $90,000 and $200,000. This is arguably a group that
doesn't need it and certainly wouldn't be the middle class.
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.
Another way to evaluate this proposed middle class tax cut is on its stated
purpose. During the last election, the promise was made to lower taxes for the
middle class and to pay for that by raising taxes on the wealthiest. The
government bill does not fulfill the spirit of this promise. As I just argued,
the tax cut as designed does not benefit middle-income earners, and the
government has since admitted that the increase at the top end will fall at
least $1 billion short of paying for what is really an upper middle class tax
cut. The Parliamentary Budget Officer said it will be more than $1 billion
short, maybe $1.7 billion short.
I took the opportunity, and I used the Parliamentary Budget Officer's online
budgeting tool, the Ready Reckoner, to come up with some straightforward options
that would be available that would meet the spirit of this promise.
One option is to amend the GST tax credit. We could increase the phase-out
threshold of the GST credit. It's now around $35,000 a year. You could move that
up to $40,000 a year and add $50 to the adult benefit and $50 to the dependant
benefit. That would cost of about $1.2 billion per year, so that would be within
the cost that we would raise from the upper threshold.
For a family of four, this would increase their annual credit by about $200
per year. It would extend the full benefit of the credit to families whose
income falls between $35,000 and $40,000 a year and extend a partial benefit to
families with income up to $61,000 a year, as the phase-out right now ends at
$52,000 a year. Therefore, that arguably benefits more people in the middle
Another option would have been simply to lower the first tax bracket from 15
per cent to 14.5 per cent, which would cost about $1.8 billion and would reduce
tax owing by a maximum of $200 a year. You could lower that first rate by more
if you increased the third and fourth income tax brackets by a little bit to
compensate, because when you lower the first income tax bracket it benefits
everyone. You could increase those brackets to get some of that back and lower
it by more to target it more to middle-income earners.
On the second part of Bill C-2 regarding The Tax-Free Savings Account, we
think that reversing the previous government's changes is a positive decision.
Returning the annual contribution limit to $5,500 recognizes that very few
Canadians had the resources to take advantage of this higher limit. In fact,
only about 8 per cent of the eligible Canadians had reached the maximum
contribution limit during the first four years of the program.
We find that there are low-income Canadians who have money in their TFSAs but
often these are seniors moving it from one type of investment to another, so
you're not increasing or encouraging more saving, or parents who are saving for
their children who are in university, which is good but not necessarily targeted
to the middle class there.
The Chair: Thank you very much, Ms. MacEwen.
Moving to Mr. Lammam from the Fraser Institute.
Charles Lammam, Director, Fiscal Studies, Fraser Institute: Thank you,
chair. Thank you to the committee for the opportunity to contribute my thoughts
on Bill C-2. I hope you find my comments helpful and informative as you
deliberate on these important public policy issues.
I'm the director of fiscal studies at the Fraser Institute. A little bit
about the Fraser Institute: It's an independent, non-partisan economic policy
think-tank. The mission of the institute is to measure the impact of government
policies and to communicate to average Canadians how those policies affect their
lives and the lives of future generations.
My research focuses on economic policies generally but tax and fiscal
policies in particular. Earlier this year, I co-authored a study entitled
Canada's Rising Personal Tax Rates and Falling Tax Competitiveness. Much of
my remarks will draw on the findings of that research, which is available on our
I should note that my comments today reflect only my own opinions and
observations of the research that we have conducted. I do not speak for anyone
else at the Fraser Institute.
I want to first start by saying that a competitive tax system is critical to
fostering a positive economic climate. Empirical evidence from around 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. By discouraging these productive economic activities, high and
increasing tax rates, particularly on highly skilled individuals, such as the
rate increase being proposed in Bill C-2, ultimately diminish economic growth
and prosperity, things that governments across Canada are looking to encourage.
Indeed, because high and increasing tax rates adversely affect economic
incentives, governments often receive less revenue from tax rate increases than
expected. This particular bill is no different.
Personal taxes are particularly important when it comes to building and
fostering a knowledge-based economy and attracting and retaining highly skilled
workers such as entrepreneurs, lawyers, business professionals, engineers and
computer scientists — again, things that governments want to do. The new top
federal marginal rate proposed by Bill C-2 as well as recent tax rate increases
in many Canadian provinces, harm our ability to attract and retain skilled
workers and in fact discourage Canadians from realizing their full potential.
Critically, the new top federal rate of 33 per cent is being layered on top
of several tax increases by provincial governments on highly skilled workers.
Just as one example, as a result of both the federal and provincial tax hikes,
the combined top federal-provincial statutory marginal rate in Ontario has
increased from about 46 per cent in 2009 to just under 54 per cent this year.
That's more than a 7 percentage point swing in the span of just a few years.
According to the latest available data, Ontario's top combined marginal rate
is now the seventh highest among 34 industrialized countries. Canada's income
tax competitiveness is further eroded by the fact that Canada's top rates often
apply to lower levels of income. This is a very important point. It's not just
the rates that matter but also the income levels at which they apply.
More broadly, due to recent tax hikes, the top combined rate now is over 50
per cent in 6 of 10 provinces. If we just consider that for a moment, it means
that in most Canadian provinces, including Canada's two largest, highly skilled
workers can lose more than half of each additional dollar earned in labour
income to personal income taxes.
It's not just the top rate that's uncompetitive in Canada. In most provinces,
a Canadian making $50,000 of Canadian labour income faces a higher statutory
rate than in most U.S. states. This is despite the reduction in the federal rate
from 22 to 20.5 per cent. In other words, Bill C-2 does little to address
uncompetitive tax rates, even for middle-income Canadians.
To put it plainly, Bill C-2 will reduce Canada's overall tax competitiveness
and ultimately undermine economic growth and prosperity.
It's worth noting that past federal governments, both Liberal and
Conservative, had the knowledge of the importance of a competitive personal
income tax system. For example, the economic plan of Paul Martin 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." Just a few years later,
Stephen Harper's Conservative government made a similar point in its own
economic plan. Unfortunately, since then we've seen marginal tax rates on highly
skilled workers become less and not more competitive.
Those are my initial remarks. Thank you very much.
The Chair: Thank you very much, Mr. Lammam. Welcome to Senator Grant
Mitchell, Senator Diane Bellemare and Senator Andreychuk.
Senator Marshall: I have questions for all of our witnesses, so I'll
start with the Parliamentary Budget Officer. I know you said in your opening
remarks that you didn't analyze the entire bill. I know that your report focused
on the second band and the top band.
Even though you didn't look at the entire bill, are you able to tell us which
group benefits the most? The reason I'm asking that is because not only did the
tax rate change but the bands have also changed. Are you able to tell us which
group benefits the most from the tax cut?
Mr. Fréchette: Thank you for the question. Yes, we did two scenarios,
and Ms. MacEwen alluded to the first bracket. The first scenario was only about
Bill C-2, which is the reduction of the second bracket. What we found out, as I
mentioned, is that, of course, in the second bracket, 7 million people will
benefit but not equally — that's the graph I showed you before — but also those
in the upper bracket. As a result, 30 per cent of all taxpayers will benefit
from the reduction only of the second bracket.
In our scenario, if you begin with the first bracket, of course you will have
more taxpayers who will benefit, which is 60 per cent. At 50 per cent, you begin
to have benefits for the taxpayers, which of course will benefit higher earners
Senator Marshall: Okay. What about the band that's in the category
from, say, $126,000 to $140,000? Were your able to split it out there between
Mr. Fréchette: We just focused on the second bracket of what is
proposed under Bill C-2.
Senator Marshall: What salary is smack in the middle? Can you tell us
half of taxpayers who filed are below this taxable dollar amount and the other
50 per cent are higher? Are you able to tell us that?
Mr. Fréchette: No. We looked at the bracket, and those are the
scenarios we did in the second report for the chair and for Parliament as a
whole. We provided four scenarios, among many others.
What we showed at that time is that it's very difficult to target one
specific group. The chair talked about the middle class as being around $55,000
or $56,000, and we said PBO doesn't use the middle class definition; we use low
end and middle income as a definition. It's very difficult, as you can see by
the graph, to target that group of $56,000 just because the distribution is
among people all through that second bracket. Those at the higher level, at the
end of the second bracket, will benefit a little bit more than the ones at the
Senator Marshall: I looked at the two reports you did, the one for
Senator Smith and the one for an MP whose name I can't remember. You included
something — I looked at the numbers — called the induced behavioural responses
from the affected taxpayers, which as an accountant is something new to me. You
actually made adjustments in your chart. Could you elaborate on that and explain
that to us?
Mr. Fréchette: The requester was Senator Smith, but I would note that
we do it for all parliamentarians. Our reports are published for all
Senator Marshall: Thank you.
Mr. Fréchette: When you talk about the behaviour, people do not like
to pay taxes, and I think Mr. Lammam mentioned that. You have elasticity of
taxable income at one point. When people pay more taxes, they try to avoid
paying those taxes. We took into consideration in our analysis the impact of
that. Of course, higher earners have more capacity with qualified people working
for them to reduce their taxable income in one way or another.
We published a report yesterday on the revenues of the government for
2015-16, and we noticed that there was probably some impact of this announcement
of increasing the tax rate to 33 per cent. Revenues from personal income tax
increased a little bit because of that.
Senator Marshall: What about the lower end? There is also an impact on
behaviour at the lower end too.
Mr. Fréchette: It is, but because they earn less money, it's more
difficult for them to arrange to pay lower taxes. The impact of behavior is a
little bit less than the higher earners.
Mr. Lammam: On these two points, I wanted to expand on the behavioral
impact of the tax rate. It's certainly the case that higher income earners are
more likely to respond to changes in tax rates in the way that was described in
terms of tax planning, shifting income to avoid the higher rate. That's
something that most economists agree on. The debate is to what extent it affects
It's interesting that when the government initially proposed its tax plan —
the new rate on top earners and the reduction for middle-income Canadians — the
idea was that this would be a wash in terms of revenue impact. The extra revenue
from the higher tax would offset the lost revenue from the lower tax. The
government didn't appropriately account for this behavioral response, and even
in its budget acknowledged this and said the net cost would be closer to $1.3
billion because higher income earners will pare back their labour effort and
will adjust their tax affairs accordingly. The PBO estimates I believe $1.6
billion being the net cost because of this behavioural impact, and others have
estimated it to be even higher still. It's really important to note that this is
acknowledging that taxes do in fact change people's behaviour. Oftentimes there
are unintended consequences from these tax hikes.
Going back to the earlier point about the effect, while there is an effect on
personal taxes as a result of Bill C-2, it's important to also look holistically
at the government's tax plans. When you look at all the various changes that
have either been announced and implemented or will be announced, it's really
important to know that middle-income Canadians will actually be paying more tax.
If you think through changes to the Canada Pension Plan, for example, that
will require Canadians to pay higher payroll tax and account for the elimination
of the income splitting for couples from the previous government and the
elimination of various other tax credits, middle-income Canadians are actually
going to be paying more in taxes when all of these changes come into effect.
Critically, lower-income Canadians, those under $45,000 of income, will see
no benefit from the personal tax reduction because the rate applies to just
those between $45,000 and $90,000. They don't see any of that reduction, but
they will see their tax bill increase as a result of higher CPP payroll taxes,
as well as elimination of those other tax credits that were done.
Thank you for that opportunity to inject those two points.
Senator Marshall: In your opening remarks, aside from looking at
individual taxpayers and the upper band paying more taxes, you stated it also
has an impact on the country as a whole because it suppresses innovation. I
don't have a copy of your remarks here. Could you refresh our memories a little
bit about that briefly?
Mr. Lammam: Sure. There are really two channels where the tax changes
have an adverse effect on our country; one is through economic incentives and
the other is through our competitiveness as a nation.
When you raise taxes, particularly the top rate being proposed in Bill C-2,
you're discouraging our most mobile workers who have the means to tax plan and
who are the most mobile in terms of finding opportunities elsewhere. You're
basically sending a negative signal to them in terms of how we foster an
economic environment that promotes productive economic behaviour.
We have to look at Canada's standing now after these changes from an
international perspective. Our rates are becoming increasingly less competitive
as a nation, and it's not just the federal change we have to account for. It's
the many provincial changes that have happened as well. In the case of Ontario,
a swing of 7 percentage points for the top rate and having 6 out of 10 provinces
with a rate over 50 per cent does send a negative signal internationally in
terms of how competitive Canada is economically.
Frankly, this is a critical juncture, because we are in a period where
economic growth is slowing down. There are a lot of things happening
internationally that governments cannot control. What they can control is their
policy framework. Taxes are certainly not the only thing that matters in terms
of how our economy performs, but at the margin, it's something that can either
help encourage more economic activity or discourage it. Unfortunately, the
change in Bill C-2 is discouraging growth, and it's particularly at a time when
Canada needs more of it.
Senator Marshall: Thank you. I know my time is up, but put me on
second round. I have a question for Ms. MacEwen.
Senator Bellemare: Thank you all for being here. My question is for
all three of you, but especially, Mr. Fréchette. Discussions about taxation and
tax increases are never straightforward or easy. It is always easy, however, to
pinpoint problems. When we talk about taxes, we also have to talk about
transfers, what we receive in revenue.
I recently reviewed the coefficient used to measure income inequality in
Canada, and I saw that the Gini coefficient has been on the rise since the
1980s. The equation takes into account taxes and transfers.
Did you measure the overall fiscal impact? For instance, when sizable
non-taxable family allowance benefits are given to everyone, it's more expensive
than under the previous system, and the taxes have to be paid.
Did you measure the impact on the middle class of all the budget measures,
including the elimination of income splitting, the allowances and the tax
changes? Have you attached a specific number or percentage to the impact on
Is it possible to measure the impact of Bill C-2 as a percentage of taxable
income? Is it different from the value in absolute terms?
The Chair: I want to get some comment from Ms. McEwen, please.
Mr. Fréchette: As I said in my opening statement, we did not conduct
an overall assessment of the impact of Bill C-2. We would like to, but there are
limits to our analysis capacity.
You are absolutely right about the Gini coefficient. It has indeed shifted in
recent years. Canada's ranking is fairly respectable as compared with other OECD
As for the issue you raised, there are three economists here today, likely
with three entirely different views on the matter. The only point we can
probably all agree on is the need for a rather thorough review of the 3,000 or
so pages that make up the Income Tax Act.
I would like to pick up on something I said in my presentation. When you want
to make the wealthy pay for measures to fund or subsidize lower-income
individuals, it is extremely difficult to target the initiative. Everyone at the
table today would agree that lowering taxes on the middle class or
lower-middle-class is a good thing. Not everyone would agree, however, that the
wealthy should basically be made to pay. Some would say yes, others would say
no. That is the challenge we have and the difficult choice you have to make when
the Parliamentary Budget Officer provides you with the numbers. We said it would
cost an extra $8.9 billion to change the personal income tax rate on the second
bracket as opposed to being neutral, as Mr. Lammam said. It is not neutral;
there is a cost. Should an additional 33 per cent be imposed, or should taxation
simply be based on total revenues and the government's tax room? That is an open
question that I cannot really answer.
Senator Bellemare: Have you been thinking of matching all those
changes that have been done and computing the net effect about the child
benefit, the fractioning of the income, the income tax change, all of them
together? Do you have an idea of who is benefiting from those changes?
Ms. MacEwen: I'm part of the alternative federal budget, which is a
project that the Canadian Centre for Policy Alternatives does. As part of our
process, when we propose a measure like the child tax benefit or improving the
Guaranteed Income Supplement for seniors, we do an analysis of who will benefit
and what the overall impact will be of everything that we propose.
We've proposed that government should do the same thing. When they do their
budget in March, they should have an impact assessment of how this will affect
inequality? How will this affect poverty? How do these changes interact with
each other in order to accomplish what they're trying to accomplish, because as
you say, we have to pay for it somehow. If we don't pay for it by raising taxes,
we pay for it by cutting services. We know that affects inequality as well, and
it affects well-being, and it affects our productivity far more than an increase
at the top tax rate.
If you look at really productive, entrepreneurial places like Silicon Valley
and New York, they have very high marginal tax rates at the top end, so it's
really difficult to buy Mr. Lammam's argument that that alone would stop
entrepreneurial or creative people.
We know that the child tax credit and getting rid of the income splitting
will help reduce poverty and inequality. We'll have to wait for some time to see
how that plays out.
We know that the previous government gave up a lot of tax room when they cut
the GST by 2 per cent. Moving forward, we know that we've cut public services.
We'll have to find a way to pay for those things, either by raising taxes
somewhere or by cutting services again. That's the choice the government have to
make, and we need to do an analysis of what that impact will be on poverty and
Mr. Lammam: Angella, we've compared the rates in Canada and various
Canadian provinces and to U.S. states and we are uncompetitive in an empirical
sense. Of course, I'd encourage you to take a look at that.
To the point on whether these tax changes will have a material effect on
income inequality, I encourage the committee to reference a study done by
Professor Kevin Milligan and Michael Smart where they actually looked at the
ability of higher tax rates to affect or reduce income inequality. They found
that it's not a productive avenue to pursue.
Even broader than that, if we're going to incorporate transfers into the
analysis, which is separate from Bill C-2 but part of what the government is
doing, we also need to be holistic in how we measure tax rates.
Economists do something called measuring the effective tax rate that people
pay. That is in part driven by personal taxes, but also by the reduction in
transfers, as your income rises, from various government programs. What's
happened with the Canada Child Benefit is that the reduction rate or the
clawback in that program has increased for many Canadians. When you take account
of that increased clawback as well as the personal tax system, Canadian
families, particularly with kids, could be facing a higher disincentive from
earning more income.
That's the key point. We have to look at the tax changes, not at one point in
time. We have to realize that when you change taxes, whether it's personal taxes
or through government clawbacks of various programs, you're changing people's
behaviour in the future, and that's really important. It's not just about how it
impacts the income distribution today. It's going to have dynamic effects on the
income distribution in the future.
As you raise rates on highly skilled workers, it sends a negative signal to
people currently in the middle income tax brackets in that by earning more
income, you're essentially going to be penalized for that success, as well as
increasing by having a high clawback rate — in other words, losing a lot of
money as you earn more income from government transfers — you're sending that
same negative signal. That could reduce income mobility, which is more important
than the income distribution.
The top earners in Canada are already paying a disproportionate amount of tax
relative to their income earned. This is from Statistics Canada. The top 1 per
cent, that is people earning over $220,000, are earning $10,000 of the nation's
income, and they're paying over 20 per cent of the nation's federal and
provincial income tax; so they're already shouldering a disproportionate amount
of the tax burden.
Senator Pratte: My questions are for the Parliamentary Budget Officer.
But other witnesses are welcome to jump in, of course.
Mr. Fréchette, some time ago, in a statement that was both noticed and
noteworthy, Senator Smith repeatedly cited a piece of your research. According
to the information he gave us, the tax reduction does not benefit nearly 65 per
cent of Canadians, in other words, the tax reduction provided for in Bill C-2
benefits just 35 per cent of Canadians, or something to that effect.
Who belongs to that 65 per cent of Canadians who will not benefit from the
tax reduction? Is it those who pay less than 22 per cent in taxes and those who
pay no taxes at all?
Mr. Fréchette: Taxpayers who do not pay any taxes, and I believe Ms.
MacEwen mentioned this earlier, are those who earn up to $45,000. A great many
people pay little in taxes. The figures you cited essentially come from that
We are still talking about the scale, meaning that those who earn $200,000 or
more benefit from the reduction in the rate applied to the second tax bracket,
which will drop to 19 per cent. In all the calculations, that is what we take
into account. Everyone is favourable to a reduction in the tax rate applied to
the category of individuals within that bracket. People at the $50,000 taxation
level will pay less in taxes, which is a good thing for them. However, those who
earn much more than $90,000 will also benefit.
Senator Pratte: Of the 65 per cent of Canadians who will not benefit
from the reduced tax rate, 30 per cent to 35 per cent do not pay any taxes.
Whatever the tax reduction may be, then, that segment of taxpayers will never
benefit because they do not pay any taxes.
Mr. Fréchette: They pay nothing or very little in taxes or could pay
less. As the second scenario shows, rather than affecting the second tax
bracket, in terms of the first tax bracket, reductions from 15 per cent to 14
per cent would target a lot more people because the levels are lower. It is more
important that the people in that category who do pay taxes pay less.
Senator Pratte: However, reducing the tax rate applicable to the first
bracket is very expensive.
Mr. Fréchette: It costs $21.3 billion over five years.
Senator Pratte: My second question has to do with the rise in the
deficit resulting from the costs of the measure. The increase in the tax rate
applicable to taxpayers who earn more than $200,000 is not enough to offset the
cost. Consequently, it will bring the deficit up by an average of $1.8 billion
to $1.9 billion a year for a period of four years, for a total of $8.9 billion.
Now, according to your latest projections, that $1.8 billion is on an
approximately $24-billion deficit for 2017-18. Proportionally speaking, it isn't
Mr. Fréchette: You are referring to the report we released yesterday.
It contains our economic and fiscal outlook, our update. Yes, it shows that the
deficit will be $22 billion. That said, when we look at the government's budget
target of a debt-to-GDP ratio of 30 per cent in 2020-21, we see that the
government could meet that goal two years sooner, in other words, in 2018-19.
That goal will already be at 30 per cent. For 2020-21, the budget goal is
expected to be 29 per cent. The government has $6 billion in tax room over the
next few years, either to reduce taxes or to increase spending.
Senator Pratte: Even though $1.8 billion or $1.9 billion is an
enormous amount of money, it isn't the end of the world given the government's
overall financial situation.
Mr. Fréchette: It isn't the end of the world. Public policy-makers
have some tax room to use as they see fit.
Ms. MacEwen: Mr. Fréchette says everyone thinks it's a good idea to
reduce taxes on people who make $50,000. I pointed out there might be a more
efficient and effective way to spend that money, rather than reducing taxes.
$1.8 billion may not be a lot in terms of the overall budget, but that could
build a lot of houses, for example, so you are putting people to work. It could
retrofit houses to lower our greenhouse gas emissions.
There are more efficient ways that would have higher multiplier effects and
impacts than giving everyone a $200 cheque so they can buy something they need,
but it's only $200 for each person. Together it's more.
Mr. Lammam: I would reiterate a point I made earlier in terms of
trying to analyze what the effect is of Bill C-2. I would broaden the analysis
to look at all the various tax-related changes that have been made to get a
better sense of what the net impact is on individual Canadians.
Just one point related to that last line of discussion about the deficit and
whether there's fiscal capacity to engage in this type of reform, and people can
disagree about the fiscal situation of the government, but we have to remember
that while the economy is growing slowly, we are not currently in a recession.
It does bring a high level of risk when governments are deficit spending,
because if there is a change in Canada's economic growth prospects and growth
reduces, being in a deficit position when that hits will have an even greater
adverse effect on the government's budget because revenues decline and other
spending will automatically increase. It's not a prudent way of moving forward
in terms of expanding the deficit, particularly at a time when we're not in an
Senator Pratte: I, too, am always concerned when the government spends
a lot of money. When you compare, however, this expense with the massive
infrastructure program, even though it represents an investment, the impact on
the deficit is really quite modest, relatively speaking.
Senator Eaton: My question is to Mr. Lammam. When you talk about
Canada's uncompetitive tax rates and that a lot of people will be over 50 per
cent, what effect will there be from the GST? We talk about personal income tax,
and we pay out from our weekly paycheque and then every time we buy something.
That must have an impact as well and that would have impact on people earning
$45,000 to $1 million. Would it have been more efficient to lower the GST for
some tax brackets rather than lower tax rates or raise tax rates? Then everybody
has a choice. It seems to me that the GST would have been a better way to go.
Mr. Lammam: The way I would answer that is to look at the evidence.
The evidence is quite clear. I think even Angella would agree on this. When you
look at the different forms of taxation, income taxes tend to be high costs on
the economy in that they discourage economic growth. Whether it's taxes on
business activity, corporate taxes, capital-based taxes or income taxes, they
reduce economic activity to a greater extent than taxes on consumption, like
sales taxes. In the hierarchy of taxes, it's actually better to reduce the more
damaging forms of taxation rather than have a cut in the GST, which tends to be
one of the least damaging forms of taxation.
I actually think it was a misstep on the previous government's part to reduce
the GST. What it should have done instead was to maintain the GST, or even raise
it, and then reduce other more damaging taxes that would have had a greater
economic growth dividend.
Senator Eaton: If you reversed it, say we lowered the tax rate, had
two or three tax brackets but raised the GST, is that a fairer and more
efficient way of raising taxes?
Mr. Lammam: It's unambiguously a more effective way in terms of the
effect on the economy. We've actually done calculations where we've calculated
what it would take for the federal government to move to a two-bracket system,
one low rate at 15 per cent that we currently have and then a single top rate at
29 per cent. By scrapping all the middle income tax rates, we calculate that it
would cost roughly 20 something billion dollars for that tax change.
The way that the federal government could find the money to finance it is by
doing away with a whole host of ineffective tax credits or what the government
refers to as tax expenditures. This has an enormous potential for improving
economic incentives, but it also simplifies the tax system because a lot of
these tax credits that exist in the tax system, while they reduce people's
taxes, they don't actually encourage people to do economically productive
things. They don't change behaviour, but they complicate the tax system and
erect real costs on Canadian families that can't navigate the complexity of our
personal income tax code.
To put it in brief, there are other ways to reform our personal taxes and
actually improve economic growth while simplifying the system and still
maintaining a progressive tax code in that people of higher income will be
paying more than those at the lower end. Unfortunately, we have not moved in
I'm thrilled that the government is currently examining the option of doing a
review of tax expenditures but they're not dealing with the —
Senator Eaton: Obviously the Conservatives lowered the GST. It was a
political move. I would say Bill C-2 is a political move. Would you not agree
with that? As you say —
Mr. Lammam: The way I would measure it is against the stated
objectives. I think this government as well as other governments has said that
they want to encourage economic growth. They want to attract a knowledge-based
economy. They want to reduce taxes on middle-class Canadians.
When you look at all of their stated objectives, the bill itself, plus the
other changes they've enacted, are not working towards that end. It's quite
clear to me that we should be looking at the margin. I don't want to give the
impression that taxes are the only thing that matter here, but at the margin
they can help Canada set a stronger economic foundation, particularly at a time
when there is slow growth and a lot of uncertainty around the world.
The Chair: Ms. MacEwen, do you have something, because Mr. Lammam said
he was certain you would agree with him?
Ms. MacEwen: He did say that. I do agree that the GST is a more
efficient way to raise tax because it's harder to avoid, right? We're talking
about higher income owners who can do tax planning and avoid that spending.
Senator Eaton: And it's a choice, right?
Ms. MacEwen: For some people it's a choice. But I don't necessarily
feel it has the same effect on our economy that he's suggesting. I do think it
would have been better if the Conservatives hadn't dropped that GST and had
gotten rid of some of those really ineffective — I agree, and largely benefiting
wealthier people — tax incentives for your kid to take hockey or whatever. Those
make the tax system more complicated and are expensive. In some small sense, I
do agree with what Charles was saying.
The Chair: Do you have a quick question before we move on?
Senator Eaton: No. My only comment is we have the carbon tax to look
forward to now. Maybe we'll be discussing that next year on top of our income
Senator Mitchell: We will be discussing that right now. Mr. Lammam,
you're arguing that the GST is a more effective tax and should replace income
tax. I would argue that, in one sense, a carbon levy is in fact a sales tax like
a GST. Would you argue that a carbon levy used to raise money that could then be
used on things we don't want that could then be used to reduce income taxes
would be an effective way to tax?
Mr. Lammam: When I say that a GST is less economically damaging than
other taxes, I'm basing that on a volume of economic research done by the
Department of Finance. I'm happy to send you those references by the OECD. This
is not something that I'm asserting an opinion about.
The reason for that is you're taxing consumption, and consumption is not what
leads to higher productive capacity in the economy. It's really about better
things, innovating, better ways of doing what we do, is really what drives
economic growth, and that's why capital-based taxes are much more costly because
they discourage those things.
To your question, the carbon tax is a bit more complicated. A carbon tax,
depending on what design or shape it takes, can be in part a consumption tax,
but it can also be a tax on production, and it can actually mimic the style of
taxes we have in British Columbia.
B.C. maintains a PST. We no longer have the same tax base as the GST. The PST
is similar in nature in that it taxes business inputs. It taxes the production
process, which is incidentally among one of the most damaging forms of taxation
when you look at that hierarchy because it's taxing the production process.
A carbon tax, depending on what form it takes, could have the sales tax
impact that you alluded to, which is much less costly, but it may have this
other component by which it taxes production and could be very costly. To really
answer that question would depend on how a carbon tax would be structured, but
most certainly a carbon tax shouldn't be motivated by a government's desire to
generate revenue. In theory, it should be driven by a way of correcting what's
called a negative externality. By that, of course the government should be
looking at ways to offset the increase in revenue from the carbon tax, and it
should be looking at those very damaging forms of taxation, whether it's
capital, corporate or income-based taxes to offset the additional revenue.
Does that make sense?
The Chair: It's great to get ourselves in a slightly different
direction, and I recognize you're trying to talk about tax and the general
impact, but I would like to stay as close as we can to Bill C-2 and trying to
analyze the bill.
Do you have a further question?
Senator Mitchell: I have two, if I could.
I really appreciate what Mr. Lammam is saying, and perhaps the Fraser
Institute — I don't know how you feel about a carbon tax — could perhaps do that
specific kind of analysis because we're going to have one. It would be very
useful to know how it could mimic the beneficial effect of the GST increase that
you're talking about, and the Fraser Institute could be helpful.
It also raises the disadvantage that some people at the Fraser Institute
argue and a tax like this could actually be offset by a carbon tax, applied
against Bill C-2 by provinces so they could adjust the specific circumstances in
their specific economies with their specific demographics. In fact, if done
properly and in a coordinated fashion, the carbon levy that we have and we're
going to have more of will actually supplement and strengthen the application of
these Bill C-2 amendments. Is that not right, Ms. MacEwen?
Ms. MacEwen: My opinion is that you should use the revenue from a
carbon tax to further offset your environmental output, because there are lots
of things that we need to do, either building infrastructure like public transit
or doing retrofits of buildings or investing in renewable energy or something
I'm not a huge fan of using a carbon tax to offset personal income taxes the
way that B.C. has done, although I do agree that perhaps some of it should be
like the GST credit where you have a rebate at the lower end to help those
people whose home heating costs are going to go up or that kind of thing. If you
mimic something like the GST credit, I think that is probably a useful way to
make a carbon tax more like the GST.
Mr. Fréchette: Just a short comment on this: It's kind of early to
look at a carbon tax. The proposal is there and it will be studied eventually.
The federal government said it will respect the various approaches that
provinces have. The $20 per tonne in B.C. is a carbon tax. Ontario and Quebec
have a cap and trade approach, which is entirely different. The outcome is the
same, it is to reduce carbon emissions, but the market is pricing and the cap
and trade is pricing the carbon emissions. It's going to be interesting to see
the direction that eventually that new policy will have on public finance.
Mr. Lammam: I just want to piggyback on that. It is really difficult
to make any meaningful assessment about the carbon tax for a couple of reasons.
One, we don't know what shape or form it will take in the provinces, and the
federal government said it will impose a tax on the provinces. It's not clear
whether it will be federally administered or within the province. There are a
lot of questions about how the carbon tax will function and how it will interact
with existing carbon pricing schemes in the various provinces. I do think it's
hard to make that kind of assessment.
Senator Mitchell: It would be really helpful if organizations like the
Fraser Institute tried to answer those questions and gave us policy direction.
My final question is to Ms. MacEwen. I'm taken by your point about the
importance of sustaining services. Often we begin to think that economies are
just numbers. They're not. They're people. People need support and services, and
if they don't have them, it erodes optimism and that's what kills economies. You
can't have a strong economy without optimism. I'm just reinforcing your argument
that Bill C-2 can actually support services, if done properly, and that
supporting services supports people. Their optimism has a stimulating effect on
Ms. MacEwen: I'm not sure how Bill C-2 would do that, to be honest.
Senator Mitchell: Because net, you're going to get more money, I
Ms. MacEwen: Sure. That doesn't help services, though. That doesn't
help people who really need it. That doesn't help support health care and what
people see in their communities. It doesn't get teachers in schools. There are
all kinds of things that we desperately need, and $200 back on your income tax
at the end of the year just doesn't cut it.
Senator Cools: I'm very impressed by the exchanges and the strong
differences of opinion and the agreement that happens from time to time.
Two things: I think that when the British North America Act was put together
and the authority to raise taxes was inserted in sections 53 and 54, at that
time they had a different view of what raising taxes meant. At some point in the
next year or two, Mr. Chairman, perhaps we could look at what the British North
America Act meant by taxes and raising taxes in today's community, where taxes
are taking on all kinds of novel forms. It would be interesting to do a
comparison. But that's for another day.
My question has to do with the kind and quality of the tax brackets. I was
particularly interested when Mr. Lammam spoke about the category of $200,000. I
wonder if anyone here can assist in identifying how many Canadians are in each
of these tax brackets. I would be very interested in knowing, because we hear
about it, those in a tax bracket, but how many people are we talking about.
The Chair: Mr. Fréchette, did you want to respond to that question?
Mr. Fréchette: Just a short comment before I do: What is interesting
about the honourable senator's comment about the BNA is that, again, she's also
referring to a reform of the global tax system in Canada, which I alluded to
before. I said that probably Mr. Lammam, Ms. MacEwen and I will agree on one
thing, which is that kind of reform, which I will probably never see in my life.
But that's another story.
To answer your question, senator: According to our analysis, there are
340,000 individuals in 2016 in the over-$200,000 taxable income and about 7.5
million individuals in the second bracket.
Mr. Lammam: That's about right. The threshold for being in the top 1
per cent of income earners in Canada is just over $220,000. This is for
individuals, not families. Roughly 1 per cent of a population of nearly 35
million works out to close to 350,000 people in that top 1 per cent. That's just
in answer to the question.
I do think there is a really important discussion to be had about tax reform.
I hope that within my lifetime there will be some serious improvements in our
tax system from the perspective of simplicity and efficiency. We had the last
round of major tax reform in Canada happen in 1997. We're 30 years out. Next
year is Canada's one hundred and fiftieth birthday. I think it's really
important to have a fundamental rethink about our personal income tax system,
not just because of the issues I've raised today but how complex our tax system
has become over the years, I think, is unreasonable.
It's unreasonable that most Canadians can't navigate or understand their tax
system. We've created an entire industry, basically, an unproductive industry,
geared towards helping Canadians navigate and comply with a very complex system.
We do have a federal tax review of tax expenditures happening currently. I
think that's great, but I think we need to be thinking big in terms of what kind
of tax reform Canada needs to simplify and make our system more growth oriented.
Ms. MacEwen: I'm not sure if you're familiar with Professor Wolfson
and Professor Mike Veall's work on people using small businesses, the CCPC, the
Canadian Controlled Private Corporations to avoid taxes, basically.
There are lots of small businesses, doctors, lawyers and other professionals,
who have set up these corporations simply to avoid paying taxes. You might want
to look. They were shocked at how many people were actually setting up those
corporations. The government, during the last election, both the NDP and
Liberals promised to look at that and close that loophole. There are likely more
Canadians with incomes over that amount, but they're avoiding taxes through
I would agree with what Mr. Fréchette and Mr. Lammam have said, that we do
need a wholesale review of this, and we need to make sure that it's fair for
everyone. Some people don't have access to these vehicles that other people have
Senator Cools: Do you think avoiding taxes is the same as a person
trying to reduce their tax exposure?
Ms. MacEwen: Yes. Avoiding taxes is different than evading taxes.
Trying to reduce your tax exposure working within the law I would say is
avoiding taxes. Evading taxes is when you're breaking the law.
I'm saying the law right now as structured isn't really fair, so we need to
look at that and change how the law operates to make it more fair.
Senator Cools: Chairman, these are very interesting points, and we
should look at this committee doing a study at some point on this issue in the
context of the national finance and context of the public expenditure in the
national finance, which would give us some constitutional authority to exam it.
It is clear that a deep, serious study is needed, and perhaps it's timely.
The Chair: Your point is taken. Mr. Lammam, do you have a comment?
Mr. Lammam: I couldn't miss the opportunity to agree with Angella
again. I really wanted to throw my weight behind her comments in terms of the
need for tax reform.
Just to get a sense of how complex the system has gotten from a bird's eye
view, the tax expenditures federally amount to, depending on how you count them,
over $150 billion each year. That's the cost to the federal government from
having various tax expenditures, including the basic personal exemption. The
point is it's a very costly activity to have all these carve-outs, the special
tax credits, the deductions for special groups and for special individuals.
Right now the federal government takes in close to $140 billion in personal
income tax revenue, so these tax expenditures, the special privileges afforded
to few Canadians, are now more costly than the entire personal income tax that
the federal government collects.
We've actually measured how complex the tax system has gotten since Canada's
inception, and it is getting more complicated. It's really important to make
sure that we have a tax system that people understand and that also promotes
Our proposal was to have just two rates, one of 15 per cent, which virtually
every Canadian would only pay 15 per cent, and the 2 per cent of Canadians would
pay the 29 per cent rate. We can get the revenue by doing away with many of
these ineffective tax expenditures, just $20 billion, in fact, of the over $150
billion currently in the system to help finance this kind of fundamental tax
reform that will help make our system more fair. It will help make it more
efficient and certainly simpler compared to the status quo.
Senator Cools: We must be ever mindful that when the income tax system
was initiated, it was intended to be a temporary measure. Everybody has
forgotten this now, but it became permanent and it grew like topsy.
The committee should also take a little look at the CRA, the Canada Revenue
Agency. As you know, prior to that, there was a Department of National Revenue.
They took that novel creation and went down that road to avoid certain problems.
We should look at that at some point in our studies because I hear many
complaints from Canadians about the agency.
The Chair: Before going to round two, I would like to welcome Senator
Lankin and Senator Omidvar here. It's great to see you. We have a full house.
It has been written during the introduction of Bill C-2, the definition of
"middle class." I asked the Minister of Finance when he came in to present the
budget to us how to define what the middle class is. I'd just like to get some
comments from our witnesses.
When the Prime Minister campaigned, he said basically, "I'm asking the 1 per
cent to help out the middle class." As you go through the bill — I've stated it
publicly just as a person — the frustration I have is have you identified who
you're helping? You've changed the brackets but have you really identified it,
because the result does not appear to meet the intended objectives.
Could we have feedback from the witnesses? Should we define the middle class?
Have we defined the middle class? Is this a middle class tax incentive or
benefit? Can we have some comments?
I guess we have to be careful. Let's just go over for a second, colleagues,
the PBO's responsibility here, because it's not fair to ask opinions, but maybe
you can address it from an analytical perspective. The PBO is empowered to do
analytical work for parliamentarians, not an opinion group. Mr. Fréchette, if
you would like to start.
Mr. Fréchette: Thank you. First, I'll say the PBO doesn't use the
"middle class." We use, as I said before, middle income, low income, based on
Statistics Canada data. Then I will quote myself from June when I told you that
the middle class for politicians is like a wide receiver. It's a moving target
that is difficult to reach sometimes.
The Chair: I appreciate that you brought in a football analogy for an
old, broken-down football player.
Ms. MacEwen: That's a great way to describe it, a moving target. I
also don't like the term "middle class." It appears to mean there is the 1 per
cent and it's a synonym for the 99 per cent, everyone else. I prefer "middle
income" because then you're specific about what you're talking about.
If you are going to talk about the middle class, you can't forget about the
working class. You have to recognize that it has to do with more than just
income. It's about what resources are available to you: education level, wealth,
family supports, possibly discrimination you might be facing if you're a person
with a disability or are a racialized person. All of that comes into people's
identities and class identities.
The Chair: So if I understand what you're saying correctly, "middle
class" is not necessarily the words you would use, but "middle income" is a
Ms. MacEwen: If you're dealing with the tax code, I would definitely
say "middle income" because "middle class" is more of a sociological term, not
an economic term.
Mr. Lammam: I think this is one of the most confusing debates to have.
There are obviously political motives for calling someone middle class because
it means whatever you want it to mean. It can mean many things for different
people. We've done research on trying to define the middle class, and it's so
nuanced in terms of what the result is.
Just to give you some idea of the nuances involved, when we say "middle
class," are we referring to individuals? Because middle income or middle class
based on individual income is dramatically different than middle income or
middle class based on family income. First off, we have to know which one we're
Second, we want to look at things like, whether it's family or individual
income, are we talking about income before tax? That's a decision that needs to
be made. Are we talking about income after tax and after government transfers,
which is also a very different result? These are just a few of the complexities
involved in actually giving a meaningful answer to the question.
My preferred way of operating is to simply use whatever income level you're
referring to in the analysis, which if you're looking at individuals can be less
than $50,000. If you're looking at families with one, two or more people, it can
be anywhere between $55,000 and $100,000. Of course, it depends on whether
you're accounting for income after or before taxes.
Some people use what's called the median income, so the exact middle point in
the income distribution. Some people break out the income distribution into
various percentages, the 20 percentages and look at the exact middle of that
The point is it's not a straightforward answer but really the question is
very ambiguous. It is more helpful to talk about a particular income level and
be clear whether we're talking about families or individuals and income before
or after taxes.
The Chair: Let's go on to the second round, and Senator Mockler from
Senator Mockler: Thank you, Mr. Chair. I would also like to commend
you on your remarks to the Senate in relation to Bill C-2.
I would like to look at Bill C-2. I'd like to have your comments on this. We
are at a time when there are more people looking for housing from coast to coast
to coast, and there are bigger lines at soup kitchens and clothing banks. There
is a good read, and I hope you take the time to read it — A Tale of Two
Countries by Donald Savoie and Professor Richard Saillant. He says: "The
further east one travels, the older the population and the faster it is aging."
In your professional opinion, will Canadians be poorer with these changes in
Bill C-2? If so, can you identify the sectors which will be impacted the most?
The Chair: We have some very interesting body language from our
panelists. Ms. MacEwen, please go ahead.
Ms. MacEwen: I think what we've established the people who will be
poorer. The people who will get money are people with taxable income over
$45,000. The people who will most benefit are people with incomes between
$90,000 and $200,000 because they'll get the full benefit. The people who will
be poorer are people with incomes below $40,000 who will probably have $1.8
billion of their services capped.
The Chair: Interesting.
Mr. Lammam: We can talk about the direct impact of Bill C-2 along with
the other tax changes that have been announced and will be enacted. Certainly
we've done that analysis. When you look at Canadians across the income
distribution, Angella is right that the people below $45,000 don't see a
personal income tax cut, but they will see less money in their pockets after
their pay cheque as a result of higher CPP contributions. They'll be made
poorer, so to speak, in current day terms. People who have higher incomes will,
on net, be paying more tax on net income. In other words, their after-tax income
will go down.
That's just one part of the analysis. It's critical to look at the effect on
people's pocketbooks or tax bill today. However, we also must analyze how this
bill will impact people's incentive moving forward. Again, we talk about how the
higher rate on upper income will reduce the incentives for people to go from
lower and middle tax brackets to those higher ones because of the increased
penalty. By working harder and investing in their skills, they'll be able to
retain less of their income.
We need public services, as Angella has mentioned, and we want those
services, but we need to have a stronger economy, one that encourages
entrepreneurship and encourages Canadians to work more. To do that, you have to
have an economic policy framework in place that is pro-growth. We need the
growth to be able to afford the public services that Canadians value.
It's really critical — not only based on current day terms, but in the future
— that we're enacting policies that actually improve our economy and actually
help generate a more stable and growth-oriented income.
People are avoiding their taxes because the tax system has become
uncompetitive. They're finding ways to channel their income through small
businesses, as Angella mentioned. That's really a reflection of how
uncompetitive the tax system is. The last thing we want to do is make it more
uncompetitive, to detract more people from earning more income, to make it more
difficult for Canada to attract and retain skilled workers and to reduce
economic incentives, whether it's entrepreneurship or what have you which grows
Let's take a broader look at this and understand that the changes in Bill
C-2, including those that pertain to the reduction in the TFSA room, will be
growth-inhibiting. They're not going to encourage growth. That's what we
ultimately need for all the other things we want as Canadians.
The Chair: You've been consistent with your points on those particular
Senator Mockler: What impact will it have on seniors? Is Canada at a
crossroad as a nation? Should government start embracing the road for an annual
guaranteed income in order to address the real challenges of aging and to have
better economic stability from coast to coast?
The Chair: That's an excellent point, Senator Mockler. One of our next
studies will be on the aging population. This is the precursor of getting into
that particular outlook.
Mr. Fréchette: Senator Mockler is absolutely right. Canada's
population is aging, as we know, and that will continue until at least 2030-35.
Furthermore, as the PBO reports show, in terms of our projections for the next
75 years, we recognize that it is indeed a serious problem.
I would like to pick up on a point Mr. Lammam made, one that ties into the
senator's question. When we look at seniors and TFSAs, we see that those
contributing to TFSAs have not only higher incomes, but also significant wealth.
Wealthy people, that is what I said in my presentation. Wealthy and older
people can contribute to the maximum. You do have older people who do not have a
lot of income or high income. They are in the low and middle income levels, but
they do have a lot of wealth because of assets and so on. They may have income
coming from dividends. which they don't pay a lot of tax on.
If you look at the future study on older demographics and the tax system in
Canada, you will have to look at the wealth of people, which is something that
all the other witnesses also mentioned before.
Ms. MacEwen: I don't think this bill is targeted towards most seniors.
As Mr. Fréchette said, wealthy seniors will have less room in their TFSAs, but
it's set up fairly. I would disagree with Mr. Lammam that people avoid taxes
because of competitiveness. I think they avoid it because of fairness. If you
know your next door neighbour can avoid taxes, then why are you going to be a
chump and not avoid it too?
When people know the tax system is fair and they trust the tax system and
there is integrity in the tax system, then they're okay paying their fair share.
However, if they think people are getting out of it, why would they pay into it
and not take advantage of the same things other people can?
Mr. Lammam: Two points: One is on how Bill C-2 impacts seniors. There
is no doubt that the population is aging. There is one under-explored result
from Bill C-2, and that's how the reduction in TFSA room could actually hurt
lower income seniors. TFSA income, to the extent that seniors claim it in
retirement, does not work against their government transfers. If they were to
pull out money from their TFSA, they will not lose Old Age Security or any
Guaranteed Income Supplement they may be receiving.
This is important for a number of reasons. If you're a relatively low-income
senior, and if you were putting money away in your TFSA during your work life,
it can actually be a good move for you in terms of augmenting your standard of
living in retirement because you're not going to be losing extra income as you
would if you had put that money in an RRSP. Low-income seniors in particular
could lose out on a benefit from putting away money in a TFSA because of the
fact that income is shielded from clawbacks. That is something to consider on
Just as a quick point about the guaranteed annual income, it turns out that
my colleagues and I have done a detailed report on this very subject and the
potential for it in Canada. I encourage everyone to look at that. I would be
happy to provide references.
The guaranteed income, from my research, has to be understood in terms of
what it is trying to achieve. Poverty is a complicated issue. A guaranteed
annual income, while it sounds appealing in theory in that we would have one
transfer, whatever amount it is, to provide some basic income for Canadians,
really assumes that the problem of persistent poverty is solely driven by a lack
Poverty is more complicated than that. People who are in poverty for long
periods of time tend to suffer from mental health issues, addiction and major
disabilities that don't allow them to work. Because of these complexities,
poverty has to be treated as such. Having a guaranteed amount of income for
everyone, regardless of what drives their poverty, can have perverse, unintended
effects in terms of their willingness to work more.
Poverty is a nuanced issue, not to get bogged down and away from Bill C-2,
but there are two concerns I have with this in Canada. One is whether it is
actually feasible for Canada to move to this system. There are some serious
practical challenges involved, and we delineate those in our report. Also, we
have to be cognizant that the drivers of persistent poverty are nuanced, and
having a one-size-fits-all policy may create new problems we currently don't
have. It's something to proceed carefully with.
The Chair: We would appreciate you giving us the link or access to
Senator Marshall: I wanted to go back to the question that the chair
asked on the definition of middle class. Ms. MacEwen, in your opening remarks,
you referenced middle class, but you also referenced middle-income earners, and
I felt you might have been using the two interchangeably. I do note your
response to the chair, but I was looking for something more specific with regard
to taxable income in terms of dollars.
Are you able to provide us with any guidance? We've been unsuccessful in
reaching a definition of middle class or middle-income earners. I'm looking to
you to solve that problem.
Ms. MacEwen: No pressure. I was substituting my own definition of
middle income for the bill's wording of middle class.
Senator Marshall: That will do for me.
Ms. MacEwen: For middle income, if we split it into thirds,
approximately, where we say a third don't pay many taxes and a third are in the
first income bracket and a third are above, so you would go with targeting that
third that's paying taxes in that first income bracket.
Senator Marshall: You're looking at the one-third of taxpayers in the
middle and whatever band they're in.
Ms. MacEwen: Exactly. If you want to do that by quintiles, I would
take the middle three income quintiles and say the bottom 20 per cent is usually
the bottom that are living in poverty or below the poverty line; and the top 20
per cent are okay as far as I'm concerned. They may be struggling to make ends
meet still, but —
Senator Marshall: They're surviving?
Ms. MacEwen: They're surviving.
The Chair: Mr. Fréchette, did you want to comment on the subject?
Mr. Fréchette: No, I don't have anything to add.
The Chair: Mr. Lammam, do you have anything to add? You were shaking
Mr. Lammam: She spelled it out well, as long as you are clear in terms
of how one defines middle class. That is important. But there are additional
questions that need to be answered in terms of whether we're talking about
individual income or family income, but I've given my remarks on this earlier.
Senator Marshall: This would be individual income, of course.
Mr. Fréchette: Mr. Lammam mentioned that twice, about individual and
family income, which is an interesting aspect of the tax system in Canada. The
tax system in Canada is based on individuals, contrary to France, for example.
In France, you can have family income included in your tax system. That's why
it's interesting in the context that it is a situation we have in Canada, but
the Canadian system is based on individual income, first of all, and then you
have all the credits for families. I agree with that.
I agree with Mr. Lammam on this. We agree on many things so far.
Mr. Lammam: When we file taxes, it is based on individual filing here
in Canada. I mentioned the distinction between family and individual income
because a lot of the other federal government initiatives are based on family
income. The greatest example is the Canada Child Benefit, the new program that
consolidated other existing programs. That eligibility is based on family
income. If you look at the government's own analysis of retirement income
adequacy that was put out in the last few months, that was based on families.
We have to be careful, because without being clear about what we're talking
about and just switching between the various policy initiatives, it can be very
confusing. That's one of the reasons why the committee is confused and why a lot
of analysts get confused. We don't have a consistent definition across the
policy areas we're analyzing. It's important to have clarity, including whether
we're talking before income or after income taxes and government transfers.
Senator Bellemare: The former Economic Council of Canada studied
income distribution and the middle class, basing its analysis on two measures,
25 per cent higher and 25 per cent lower, or 50 per cent higher and 50 per cent
lower, than the median income.
At the time, the council found that, since the 1970s, the number of
individuals earning a higher or lower median income had dropped, meaning that
the middle class had shrunk.
My question is somewhat in the same vein. We are hearing more and more about
gender-based analysis. Have you studied the impact through that lens?
Mr. Fréchette: The PBO did not do a gender-based study, but another
Senate committee is really pushing us in that direction. Senator Nancy Ruth
regularly asks us that question. Yes, we could do a gender-based analysis of the
impact, but so far, we have not done so.
We are asked whether, in preparing our labour market report, we conduct an
aggregate study based solely on gender or whether we also take into account the
aboriginal perspective. That is something we do intend to undertake at some
point, but it will make the task more challenging.
An analysis that takes into account gender or other categories of Canadians
would be favourable despite making the work more complicated. Clearly, such an
analysis would be very helpful to all parliamentarians.
Senator Bellemare: Did you measure the impact of Bill C-2 on
Mr. Fréchette: No, because it pertains to the federal government.
Senator Bellemare: It deals essentially with the federal average?
Mr. Fréchette: It deals with an aggregate average for all Canadians.
Ms. MacEwen: I would like to thank Senator Bellemare for the question.
It's a fantastic question. I believe Professor Kathleen Lahey at Queen's
University does some great analysis on this, and broadly her research finds that
a tax cut would be more advantageous to men and cuts to public services would
more likely harm women.
We know that. We know that budgets have disproportionate effects on men and
women and disproportionate effects on racialized people and indigenous people
because of where they're situated both in the labour market and in the country.
That would be another analysis. I would have the government do a serious
analysis of the gender impacts of the choices they're making.
Mr. Lammam: I have two broad comments. One is about female labour
force participation. There has been a dramatic increase in labour force
participation among women that I'm sure everyone is aware of. Any type of
analysis that looks at gender-based issues, particularly as they pertain to
incomes, must be cognizant of the different factors that drive incomes. Any kind
of analysis of wage differentials or income differentials needs to account for
the various characteristics that also influence wages and income outside of
gender, so things like tenure and education levels. It's very important in any
kind of analysis to be sure that we're doing the apples-to-apples comparison.
As a final point on this notion that Canada's middle class is not improving
or is stagnating, we just did a paper that looked at the median income of
Canadian families going back to the 1970s and how that changed. We found that
for the median family, incomes are up over 50 per cent. This is incomes after
taxes and after transfers, but also importantly is to do an adjustment for the
size of the family.
What's been happening in Canada for literally a century now is that the
average size of families has declined markedly. From the 1970s, the average size
has gone from three to closer to two. That matters because if you take a given
amount of income, let's just say $100,000 in inflation-adjusted terms, in the
1970s and spread it across three people and had the same $100,000 but spread
across two people today, per family member that $100,000 translates into much
We have seen is a shift, and there are ways that Statistics Canada does this
adjustment, so that over time per family member, Canadian's incomes after tax,
after government transfers, are increasing, and they've increased quite
significantly since the 1970s — over 50 per cent.
Senator Bellemare: There has also been an increase in participation
rates in the labour market by families over time. That might also explain the
Ms. MacEwen: Mr. Lammam did mention at the beginning the huge increase
of women in the labour market. We've had this huge increase in paid employment,
so if you adjusted the hours worked per family, I think you would find a
substantial difference, and people forget that you've then lost that unpaid
labour that women used to perform. They used to take care of kids. They used to
drive their parents to the hospital. That unpaid labour is now gone, and
families are stressed trying to either replace it or pay for it. Now you've
entered some of that into the market and you have to pay for more now.
Mr. Fréchette: The best example I can give is the income splitting
analysis we did. It is probably the most striking in terms of the gender-based
impact. As you know, income splitting works very well when a large discrepancy
exists between the incomes. We found that, on the women's side, incomes were
lower. That's a great example of a gender-based analysis.
Senator Pratte: What do we know about the increased contribution limit
to $10,000 that was passed? It lasted a year, right, to $10,000? I suppose we
don't have statistics on it because it's too recent. But do we know who was in a
position to benefit from that increase that the government now proposes to roll
back to $5,500? Who was in a position to benefit and who will lose from that?
Ms. MacEwen: The people who will mostly lose from that are seniors who
had to be taking money out of their RRSPs and putting it somewhere else. That
had been a lot of the push behind. It would be seniors with lots of wealth.
Senator Pratte: With lots of wealth or revenue or both?
Ms. MacEwen: Wealth.
The Chair: Are there any comments from the other panelists on that?
Mr. Fréchette: When the TFSA limit was raised to $10,000, those who
benefited most were obviously older households with significant wealth. And by
wealth, I mean the entire assets of the family. Of those individuals, many had
relatively low incomes for all kinds of reasons, but significant wealth. They
had various assets, homes and so forth. They were the ones able to make the
maximum contribution of $10,000.
Senator Pratte: These people would move their assets from one type of
investment to a TFSA.
Mr. Fréchette: Precisely. They would do it to boost their assets, for
instance, to get a higher return within a TFSA portfolio, which would allow them
to grow their wealth further.
Senator Lankin: I appreciate the opportunity to participate.
I might ask that the committee give consideration in their study of this bill
to perhaps engaging someone around a gender-based analysis. I know there have
been very good presentations to the Human Rights Committee about how that work
is being done, and that might be something that we could consider undertaking.
I apologize for coming late. I will be sure to read all of your comments. I
was at another meeting.
I want to ask a particular question. I had the opportunity to engage in the
work of a commission to review social assistance in the province of Ontario. One
of the things that we found was a perverse impact of marginal effective tax
rates on behaviour of individuals in attempting to leave social assistance and
attempting to move to higher tax brackets. It was not just for social assistance
recipients, but it also presented issues for the working poor.
Here we're talking about tax reductions, but those can also create poor
people just below these cutoffs — marginal effective tax rates. If you spoke to
this already at any depth, please just tell me and I'll read the comments, but
if you haven't, could you all venture your opinion, knowledge or research basis
for commenting on what the marginal effective tax rate impact of this bill will
Mr. Lammam: This is something I did raise earlier. It's a really
important issue that doesn't get sufficient attention. The bill that we're
talking about really is focused on the personal income tax changes, but my
suggestion is to look at the government's change holistically, which includes
the Canada Child Benefit. When you look at that program, the interaction with
higher payroll taxes for the Canada Pension Plan that will be implemented in the
coming years, despite the personal income tax reduction, some families in Canada
will be seeing a higher marginal effective tax rate. It's a pretty important
concern in terms of discouraging people from improving themselves and working
hard and earning more income. I think it's something that doesn't receive
In some cases, depending on which province, which income level and how many
children you have, you can have marginal effective tax rates well into 80 per
cent. So every additional dollar you earn in the labour market would be clawed
back by 80 per cent, including both the government clawbacks and the personal
income tax and other taxes that you have to pay. This is something that is very
important and that needs to be looked at.
There is a lesson to be learned, and we kind of have in Canada with the
working income tax benefit. The working income tax benefit, for those who don't
know, is a federal program that rather than clawing back the income, at least in
the early part of the range, provides a supplement to people earning income. So
it provides an additional amount of transfer, a phased-in amount as you earn
more income up to a certain amount. That is driven by lessons we had in Canada
with the self-sufficiency project, which was basically providing a wage or
income subsidy for people who were working. So rather than creating a
disincentive for people to earn more, it operated as an incentive that people
would receive provided they were working.
Those are the kind of things I think we should look into, and certainly
examine all the government's programs, the total effect, and what that will be
on Canadian families.
Ms. MacEwen: I offered several options to the middle income tax
benefit, and what I considered was expanding the working income tax benefit, but
that really gets at the working class.
Right now, the working income tax benefit maximum amount is $1,000, and it
starts to get clawed back when you make $11,000. If we expanded the working
income tax benefit, that would have a positive effect on these marginal income
tax rates, and that would encourage more work and innovation than doing anything
at the higher end.
Senator Omidvar: I too, like Senator Lankin, apologize for coming
late. If this has been raised, I would be happy to read the transcript.
I'd like to get back to the particulars in Bill C-2 and the proposed drop in
TFSA limits from $10,000 to $5,500. My understanding is that even at the lower
limit, which was introduced last year, less than 8 per cent of Canadians
actually used the full room, which is not a lot, and I think about the real
middle class, which in my books is not $45,000 a year but somewhat lower.
I wonder if you have an opinion on a lifetime contribution limit as opposed
to an annual limit. A lifetime contribution limit would allow people who are
making less than $45,000, let's say for certain numbers of years, but then they
progress and they, too, have some way of benefiting from this tax instrument
that is currently out of their reach.
Ms. MacEwen: I think that would be an acceptable solution because over
time this will benefit just because you happen to be putting money away now at
the beginning of the program. Obviously there are costs to that, but I do think
a lifetime cap is an acceptable alternative.
Mr. Lammam: I think it's a really important point that people may not
be using their TFSA fully in the current year, but that could be because of the
stage of life that they're in. They could be maybe a university student,
starting a young family with other competing priorities, financial priorities,
and contributing to the TFSA, perhaps, is not high on that list.
I think we effectively do have a bit of a lifetime cap now because you can
use any unused room in the future. But it's not just how much you put in this
year, it's really looking at it from a life cycle perspective. I wouldn't expect
a lot of young people to be contributing to their TFSA or even their RRSP, but
that's not because the policy instrument is not useful for them in the future.
It's driven by the stage of life they're in.
Mr. Fréchette: You can look at the PBO's report of April 27, 2015,
which gives four tables on what Bill C-2 is doing, because you're coming back to
$5,500, and the comparison to the long term until 2075, if it had been at
$10,000, and you will see exactly the distribution of wealth during that period.
The Chair: Thank you very much. It's been a fantastic discussion we've
had. Thank you, Mr. Lammam, Ms. MacEwen and Mr. Fréchette. We will see you next
(The committee adjourned.)