Proceedings of the Standing Senate Committee on
National Finance

Issue No. 16 - Evidence - October 26, 2016


OTTAWA, Wednesday, October 26, 2016

The Standing Senate Committee on National Finance met this day at 6:46 p.m. to examine the subject matter of Bill C-2, An Act to Amend the Income Tax Act.

Senator Larry W. Smith (Chair) in the chair.

[English]

The Chair: Good evening, colleagues and members of the viewing public, and welcome to the Standing Senate Committee on National Finance. The committee examines matters relating to financial estimates at the federal level generally, as well as government finance. Today, we continue our study of Bill C-2, An Act to Amend the Income Tax Act.

My name is Larry Smith, a senator from Quebec, and I chair the committee. Let me briefly introduce the other members of our committee. To my left, from Montreal, is Senator André Pratte. To his left is Senator Joseph Day from New Brunswick. To my right is Senator Richard Neufeld, from the north of British Columbia. To his right is Senator Nicole Eaton from Toronto, and to her right are Senator Beth Marshall and Senator Denise Batters from the province of Saskatchewan, home of the Saskatchewan Roughriders, who just lost to the Montreal Allouettes. You have to understand that as a former football player, with my Grey Cup rings, we did beat Saskatchewan two times.

From the Canadian Centre for Policy Alternatives, we welcome David Macdonald, Senior Economist. From the Conference Board of Canada, we have Craig Alexander, Senior Vice President and Chief Economist, and from the Canadian Taxpayers Federation, Aaron Wudrick, Federal Director. Welcome.

Thank you for being with us this evening to speak about Bill C-2. I understand that each of you has a short opening statement. We'd like to hear from you. Could we start with Mr. Macdonald?

David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives: Thanks so much for the invitation to speak to this bill today. It was a particularly convenient topic for me in the sense that I've already written a report on each of these issues, one on the tax bracket trade and one on the TFSA, or limiting the TFSA cap. It was convenient because I could just go back to those, and having made representations to the parliamentary FINA committee, hopefully this will be interesting for you today.

I will start my comments with the reduced cap on TFSAs from $10,000 to $5,500 in 2016. This is certainly a move that we have supported and has previously argued for, as I did in this report, The Number Games: Are the TFSA Odds Ever in Your Favour, which I published in May 2015.

What is surprising to me, actually, is that the number of people who maximize their TFSAs remains surprisingly low, even in 2013 at the lower level of $25,500, the lifetime cap at that point. For the bottom 9 deciles of individual income in Canada, only 10 per cent in any of those deciles maximized their room in 2013. Even looking at the top 1 per cent, where you would expect much more of Canada's wealthy to be maximizing this tax loophole, only 30 per cent maximized the loophole in 2013. What is clear is that we are not hitting the top of the limits in terms of the TFSA.

We actually have very few TFSA maximizers. The distribution of who is doing that makes it clear that TFSAs have become a tax loophole that benefits the rich and not the poorest. They gain the largest benefit from it. It is a tool to increase income inequality, and, over time, it will be very expensive. Present day estimates from Kevin Milligan, for instance, make the TFSA about a $10 billion tax expenditure when it's fully implemented at maturity.

At present, TFSAs are, in essence, a blank cheque for the richest. They are the ones with the most extra income to save. They are the ones with the wherewithal to maximize the tax-free increases in their TFSA.

I'm encouraged that the government has lowered the cap on TFSAs, but I think that we need to go a step further. I think that it's time to put a lifetime contribution cap on TFSAs at $150,000 and also put a maximum asset cap on TFSAs of $300,000, making sure that, while lower- and middle-income families can use them, they don't become a blank cheque for Canada's wealthiest as they expand over time.

Let me now turn to the tax bracket trade, which is to say the introduction of the new 33 per cent bracket for incomes over $200,000 in direct trade for a reduction in the second bracket from 22 per cent to 20.5 per cent. I have outlined all of these, as well, in the other report that I wrote on this, called Real Change for the Middle Class, in December 2015.

First of all, I have to say that I am in support of the new top tax bracket. In fact, something very similar has been advocated every year in our alternative federal budget. This is an important measure to offset income inequality in an after-tax sense.

However, what I object to in this report is that this is in trade for a reduction in income taxes for the second highest bracket. That is not particularly progressive, nor does it particularly aid the middle class once you examine who is impacted and who is not. It's not a particularly good way, in that sense, to spend the $3 billion that you have raised creating a new top tax bracket.

The top 2 per cent of families in Canada, who make at least $300,000, pay more under this new tax. They will pay roughly $8,500 more every year, although the average family income in that bracket is almost $600,000 so they probably can afford to pay slightly more. However, all of the money gained from those top 2 per cent is spent on the next 18 per cent, more or less, with little or nothing going to the middle and nothing at all going to the bottom.

For instance, the fourth and fifth deciles of families get under $50, on average, for this tax bracket change. The top 20 per cent, excluding the top 2 per cent, which pay more, make, on average, between 500 and $800 a family. That is a dramatic difference.

The Chair: Just so we can all understand you, because you are going very quickly, could you just walk us through that when you say the 18 per cent? We all understand the 200,000, 300,000 and 600,000. We understand those people pay more taxes, but as to the people underneath, if you could just clearly explain: How much would those people be earning, if its 150 or 160 or 190, and what are they getting back so that we can understand, to reinforce your point with clear facts that are simple to understand? I think that would be helpful.

Mr. Macdonald: Definitely. The top 20 per cent of families in Canada make over $97,000, let's say make over $100,000 in family income. That's the top 20 per cent of families. Most of the new money gained from the top 2 per cent — these are folks who make over $150,000 — is essentially spent on families that make between $100,000 and $150,000. What you end up with is a shifting of the chips around for the top 20 per cent and very little benefit for the middle class and no benefit at all for lower income families.

Senator Eaton: So, for the top 2 per cent, the extra they pay goes to the next 20 per cent?

Mr. Macdonald: That's right. What that means is that most of this change is concentrated in the top 20 per cent, leaving the bottom 80 per cent with very little change in their after-tax incomes.

As a way to illustrate that we could do much better than this tax bracket shift, I examined four different things that you could do with $3 billion, constrained within the tax system, spending the same amount of money.

The first two that I examined were: Instead of decreasing the tax rate of the second bracket, you'd decrease the tax rate of the first bracket. These are the folks a little bit lower down the income spectrum. I also looked at increasing the basic personal deduction, which is available to all Canadians and can also reduce taxes. Neither one of those are particularly progressive in the sense that wealthier families always make more than middle class and lower income families, but they provide slightly more income, particularly for the middle income Canadians. So these would be families between about $50,000 and $80,000, the middle of the income range for families.

The two more promising measures, I think, were increasing the GST tax credit or increasing the Working Income Tax Benefit, both of which provide a bulge of payoff for middle income families. For instance, increasing the Working Income Tax Benefit would provide, on average, $340 per family in the middle decile, the fifth decile. The second bracket change, which is the proposed change, only provides $50. Using that same amount of money and slightly different instruments, you can much more effectively target the middle class without spending the vast majority of that money at the very top of the income spectrum.

With that in mind, I would like to mention a final point on revenue generation. I'd certainly say that the federal government doesn't have a spending problem; it has a revenue problem. I think it's time to examine — hopefully this committee and others will examine — tax loopholes in a broader sense. Certainly, anything that we discuss here pales in comparison to the amount that's spent on tax loopholes in any given year. For every dollar that is collected in personal income tax, roughly 50 cents of that is given straight back in tax loopholes.

I'll wrap it up there, and I look forward to your questions.

The Chair: I'm sure you have created a lot of questions in the minds of our panel, and you'll be very busy.

Craig Alexander, Senior Vice President and Chief Economist, The Conference Board of Canada: Let me pick up the conversation where we left off, talking about the change in the income tax brackets.

The imposition of a new high income tax bracket for incomes above $200,000 basically is targeted toward hitting the top 1 per cent of earners in Canada, and it's very clear from the way this is being communicated that this is an effort to basically lean against the rising trend of income inequality. I think we need a little bit of perspective on what is actually happening to the income distribution in Canada to understand the full merits of the changes being proposed.

There is no question that income inequality in Canada has been rising over the last several decades. It is notable that the biggest increase in income inequality in Canada actually happened in the mid-1990s. It actually happened when the federal government was fighting its deficit and transfers were being cut to provinces, and it sort of flowed through the chain. That's when you saw a very big increase in income inequality in Canada.

Then, after that period, it's actually noteworthy that income inequality in Canada, as measured by the Gini coefficient, which is a measure of the distribution of income across Canadians, is actually very flat. Since 2000, from an economy-wide point of view, we haven't actually seen much rise in income inequality but, when you delve below the surface, what you do find is that there has been an increase in inequality, but it is predominantly for the top 1 per cent of earners.

This is, I think, a reflection of some of the big structural changes that are happening in the economy. It's reflective of globalization and technical change that has put out an enormously high demand for high-skilled workers. The labour market is functioning, and what is happening is that you are getting a wage premium put on very high-skilled workers. You're seeing middle-skilled workers being replaced by capital and by offshoring in the past, and this has really constrained middle-income jobs. At the bottom end of the income scale, you have seen it rise, but it is primarily because of governments introducing higher minimum wage rates. You can see that the bulk of the rise of income inequality in Canada is coming from the 1 per cent versus the other 99.

From the point of view of leaning against income inequality, I wrote an in-depth report on this topic in 2014 that actually was entitled, The Case for Leaning Against Income Inequality in Canada, where I basically outlined what the forces were. The proposed high income tax bracket will target that particular group that has had the strongest income gains in recent years. If that's the primary objective, then that's a targeted approach.

Having said that, there are a few observations that you need to make about this policy. The first one is that, from an economy-wide point of view, you're really not going to make a difference in income inequality. There are so few people in the top 1 per cent that, even if you put in a tax rate that took away 80 per cent of all of their income and spread it across all of the rest of the 99 per cent, you actually really wouldn't move the needle on the Gini coefficient. There is just not enough income off that 1 per cent to make a difference.

The second observation is about the revenues that the new tax will create. The way it was initially conceived was that it was going to be a transfer: Take tax money from the top 1 per cent and give it to the middle income tax bracket and one would pay for the other.

When I was at the C.D. Howe Institute, Alexandre Laurin did an in-depth study on this measure to identify how much revenue you would collect. I peer-reviewed the report. The analysis is very sound. The assessment was that revenue growth from the new tax might be as low as $1 billion a year, significantly less than what is currently anticipated. So the one tax will not pay for the other tax.

But that is a side issue if the actual objective is a socio-economic one about leaning against income inequality between the 1 per cent and the rest. This is a question about government revenues and what it costs to actually introduce the measure.

The third thing I would observe is that I think that Canada needs to be mindful of taxation on high-skilled workers at a time when we are in a fiercely global-competitive world fighting for talent. I worry about the potential for it to cause a brain drain and make it less attractive to find workers in Canada. We need to be mindful of that. If the new tax measures are put in place, we need to keep a close eye to see to what effect the labour market responds to this.

Again, I want to stress that I think that the higher income inequality we are seeing across the industrialized world is a concern. There is a case to be made for leaning against income inequality. The tax bracket will hit the 1 per cent where you've seen the biggest increases in income, but you also need to be mindful of the secondary or unintended consequences that might arise from it.

The other thing I would stress is that if you are primarily concerned about income inequality, the solution is not actually through the tax system. In my opinion, the solution is actually removing of barriers of opportunity to people who are lower down on the income scale. If you actually remove the barriers, invest in training and skills and get them up the curve so that they are in more labour market demand, then you will actually improve labour productivity, increase labour income and make the income pie bigger and reduce the disparity in income at the same time.

With respect to the TFSA contribution limits, this is one of those topics where you can look at it and ask whether the glass is half empty or half full. When you look at the data, 17 per cent of Canadians are hitting the maximum limit on the TFSA. That means there are Canadians who would like to save more but can't because the limit constrains them from doing so.

I'm concerned that personal disposable-income growth, economy-wide, is only going to be about 3 per cent a year over the next several years according to our forecasts, and Canadians only save 4 per cent of their current income, according to the personal savings rate. I actually think Canadians need an incentive to save, and I think the TFSA has proven to be a successful vehicle.

I don't dispute the fact that the higher limit would benefit the wealthy greater than the rest of the income distribution. About a third of all high-income earners are maxing out their TFSA limits, but 17 per cent of people with an income of 20,000 or less are actually hitting the maximum. You might ask, "If they have only 20,000, how are they hitting the current maximum?" It's a lot of Canadians seniors who have accumulated wealth and are putting money into TFSAs, so it is acting as a tax shelter and helping support the income of seniors.

The Chair: Reverse mortgages. Put money into your TFSA as a senior.

Mr. Alexander: We can see that there are individuals who are hitting the limits. Even with the expanded CPP, the people I worry about are middle-income Canadians who do not have an employer pension plan. They do need incentives to help them save for retirement, and the TFSA is a very useful vehicle to do this.

On the one hand, I commend the government for maintaining the TFSA and only rolling it back to a contribution limit of 5,500, because I think it's a useful thing, but on the other hand, I would prefer a higher limit. I think it's a useful thing.

Something I'd like to slip into the conversation is not regarding the bill but is also relevant: We at the Conference Board are currently working on a report measuring the tax gap, which is the difference between tax revenues that should be collected from individuals and businesses versus what tax revenues are actually paid. In Canada, we do not have a good measure of this. What you are actually capturing is not just tax evasion; you are also picking up under-reporting of income or underpayment of taxes due.

When we started doing this analysis, it's hard to get an exact figure, but if you use international guidance — look the U.K., Australia, U.S. — and ask what the tax gap could look like in Canada, the answer is that it could be anywhere from $8 billion to $47 billion. Within that range, I can make a strong case that it's at least $20 billion.

Beyond thinking about the changes to the income tax measures and TFSAs, I commend the government for putting more money into the Canada Revenue Agency to try to reduce the avoidance of taxes. This is a significant issue, and at a time when the government is running a deficit, this could be a source of additional revenues.

The Chair: Thank you, Mr. Alexander. Mr. Wudrick, please go ahead.

Aaron Wudrick, Federal Director, Canadian Taxpayers Federation: Thank you for the invitation to speak tonight to Bill C-2.

I suppose I could summarize our position most easily by just referring to Mr. Macdonald's. It's fair to say we would probably take the opposite view from most of his positions. That said, I should say that even though we are a group that is dedicated to low taxes, it would be strange for us to not applaud a cut to the middle income tax bracket.

With that said, the proposals that Mr. Macdonald has put forward with respect to what we do with that money, if we were to agree that we had a certain amount of money that we wanted to spread out in return in the form of taxation, his ideas have some merit on that front. I would simply make the argument that we would like to see more tax cuts to all the rates rather than deciding what to do with the money from that one tax cut.

As such, it would be rather strange for us as an organization, which for years, especially during the preceding government, had called for broad-based tax cuts rather than the boutique approach of tax measures, which unnecessarily complicated the tax code, in our view — it would be strange for us to not applaud this government for bringing in the cut, so we do support that..

With respect to the rest of the bill, we don't have much positive to say. We oppose the introduction of the new 33 per cent marginal rate. I can appreciate that, politically, the wealthy are not a very popular demographic for defence. I will nonetheless endeavour to try somewhat, mainly because I think we need to always be mindful of the cost-benefit of these measures, as well as stepping back and looking sometimes at who we really mean. When we're talking about the wealthy, that's a very nebulous word. Are we talking about multimillionaires or people who are close to that $200,000 limit?

The new marginal rate of 33 per cent kicks in at $200,000, and that's certainly more money than most Canadians earn. But if you put it into context, if you have a household that's earning $200,000, throw in a few kids and a mortgage, and they live in a place like Vancouver or Toronto, these people are not the downtrodden but they are essentially just living an upper middle-class lifestyle. These are not people out shopping for their third yacht. Sometimes when we talk about taxing the wealthy, that is the imagery being conjured up, and we need to be mindful of that.

Speaking of that high rate, if you look at the U.S. by comparison, their top marginal tax rate kicks in at just over $400,000. In the eyes of the American government, the rate that is deserving of the highest marginal rate is a much higher level than here in Canada. That's something we need to keep in mind.

There is also just the basic issue of incentives. This is going to be an internal debate forever between groups like ours and the CCPA about whether a flatter tax system or a more progressive system is the better way to go. I think there is considerable support for the position that when you increase marginal rates at the high end, there is a much higher level of responsiveness. There is academic literature that suggests that the wealthiest are the ones who the most responsive to those changes. I think that's reflected in the fact that this government, when it proposed that new bracket, had estimated the revenue yield to be about $3 billion a year. As Mr. Alexander has explained, it turns out to be much less than that in reality.

I think that is a signal to us all that it may look very simple on paper. These are people with a lot of money. It's easy to impose a new tax rate and we'll get more money. The reality is that there is a behavioural response and we don't always get the yield that we're looking for.

Finally, I think there is a principle at stake. Again, the rich are an easy target because they have the means, but we are in a time of slow growth. Policy-makers around the world are desperate to break out of this. They are looking for ways to stimulate economic activity. The people who in many cases are the ones that are generating this growth, creating jobs, generating wealth in the economy — do we want to send the signal that your reward for that is that we are going to hit you with a higher tax rate?

Finally, to touch on the TFSA reduction, we're very supportive of vehicles like the TFSA. They allow for Canadians to make personalized decisions that are tailored to their individual circumstances and their families. Contrast that with programs like the CPP, which of course has a good intention but is essentially one-size-fits-all. We like the idea of empowering Canadians to make decisions.

As Mr. Alexander mentioned, we're talking tens of thousands of people who are of modest means, who are earning $30,000 or $40,000 a year, and who are still able to maximize the use of that vehicle, which suggests that it is useful to Canadians of all means. We were disappointed to see the limit reduced. We would certainly encourage the government to consider returning it to $10,000.

I'll leave it at that and welcome your questions.

The Chair: Thank you very much, Mr. Wudrick.

Welcome, Senator Mitchell, Senator Bellemare and, from New Brunswick, Senator Percy Mockler. We have everybody introduced.

First up on the schedule is Senator Eaton.

Senator Eaton: Thank you very much, gentlemen. These are very interesting views, all of you.

To remain competitive, which is a word that I think Mr. Macdonald or Mr. Alexander used, and to close the income inequality, and also remembering that Canadians not only pay federal tax, which the top bracket will be 33 per cent, but they also pay provincial tax on top of that. Then, of course, we have the GST, and we might get a carbon tax. It might go to almost 60 per cent of taxable income by the time you get there.

I was wondering: Why wouldn't you do something imaginative like simplifying the tax code, bringing it down to two brackets or maybe three, taking out some of the loopholes and raising the minimum taxable. We're talking about income inequality. Living on $45,000 a year is rather tight, if you look at the cost of public transportation, cable, telephone. We all know it's very tight. Why wouldn't you raise that to $50,000 or $55,000, and then raise the GST a couple of points?

The Chair: Who would like to start on that question? That's what I call a bundled question, senator. You are planting the seeds. Mr. Macdonald, do you want to start?

Mr. Macdonald: I'm happy to start.

I think a lot of time and effort should be spent in simplifying the tax code. The basic progressive tax system is actually quite straightforward, whether we have two brackets or three brackets. The complexity in the tax code is not the basic progressive tax system but, rather, the litany of tax loopholes that allow wealthy individuals to be as responsive as they can be. If you have a new top bracket, maybe you decide to increase your TFSA or RRSP contributions. Maybe you decide to get paid in stock options instead of in money.

I think there's a fair amount of agreement that boutique tax cuts, like the children's fitness tax credit and the arts credit and so on, misspend public money that could likely be better spent on actual arts programs and schools so that everyone can gain access to them.

I think it's time to look at some of the bigger tax loopholes, like the partial inclusion of capital gains, the dividend gross-up, for instance, as well as the exemption of principal residences.

One of the graphs in this report shows exactly what the impact of raising the basic personal exemption is. It is slightly more progressive than changing the second bracket but not a lot. You end up with the biggest benefit being at the high end, because any increase in the basic exemption ends up being a benefit at the top marginal rate.

Senator Eaton: Forget benefiting those who earn over $200,000. They can look after themselves. If we're talking about income inequality, wouldn't it be fairer to give the person struggling on $45,000 a year another $5,000 a year that they could add to their income and not pay taxes on?

Mr. Macdonald: Yes. At present, that's not how the basic personal exemption works. At present, if you raised it by $5,000, most of the money would go to the top 1 per cent. That's just how the tax system works. If you're talking about some sort of income transfer —

Senator Eaton: If I was earning $45,000 and all of sudden I didn't have any taxes to pay, that wouldn't benefit me?

Mr. Macdonald: It would benefit you a lot less than it would benefit your boss down the street.

Senator Eaton: Would it benefit me?

Mr. Macdonald: This is the point, though. If you make a change in the centre that sees some small benefit for the middle and is three, four or five times as large at the top, that's maybe a misspending of resources. What you want to do, of course, is focus it more on the middle. Things like changing the GST tax credit or changing the working income tax credit are more likely to target those middle-class families, between $40,000 and $60,000, rather than changing the personal exemption.

Mr. Alexander: In my mind, the Canadian tax system is very complex. As a result, a simplification of it would be enormously helpful. In fact, you actually might be able to find a significant amount of revenues that you could then channel back into reductions in income taxes.

I take the point that the proposed tax changes actually don't help people at the lower end of the income scale, who I think deserve help. I'd like to see a higher working income tax exemption. I'd like to see the threshold come in at a higher level. I'd like to see the clawback rates change so that you don't have steep increases suddenly in the effective tax rates of people as they climb up the income ladder.

I can find lots of things that we can do to try to remove barriers to opportunity. There are a lot of things that are restraining the ability of people to climb up the income ladder. Canada actually has relatively good social mobility in the grand scheme of things, in contrast to the United States. But in point of fact, there are a lot of barriers that are restraining the ability of people to grow their income and improve their outcomes, and it doesn't just have to be through the tax system.

I take your point. It's a very complex system, which is a by-product of an environment where you have governments that were working with very tight fiscal balances. In an environment where you don't actually have much fiscal capacity, you can't do large things and you can't make big changes. As a result, the tendency over time is you get incremental tax changes. That's how we got a lot of the boutique tax credits and things like that.

It's a little like your house. When it gets cluttered, every so often you need to do some spring cleaning. I would argue this is an ideal time to do some spring cleaning of the Canadian tax system.

Mr. Wudrick: I think there's probably consensus at the table that the tax code is extremely complicated. We track the size of it. It's over a million words now. It's actually twice as long as War and Peace, if anyone is interested in the length of it.

We're obviously going to disagree with groups like the CCPA about what the right level of tax take should be, but whatever that level is, there are much simpler ways to achieve it than what we have right now. We're certainly a group that has been encouraging a simplification of the tax code. That will, in many cases, involve closing loopholes. I do think we need to be honest about what that might mean. If the result of closing loopholes is a higher effective tax rate on people, that may have some unintended consequences. There are simply much easier ways to get a given level of revenue than what we have right now.

Senator Eaton: None of you answered the question. Should the GST be raised?

Mr. Alexander: I would argue that, from an economic efficiency point of view, a shift towards higher consumption taxes, as long as low-income Canadians are protected from the impact — increasing the GST is not progressive because of the purchase of staples. You need to be mindful of that. But the economic literature is very clear: Consumption taxes are less distortionary than income taxes, so a shift towards consumption taxes would be desirable from an economic efficiency point of view.

Senator Marshall: The information is great. It's very interesting. When we first got the bill, I was of the impression that the government was going to lower the two lowest tax brackets so that it would benefit individuals in that category. When Senator Smith spoke in the Senate, he said — and I perked up when he said it — the real winners were going to be those making $150,000 to $200,000 a year, like MPs and senators.

Senator Larry Smith: I shouldn't have said that. I stand corrected.

Senator Marshall: I was kind of surprised. I know in looking at the paper for the Canadian Centre for Policy Alternatives, there is something there which indicates that the largest gains will go to families in the top 20 per cent making over $124,000 a year.

Having said that, and with the understanding that the government was trying to reduce taxes for the lower two groups, could they not have reduced the percentage of tax rates for the two higher classes in order to compensate so that they would not see a benefit from the tax reduction in the lower two groups? Do you know what I mean? Isn't it possible that instead of keeping the two groups at 26 and 29 per cent, they could have reduced it to 25 and 28 so that the result would be neutral?

Mr. Macdonald: One of the challenges with changing any of the tax brackets, whether it's the bottom tax bracket, the middle tax bracket, the top tax bracket, the new top tax bracket, is the folks affected the most are the folks that make the most. You pay the tax rate on that first section of money, so the first bracket is up to 45,000 and you pay 15 per cent.

Senator Marshall: I realize that.

Mr. Macdonald: When you fiddle with that, the folks that make under 45,000 benefit, but so does everybody else who makes over 45,000. The biggest benefit goes to those people that are outside of that bracket, just above it. For instance, the reduction in the second bracket that runs from 45 to 90, roughly, the folks that get the full benefit, you have to make 90 at least, so you're well up the income spectrum at that point.

Senator Marshall: But there are five groups there now going from 15 per cent up to 33 per cent, so the top group was raised from 29 per cent to 33 per cent so that they paid more. Couldn't the group at the 29 per cent be put up to 30 per cent so they didn't see a benefit? The government could have achieved its objectives and it really wouldn't have been that much of a change.

You're suggesting other ways, assisting people in the lower income categories, but it would seem to me that it would have been fairly easy to increase people at 26 per cent and 29 per cent to 27 and 30 per cent. That is an alternative, isn't it?

Mr. Macdonald: Definitely. I guess the question is what you do with that raised revenue if your goal is to make a transfer that largely impacts the middle class. It's difficult to do that within the straight tax system. You need some sort of a mechanism like the GST credit or the WITB to target more of that middle class as opposed to changing the rates.

Mr. Alexander: The one observation I would make is in terms of household income growth. When we're thinking about the individuals that don't have income above $200,000 but are benefiting from the tax cut you're describing, the only thing I would flag is that these households are not the ones that have seen large-scale increases in income. The bulk of the income growth, the fastest amount of income growth that you've been seeing, is for those above the $200,000 mark.

Are there different options that we can use to make the Canadian tax system more progressive? Yes, there are. But what is the objective? If you just want to make the tax system more progressive, there are lots of different ways you can make it more progressive.

If the objective is to identify that the fastest income growth is at the very top end of the income scale and the purpose of this is to gently lean against that tendency, then you get into a debate about how to use the revenues that have been collected. I think it really comes down to the intent. If you want to make the tax system more progressive, there are alternatives, no question about it.

Mr. Wudrick: You're absolutely right. If your objective is to give more money to one group and you can get it from another group, it's simple to raise taxes in one group and cut taxes for others or just transfer that money over.

We always find it curious at the CTF that when we talk about these tax cuts, the emphasis usually seems to be on the loss of revenue to government rather than the fact that this is really Canadians' money in the first place and they're just going to keep more of it.

I recognize the difference in emphasis, especially if you're a group that has other plans for that money and would like to see the government do something with it. In our view, when we talk about a loss of revenue to government, that to us is a secondary issue. The main focus for us is that the money remains with Canadians who may have other uses for it.

Mr. Alexander: The other dimension here that is worth flagging again goes back to the competitiveness issue. We tend to talk about income inequality in isolation: What is happening to income in Canada and what can we do about the tendency in Canada? We need to be mindful of the fact that America is basically running economic policies that are allowing income inequality to rise enormously higher than we have in Canada, and this actually creates a competitive challenge for Canada. If America is willing to pay their low-income workers a lot less and their high-income workers a lot more, it becomes a very fundamental economic challenge for Canada as to how we maintain a socio-economic environment that does not have the extremes of inequality that America is developing, and as it's playing out, you can see the harm it's doing in America today.

Then you look at Canada and you say, "This is the world we don't want to go to." How do we lean against that tendency, because it is going to flood across our borders. Again, this goes to the point that we tax our high-income earners a lot more than Americans tax their high-income earners. How do we keep the high talent, information communication, technology people that we want to be in Ottawa or in Kitchener developing the greatest next technological things from going to Silicon Valley where they're going to be taxed a lot less?

This is not an easy topic. There isn't a silver-bullet answer here. It's something to be aware of when you're thinking about the conduct of policy in Canada. America is actually posing a very grave threat to Canada in terms of the income inequality they are running.

[Translation]

Senator Bellemare: Thank you for your comments. With regard to taxation, as you said, Mr. Alexander, it is easy to agree at least on one thing: the tax system should definitely be reviewed. Perhaps it is time for a complete overhaul of the tax system. I think the previous witnesses all reached the same conclusions.

We are here to study Bill C-2, and I will go back to the same question. For my part, I believe that tax cuts should also be analyzed in relation to the income transfers included in the budget. As far as the committee is concerned, with respect to income inequalities, do you examine the overall impact of tax measures, tax cuts and tax bracket increases, as well as the child benefit, for instance? Moreover, income splitting will not be allowed.

Have you examined the impact of these measures on the distribution of income among Canadians? Do you have an idea of the overall impact of these measures? Are they progressive, regressive, looking at the whole picture?

[English]

Mr. Alexander: The extended childcare benefit is significant. It is not only a consolidation of the existing benefits but also an expansion. From a point of view of who will benefit from that, it will be felt across the entire income spectrum. All families of different incomes have kids. I do think on balance it will prove to be slightly on the progressive side if you look at fertility rates, et cetera, and it does complement the reduction in the middle income tax bracket proposed in the bill.

We should keep in mind that when that rate gets cut, that cut will not be saved. Canadians are going to spend that additional money, just as the Canada Child Benefit will be spent. The amount of that money that will actually be put into savings will be incredibly small.

When you complement that with the infrastructure spending in the budget, in our economic forecasts, which is something my team does, it actually makes a meaningful impact in terms of economic growth in 2017. The effect is diminished in 2018 because if you increase people's incomes one year through the child benefit and then maintain the same level of payments, it's like a one-time boost and then it flattens out.

From the point of view of what it does to economic growth next year, you are looking at adding maybe 0.4 percentage points to economic growth. That may not sound like a lot, but it's the difference between growing at 1.6 and 2 per cent. That difference actually moves Canada from running at potential growth to being above potential growth.

From an economic policy point of view, when we look at the most recent Monetary Policy Report that came out from the Bank of Canada, what you can see is I think there is a heavy reliance on fiscal policy to actually provide a lift to the economy to get it to above trend growth and eat up the slack in the economy.

There is the socio-economic dimension to this — what will it do to income distribution? — and then there's the question of what does it actually do to economic growth? My intuition is that without the additional fiscal policy, the Bank of Canada would actually end up having to cut rates, which I find worrying given how low interest rates are today.

[Translation]

Senator Bellemare: It could become negative, as it is in certain countries, which nobody wants.

[English]

Mr. Alexander: We do not want to have negative interest rates, nor do we want the Bank of Canada doing quantitative easing. I firmly believe that when the history books are written about this period, when we get 10 or 15 years down the road, I think we will find that history will not be favourable to the programs of quantitative easing and the negative interest rates. I actually think they are causing economic harm.

Mr. Wudrick: I think it's the right approach that we have to look at changes introduced as a whole, but I could speak to the CCB in particular, the child care benefit. We were supportive of the UCCB. We think the principle of a direct payment to parents versus the government attempting to guess at a program that people would benefit from — we think direct payment is a superior way of doing that to support families.

But we did like the change brought in by the new government. We think the principle that the money should be directed and means-tested towards the families who need it more is a good way to spend that money, so we were supportive of that change.

Mr. Macdonald: I think it's a great question. Every year in our alternative federal budget, we do exactly that analysis. We shouldn't have to ask each other, "What is the impact of this budget on income and equality writ large?" But we do, unfortunately. If our crack team of economists at the CCPA is capable of producing a distributional analysis, certainly the Department of Finance is.

I think one of the things that should absolutely be noted is the combined CCB and GIS changes that occurred on July 1 and likely lifted about 500,000 Canadians out of poverty. We will see a tangible reduction in poverty rates as a result.

Whether, for instance, the ninth and tenth decile, excluding the top 2 per cent that pays more, whether those folks will make more in terms of a tax break than lower income families do from CCB and GIS, I don't know the answer to that. I think that it might be close. We are talking about a tax break worth about $800 for the top 10 per cent minus the folks paying a lot more. That's a fair amount on average per family, so I would be surprised if you saw any individual decile in the middle or lower end that benefited more than that due to the combined CCB and GIS changes.

Mr. Alexander: In terms of the impact of the measures on poverty, it's almost akin to a basic income program in terms of the effect, but for families. If you don't have children, then you are not going to benefit from it, but if you have children, it's almost like we've created a basic income floor for them through the program. That's why it has such a meaningful impact on poverty.

The Chair: I think it's fair to say that if you bundle, like the previous government did and this government is trying to bundle a package of tax measures, if you take the cumulative effect of bundling, things could look good. But if you look at Bill C-2, which we are doing, which is about trying to give a break to the middle class — and I would like to ask you for a definition of "middle class." I hear "middle class," "high income earners," "moderately high income" and "middle income."

Is this program delivering what it is intended to? This program is about a break for people supposedly earning $45,000 to $90,000. Does it deliver the break we say?

Second, we've heard different testimony from witnesses saying there's going to be a deficit of $8.9 billion over four years. People say it's a small deficit or a big deficit, but whatever it is, it's money that you will get $700, $500 or $400 back, but then you have to pay off the deficit. You are putting money into one pocket and it's going out the other pocket because we have to pay off the deficit.

I think we all agree that the child care benefit for families — which is a different vehicle but is a fantastic one. The issue is that vehicle existed in a different form in the past government, equal for two different governments taking two distinct measures. Which one is better? We can play that out.

But in this thing, we're looking at Bill C-2. What does C-2 do? Does it deliver the expectations? That's what we are trying to analyze here to see if there can be amendments made or decisions to make it better. It would appear that our objective is trying to make things better for Canadians, at least I hope it is.

Maybe you could answer that question. Is there a middle class? Should we be calling it "middle class"? Who is the middle class?

Mr. Alexander: Your question changed. The tail end of that question is that everybody is the middle class, except for people on government support programs, in terms of they actually think they are the middle class. People receiving government income support — that's what they are living on — recognize they are probably not the Canadian middle class. Pretty much everybody else in Canada, except for extremely wealthy individuals, will self-identify as being the middle class.

In my mind, when we talk about the middle class, I can use a narrow economist definition that would look at the actual income tax brackets, but in terms of talking about a government providing support to the middle class, I think what it actually comes back to is we are going to provide support to Canadians, because that's the way the electorate is going to interpret it.

In terms of the different categories from the point of view of Bill C-2, understand that the threshold of income over $200,000 is the top 1 per cent. We can call them whatever we want, but they are the top 1 per cent of earners. We wouldn't consider them to be in the middle of the income distribution. We would consider them to be the very top of the income distribution.

With respect to the tax measures that are actually in the bill, I think that a legitimate point has been made that, given the income brackets that were discussed earlier, people earning below $200,000 but towards the top end of the income scale are benefiting from the tax reduction. You can have a debate about whether that's the middle of the income distribution or if that's the upper middle of the income distribution.

To your point about the financing of it, I tried to stress that the original concept was that the introduction at the top bracket was going to pay for the middle bracket, and the Department of Finance has recognized that this will not be the case and that there will be a shortfall. That means that you have to use other fiscal capacity to make good on the promise.

What I was flagging is that the Department of Finance could be optimistic because of the behavioural response that we could actually see by high income earners in terms of doing things like choosing more leisure over hours worked. If you have a doctor who doesn't work Fridays, that doctor might now choose not to work Mondays and Fridays because of the increase in the tax rate. The after-tax income gain isn't as great, so why not take the other day off?

We have seen this empirically in other countries. We know that for changes in income tax rates lower down the income scale, there is much more limited behavioural response. Basically, people don't have as many options. At the top end of the income scale, it has been demonstrated internationally that there can be a significant behavioural response to changes in the high income tax brackets.

Alexandre Laurin used sort of an average or median set of elasticities related to changes in high income tax brackets and income from various countries and several academic studies to come up with an empirical estimate that said that you may only get $1 billion a year, significantly less than what you were anticipating.

There is also a knock-on effect. If there is a behavioural response by high income earners, that will not only impact federal tax revenues; it will also impact provincial tax revenues. Alexandre Laurin's analysis is basically that the fiscal hit to the provinces could be a loss of income of about $1.4 billion because of changes in the activities of the high income earners.

The measure is not going to pay for itself. You do have to find the fiscal capacity to pay for it, and it could put more fiscal pressure that the government is currently counting on.

You then have to go back and ask the question of what was the intent of it. If the issue is about how much revenue you will get from this top 1 per cent tax bracket, the government will be disappointed. If the objective is more socio-economic and what you are trying to do is shift the after-tax income distribution, then they are targeting the top 1 per cent of earners.

Mr. Macdonald: To speak to the point, I entirely agree that the middle class writ large, is not an economic concept; it's a social concept. Usually when I'm talking about the middle class, I'm talking about the 3 to 30 per cent of families that sit in the middle.

When we talk about individuals, for instance, it's well worth pointing out that half of Canadians make less than $30,000 a year and half of Canadians make more than $30,000 a year. The bracket that starts at 45, 65 per cent of Canadians don't make $45,000 a year. They would see no benefit from this whatsoever. The folks who make the most benefit are folks not even in the 45 to 90 bracket because you have to make at 90 or more to get the complete benefit of all of that money that sits between 45 and 90. As for the folks who make over 90, now you are talking the top 15 per cent of the income spectrum.

There is no benefit, in fact, in the bottom 65 per cent of filers because they don't make $45,000 a year. Therefore, they cannot benefit from this, by definition.

Mr. Wudrick: I didn't know I would have this much agreement with CCPA and on a panel today.

I think we all know the middle class's popularity as a political term is a testament to its elasticity. It is not so much an economic classification as a cultural one. That makes sense. If you live in some parts of the country, you can have the same lifestyle making $60,000 in your household versus $150,000. It is understandable, and again, that is why it is so popular with politicians, because the middle class is who you want it to be.

With respect, you asked the question about what is in Bill C-2 specifically, the trade-off in the income brackets. Again, Mr. Alexander, I think, encapsulated it well. That promise was designed as a trade-off, a straight trade. We're going to take it from this bracket and give it to these people. That is not what's going to happen. Not only will there be less revenue from the wealthy, but it's going to be more expensive, lost revenue on the other side, and that becomes more important if we then step back and look at the broader fiscal picture. We have a government that has tripled its promise in terms of the size of its deficit. I would argue that is a significant change in terms of policy, and, as you say, that will have consequences down the road in terms of repaying it.

Senator Pratte: Well, I have so many questions I don't know which one to pick.

Let's talk about the impact on the deficit, because the Parliamentary Budget Officer speaks of a deficit of $1.8 or $1.9 billion a year over four years, but 1.8, $1.9 billion a year. What is the significance of that figure on the projected yearly deficit that we have now? He has it at $24 billion, I think, for 2017-18. What is the significance of that amount for the federal public treasury? That's question number one.

Mr. Alexander: I argue that you will not get the tax revenues that you expect from the top tax bracket. All else equal, if nothing else changes, because governments have choices, so if the government says they will run a deficit of $30 billion and they are not getting the tax revenues they anticipate from the new tax bracket, they can take other actions to mitigate that impact. But on a status quo basis, you ultimately are saying you will add a couple billion dollars to the deficit without any other actions.

In terms of the state of the federal government finances, if we look at the debt-to-GDP ratio for the federal government, it is quite low. There is fiscal capacity to run deficits at this point in time, but I would argue that being fiscally responsible is also running balanced budgets over the business cycle.

A key question is at the time Canadian economy is hit with the commodity shock and we are having below-trend economic growth, there's a lot of slack in the economy and monetary policy is already pushing as hard as it can, I think you can make an economic case for deficits at this point in time. The question is what you want to run the deficits on. Do you want to run deficits on changes in the income tax brackets, or do you want to run deficits on productivity-enhancing things like infrastructure? Governments have to make trade-offs.

I am not worried about the current state of the federal government's finances. I think they can afford to run deficits for a period of time to help boost the economy. I think Canada has a very fundamental problem with productivity, and I would encourage the government that if they are going to run deficits now, now is the time to invest in things that are going to boost productivity, innovation and competitiveness. The tax brackets are probably not going to achieve that.

Mr. Macdonald: With a projected $29 billion deficit this year, at about 1.5 per cent of GDP, it is relatively small compared to the other sectors in the Canadian economy, particularly the household and corporate sector that, over the past year, ran substantial deficits. The household sector has been running $100 billion deficit every year for 15 years, which is why we have a household debt crisis.

From the perspective of sectors of the economy, the federal government is, in fact, best-placed of all the sectors. The provinces themselves now have more debt than the federal government, a unique situation in Canada. The federal government has the least debt of any of the sectors in the Canadian economy. Whether we run an extra billion or two does not make a difference. In fact, at this point, we should likely be running larger deficits than $29 billion, somewhere in the neighbourhood of 2 per cent of GDP, which would get us up to about $40 billion.

One of the points worth making is that the elasticity, when it comes to high-income groups, is related to their other opportunities to bypass the tax system through legal tax loopholes. The more availability there is of legal tax loopholes, the more availability there is to react to higher tax rates by moving your money in another way, being paid a different way, being paid through a corporation instead of being paid individually and so on. It is worthwhile pointing out there are ways to reduce the reaction of high-income earners by reducing their opportunities to legally avoid the tax system via tax loopholes.

Mr. Wudrick: Finally, we can disagree, David. I was waiting for the moment.

With respect to the government debt, it's true, certainly federally, that the debt-to-GDP ratio is lower than most of our OECD peers, but adding in the provincial governments is a more fair comparison. When we're dealing with states like United Kingdom or Japan, these are unitary states. They don't have provinces, and at the end of the day, government debt is a burden on the taxpaying public. I think once you add the provincial debt in, our ratio leaps considerably, and it's not some of the worst, but it is substantially higher, double what it is federally alone.

We are not a group that is supportive of deficits. If we are going to run a deficit, it matters how you spend that money. In the case of this government in particular, much of what they claim to be investing in long-term growth productivity, we don't see that in a lot of what they are spending on.

When it comes to the loss of revenue as a result of these tax changes as well, if there is less money to go around, it does beg the question whether they will reassess some of their other spending plans. Governments cannot proceed on the assumption that they will have all the money they had. If things change, they must rethink their plans. The presumption they must blindly go ahead and spend on whatever they said they would, even though the revenue side has changed, I think is a mistake.

Even if you run counter cyclical deficits, which again we don't support, you should do it when there is actually a recession and not when there is slow growth. If a recession does come and you've used your powder and your powder is not dry, that can lead to a much more serious situation.

Senator Day: First, you said finally you have something to disagree on, but the final comment by Mr. Macdonald was with respect to too many loopholes in the system. Do you disagree with that?

Mr. Wudrick: No.

Senator Day: I didn't think so. I thought you changed your mind in terms of this discussion.

Mr. Alexander, the outpouring of compassion from Canadians during the refugee crisis is an indication that Canadians are different from people in other countries. The formula you are using for behavioural effect is based on a lot of different nations. How accurate would that be in Canada when it is the psychology of Canadians to recognize that it's important to pay some taxes in order to have a good, safe country, the best in the world? Why are you applying a formula developed outside of Canada to reduce projections here?

Mr. Alexander: I gave you a copy of the report. If we use the behavioural elasticities estimated for Canada, you actually end up with the same conclusion. You end up with revenues being significantly less than what is currently projected.

Senator Day: You referred to a report. Do we all have that?

Mr. Alexander: I would be more than happy to provide it to the committee. I will provide it to the clerk.

Senator Day: That would be helpful, and then we can see the analysis.

Mr. Alexander: The analysis was specifically on the province of B.C. We could raise a question about whether there are behavioural differences in terms of people across Canada.

Senator Day: We probably shouldn't get into that right now.

Mr. Alexander: The study done for Canada was specifically focused on an estimate for behavioural responses in B.C.

When you're talking about future tax revenues, it is a forecast, not a prediction, and I could be wrong. Is there is a significant risk? There is the possibility we may be disappointed by the amount of revenues collected.

If the Canada Revenue Agency is very effective at addressing the tax gap, the behavioural response could change on this side but collections increase on this side so as a result you have some degree of offset. There is effort underway to improve the CRA collection of revenues. However, it's important, particularly when the government is running a deficit of $30 billion, to at least acknowledge some of the downside risks to the tax revenues that will be collected from this new tax bracket.

Senator Day: I agree to point them out as a possibility and not as a fait accompli. This may or may not happen.

There is also the possibility that the 1 per cent of taxpayers in that upper bracket of over $200,000 could grow. There could be more Canadians if the economy picks up again that could pay taxes in that upper bracket. That is wishful thinking.

Mr. Macdonald: Changing the tax rates for the top 20 per cent is potentially one of the worst ways to spend deficit money if your goal is to increase economic growth. Giving money to wealthy people is much more likely to end up in savings or imports than it is to end up in expenditures in the Canadian economy.

If you were interested in using the deficit as a stimulating tool, you would be more interested in spending on social or physical infrastructure, or if you want to transfer directly to people, spending it on lower income households who will spend everything they have and not save a dime of it and are less likely to buy imports with it. This is potentially the worst way to spend the money. It is not particularly economically stimulating.

Senator Day: Did you agree with the others in relation to the number of taxpayers who take advantage of the maximum amount for tax free savings? It's a percentage. Somewhere between 10 per cent and 17 per cent of taxpayers who have opted for a tax free savings account but don't top it up. They don't go to the maximum amount.

Mr. Wudrick: That's the number who do go to the maximum.

Senator Day: Yes, the number that do.

Mr. Wudrick: Yes. I don't dispute the figures, but that's still a significant number of people. It's not surprising that more wealthy people make use of it. They have more money, so it makes sense, but there are still significant numbers of people at the lower end. The fact that 10 per cent of people making $20,000 or $30,000 a year could make use of that is still significant.

The argument in the first place about TFSAs is that there won't be anybody making that kind of money that would make use of these vehicles, and this shows there are. Mr. Alexander was right that it depends on whether you look at a glass half full or half empty. We are thankful it is still there. We would like to see the limit back at $10,000.

Senator Day: The $10,000 for TFSA was only for one year. Do we have statistics for that one year?

Mr. Alexander: It's too soon. We get the data from Statistics Canada with a lag. The data here is two or three years old by the time it is all complied through the income tax system. If we look at low income Canadians maxing out the TFSA, it's seniors who are taking advantage of sheltering some of their wealth. I support helping seniors in retirement with their after tax income.

There are Canadians in those middle income brackets that don't have employer pension plans. Can they actually adequately save for retirement if they don't have an employer pension plan and they have to do it purely on the basis of personal savings and taking advantage of RSPs and TFSAs?

I hate the fact that the jargon of a tax loophole gets thrown around. This isn't a tax loophole. This is an incentive to save. That is what this is about.

The Chair: Yes, it is after-tax money.

Mr. Alexander: This is after-tax money. It is money that's already been taxed and now you are trying to incent them to save. You can make a strong case that this is helpful to many Canadians who need to save for retirement and don't have adequate employer pension plans.

The last thing that really didn't come up is the foregone revenues that the government will face if the TFSA limit had been maintained. There were numbers being discussed about how much the treasury would lose in money. It's not actual tax revenues lost; it is foregone potential revenues. The point here is: If you don't have the incentive, you may not actually see the investments. If you don't see the investments, you won't actually have tax money to collect from them.

I have not worked through the numbers, but my intuition is some of the estimates about the amount of foregone tax revenues that the government is facing are actually overstated, because I honestly think that if Canadians do not have incentives to save, they're less inclined to save.

Senator Day: Would your inclination be to leave it at $10,000, not indexed? It was going to $10,000, not indexed. Now it's at $5,500 indexed.

Mr. Alexander: Can I have $10,000 and have it indexed?

The Chair: We have a secret to share. I'm the critic of the bill, actually, and Senator Day is the sponsor of the bill. So you see Senator Day posing his questions to be able to get some of those answers that might support him.

Senator Day: You're helping me write my speech.

Senator Neufeld: I am certainly not an accountant, and I'm not a tax expert as some of you folks are. We could be at a $40 billion deficit very easily. People talk about maybe we'll get there. My sense is that we're going to be there, just simply with the things that are going on. I can remember my premier telling me many times in B.C., by the way, that the idea is to grow the economy, not borrow money or create deficits. It's to grow the economy, and that way you grow your revenue, but that's a different world.

I want to talk a little bit about TFSAs also. I'm having trouble understanding why those who seem to be against TFSAs say they are not fully utilized. What do you mean by that? RRSPs are not fully utilized, but nobody is saying that's bad. Why would you say a TFSA is bad because it is not fully utilized? I'll ask Mr. Macdonald, because he's the one that came out more in opposition to this than the others.

Mr. Macdonald: I suppose it's in context of the bill limiting the contributions. Whatever the problem is with TFSAs, it's not that the contribution level is too low, because even at the low rate in 2013, we are not seeing high maximization.

To Senator Day's point, we have seen declining maximization rates year after year as the amounts you can put into a TFSA goes up. While in 2013 it was about 7 per cent of middle-class families maxing out TFSAs, by this year it will likely be about 5 per cent maxing out their TFSAs.

Senator Neufeld: Why should that make a difference as to whether you like it or not? If the amount is $10,000 and people can't put that much in, why does that matter to an economist? Why do you care about that?

Mr. Macdonald: My position is that the annual limits don't matter that much. What is really going to be important is a lifetime limit. Whether it's $5,000 a year for 10 years or $10,000 a year for five years, I don't think it makes that much difference. What is important is a lifetime cap on those contributions such that it doesn't became a blank cheque for the wealthiest Canadians to avoid paying tax on capital gains and investment income they make that others may not. They are not paying tax on the accumulation of the gains in a TFSA, which is why I think there is a case to be made for a lifetime cap on contributions, as well as a lifetime cap on fair market value in a TFSA.

Mr. Alexander: Shouldn't you be in favour of $10,000 and a lifetime cap?

Mr. Macdonald: I don't mind, but I think that fundamentally what is important is the lifetime cap. As I say, whether the annual cap is $2,000, $5,000, $10,000 or $150,000, what is much more important is capping that such that it's lower- and middle-income folks that can use it, and upper-income folks get a capped benefit, and after that they have to pay tax just like everybody else.

Senator Neufeld: The tax has already been paid before they invest a TFSA.

Mr. Alexander: In terms of the accumulation of capital gains, which they avoid paying.

Senator Neufeld: That's right.

Mr. Alexander: Or interest income.

Senator Neufeld: We've always enjoyed that, and everybody has enjoyed that. You're talking about for your home or things like that.

Where I come from, there are a lot of seniors who are asset rich and cash poor. I guess you could put it that way. They bought their house 50 years ago in someplace around Vancouver and paid it off. They are living in that same home, and now it's worth $5 million or whatever. It could be worth $2 million. Why do you hold it against a person like that when they say, "I'm going to take a reverse mortgage on that because I can hardly make ends meet and live on my old-age pension"? Why would we be against them taking out a reverse mortgage and taking some of that money and putting it in a TFSA? What would be wrong with that? Is that not helping the senior population or those people who find themselves in this position? What I tend to hear is no, you don't want to help those people.

I think this is a great incentive. I don't max my TFSA out either, but I think they are a great incentive for people to actually save some money and have some money to spend. They will spend it back into the economy and grow the economy. What is wrong with that?

Mr. Macdonald: It's a question of opportunity costs. It's a question of do folks at higher income brackets pay more money so we have more money to support things like increases on the Guaranteed Income Supplement that directly impact seniors? Whether they are asset rich or asset poor does not make a difference. If their income is low enough, they receive the Guaranteed Income Supplement and Old Age Security.

For the few cases where those folks may be asset rich, there is a whole variety of other cases where folks are asset poor and actually poor. It's a question of how do we help low-income seniors the most? Do we do it through a tax-saving system that's primarily going to benefit wealthy Canadians, though it might benefit some seniors, or do we do it by taxing wealthy Canadians on their gains and income, dividends, capital and use that money to improve programs like the Guaranteed Income Supplement that support all low-income seniors?

The Chair: I believe there are 15.1 million accounts as of 2014. We just got the latest statistics. It started in 2013. It was 12.1 million and then it rose to about 14 million. I believe it will be 15.1 million accounts. The average contribution is $2,880 a year. Just so people understand the numbers on the TFSA.

Senator Neufeld: I just checked with the clerk here. In 2016, you can put $25,370 into an RRSP. You're okay with that?

Mr. Macdonald: Only if you make enough. That's not open to everybody. That's only if you're wealthy enough.

Senator Neufeld: Are you in favour of that?

Mr. Macdonald: That's one the things we need to examine. If there is a lifetime cap on TFSAs, you're absolutely right. Those same arguments apply to RRSPs. Should there be a lifetime cap on RRSPs? Should you be allowed to have an RRSP that's worth $10 million or $20 million and be able to grow that tax free? That's a benefit that goes directly to Canada's wealthiest.

Senator Neufeld: You do pay tax on it when it you take it out.

Mr. Macdonald: But you don't pay tax on the accumulation.

Mr. Alexander: From a panel point of view, this is where we disagree, because at the end of day, Canadians need incentives to save. RRSPs are a very effective tool. Even if people don't max out the limits, I think RRSPs are a very important incentive to help Canadians save. The TFSA is arguably a better one and is more progressive because it helps lower- and middle-income Canadians more. You could actually end up paying a higher tax rate in retirement than you had in your working life if you actually did a good job of saving. At the end of day, the RRSPs and the TFSAs are playing an important role in the economy in terms of helping support savings.

Personally, I'm worried about the fact that from a Canadian culture point of view, we are basically becoming a culture of debtors. Every generation is saving less than the generation before them. They are carrying debt a lot later in life. At the end of the day, we do want to give Canadians incentives to save. The tradeoff, particularly in a low-rate environment, is there is a big incentive to spend and leverage your balance sheet up. We need incentives to encourage Canadians to save.

Mr. Wudrick: When we talk about saving and concern about seniors in poverty, which is a legitimate concern especially going forward as demographics change, there are two ways to do it. There is the CPP approach, which is to force Canadians to save and have the government invest the money and dole it out as they see. Or there is what we see as a superior approach, which is to try and find ways to incentivize Canadians to save if they want to, and the TFSA and RRSP are vehicles that do that.

One thing I found curious in the recent debate about TFSAs and CPP is that opposition to TFSAs is often married with support for expanding CPP. Why is it that we are so concerned about Canadians who want to save and can be induced to save, and yet there are Canadians, on the other hand, who perhaps for whatever reason don't want to save, but they want to force them to through CPP? I find that to be a contradictory position.

Senator Mitchell: Thank you, gentlemen. It's been very interesting. I'm quite interested in the issue of saving. Twenty per cent of Canadians have pensions, maybe it's thirty per cent, and half of those are RRSPs, and there's very few defined benefit plans, relatively speaking.

If somebody has $1 million today, and they don't want to go into their capital and they put it in the bank, they will be lucky to have $30,000 a year. That's not a lot of money to retire on, and who has $1 million? So I'm interested in the idea of incentivized saving.

One thing that struck me, through your discussion, is the comparison of TFSAs and RRSPs. Which one is the greater incentive to saving for Canadians? Which is more effective?

Mr. Macdonald: Well, the RRSPs, particularly for the middle or lower income brackets, are not a particularly effective way of encouraging people to save. There are fairly strong incentives for folks to put more money into RRSPs. The collapse of employee pension plans is almost exclusively on the private sector side, not on the public sector side. The private sector defined benefit plans have dropped from 40 per cent to 10 per cent. It is a huge collapse, whereas CPP steps into that void to some degree.

That being said, TFSAs are definitely a better vehicle for lower income. If you know in advance you are going to be lower income when you retire, then a TFSA is definitely the best instrument for you. If you put any money into an RRSP, it's foolish. If you think you are going to be in the bottom third of seniors, you should never put any money in an RRSP, because it will be clawed back out of GIS at 50 cents on the dollar, and then with provincial programs on top of that, you would end up with a clawback of 75 cents on the dollar from RRSP income if you are at the lower end. From that perspective, TFSAs are a much better vehicle for lower income Canadians.

In both cases, though, what we are not seeing is adequate savings, and one of the best ways, as Mr. Alexander pointed out, to have adequate savings in retirement is to have a workplace pension plan, which is much more likely to go along with a unionized workplace. If you want retirement security, one of the best things to do is work at a unionized workplace. That is one of the best ways to ensure you will have retirement security because you will have a decent pension plan. Otherwise, these voluntary savings programs have not been terrifically effective for lower and middle class Canadians.

At the end of the day, if you don't have savings, it becomes an expenditure for the federal government and they will support you through Guaranteed Income Supplement and Old Age Security because we are not willing to see seniors go poor in this country, which morally is the right choice. If there is not a pension plan to fund that, then it will come out of the public purse at the end of day.

Mr. Alexander: The majority of Canadians do not have the opportunity to work in unions and have defined benefit plans. The economic reality is that the vast majority of Canadians are working in the private sector. We have seen the decline in defined benefit pension plans. We have seen a shift to defined contribution plans and a decline in pension availability broadly.

As I said, we've seen a broad-based increase in the amount of debt Canadians are carrying. At the same time there are fewer savings vehicles, you also simultaneously have less inclination to save. Remember, again, we are in this incredibly ridiculous low interest rate environment that has effectively made debt almost free. The fact that you can get a 2.6 per cent, five-year fixed mortgage is telling you that the cost to borrow is incredibly low.

In terms of which one is better, as I mention earlier, and David actually articulated very well, the TFSA is better —

Senator Mitchell: Which one is more effective?

Mr. Alexander: They are complementary. I don't think you should replace one with the other. They have different features. If you were talking to a financial planner, you would find that the financial planner could give you actual scenarios that say if this is your situation, then this is the right approach, and if that is your situation, that is the right approach. The bottom line is the two together are complements. They function differently depending on your financial circumstances.

Senator Mitchell: The flip side is, which one of the two costs government more money in lost taxes?

Mr. Macdonald: RRSPs by a factor of 20.

Senator Mitchell: Even though they pay taxes at the end, because it's deferred for so long?

Mr. Macdonald: TFSAs are very small at this point compared to RRSPs.

Senator Mitchell: Mr. Alexander, you have kind of killed the thought, but I will not give up yet. Is there something to be said, although there is a cost to government, for shifting the maximum TFSA to $10,000 and reducing the maximum RRSP to some amount, or giving people the choice? Is that too differential in that one costs the governmental a different amount than the other? Is it even worth pursuing?

Mr. Alexander: I don't think there is a strong rationale to shift the relative mix. But I'll be honest, you've asked a question that you could sit down arithmetically and start working through the numbers on, and I would want to crunch the numbers to give you a precise answer. As I said, I look at these two vehicles as complementary.

Senator Pratte: I want to make sure I understand this correctly. The way our system is designed, I understand that every time we reduce the rate in any bracket, the people who earn more will get more money, not necessarily relative to their revenue, but in cash they will receive the largest amount; right?

Mr. Macdonald: Right.

Senator Pratte: That means we are condemned with keeping the same rates forever. Because if we follow the logic, for instance, that Mr. Macdonald has expressed, if we want to be fair in reducing the rates and always want to give more money to the poorest, the way to do that is never to touch the rates of those brackets and find some other way, like you suggest in your study, because reducing the rates will always give more money to the people who earn the most.

Mr. Macdonald: There are two competing portions of the tax system. One is a progressive tax bracket that no matter where you change it, the folks at the top gain the biggest benefit. The other is refundable tax credits that you can design in a way that the folks at the lowest end of the income spectrum benefit the most, like the Canada Child Benefit or the Guaranteed Income Supplement. Those two compete, and the folks in the middle might get some refundable tax credits, but they might get some benefit from increased taxes.

Senator Pratte: I want to understand, because I am a slow learner. When we say that people who earn more get more money, we are talking in terms of cash, right, but not necessarily relative to their revenue?

Mr. Macdonald: That's right. For instance, this tax bracket change will result in everyone making over $90,000, getting a net benefit of just under $700 apiece, excluding the new bracket.

Senator Pratte: People in the lower bracket would get $150 or $50 and so on, but that represents a larger percentage of their revenue than the $700 for the people who are earning $200,000?

Mr. Macdonald: Yes.

Senator Pratte: In a way, in dollar amounts, it's a larger amount for the people earning $200,000. I hesitate to say this, but, in a way, it's fairer, no?

Mr. Macdonald: It could be, except that nobody under 45,000 makes anything because the bracket starts at 45,000. That's 65 per cent of all Canadians.

Senator Pratte: Out of this 65 per cent, 30 per cent or 35 per cent don't pay any income tax at all.

Mr. Macdonald: That's right.

Senator Pratte: So any way you reduce the income tax rate for those people, they never get anything at all anyway?

Mr. Macdonald: That's right.

Senator Pratte: Okay. I think I got parts of it.

The Chair: But the $50 you get is only going to buy you two cases of 24 beers. It's not a lot of money.

Senator Pratte: The answers were very clear. I'm not sure I got the questions, but the answers were very clear. Thank you.

Senator Mitchell: The other feature is that that $50 may be a lot more important to you at the margin than the $700 is. It may be the difference between buying better food rather than a better suit.

My other question is — and I don't think it's come up at all over the last few meetings — the charitable donations feature of the bill. There are moderate changes, or is that moderate? Is that going to make any difference? How is that going to affect behaviour, and how is that ultimately going to affect the charitable sector? Is it relevant, really?

Mr. Alexander: I'm afraid I didn't look at the charitable aspect. I focused on the other two.

The Chair: Do you have another question?

Senator Mitchell: No, that's good. They are changing the rates.

Mr. Alexander: I could be wrong, but I thought that the changes to the charitable status were simply to reflect the changes in the income tax brackets.

The Chair: I think so.

Mr. Alexander: That's one of the reasons why I didn't spend a lot of time.

Senator Mitchell: It just says it goes from 29 per cent to 33 per cent.

Mr. Alexander: Because that's what is happening to the income tax bracket.

Senator Mitchell: Oh, I see.

The Chair: That's right; it's all related to the change in the bracket.

Mr. Alexander: If you change the income tax brackets or impose a new one, you have to make a change in the charitable legislation.

The Chair: Gentlemen, before we wrap up, just one question for each of you to answer in 30 seconds. If there's one thing that you could look at to either change or improve Bill C-2, what would it be? Who wants to start?

Mr. Macdonald: Lifetime cap on TFSAs.

The Chair: Lifetime cap on TFSAs. Mr. Alexander?

Mr. Alexander: I'm more comfortable simply giving remarks on the impact that the bill is going to have rather than exactly what the change would be.

The Chair: Did you play hockey when you were younger?

Mr. Wudrick?

Mr. Wudrick: We would say scrap the 33 per cent bracket. We think we should be moving towards a flatter rate, not a more steeply progressive one, so we don't like seeing that new rate.

The Chair: Gentlemen, I'd like to thank you on behalf of all of us here tonight. It was very informative. You gave open answers to the questions, and we really appreciate the time that you spent with us in our analysis in trying to understand Bill C-2. I thank you very much for your participation.

(The committee adjourned.)