COLUMN

A controversial report that Ottawa ignored

Diane Francis May 18 1998
COLUMN

A controversial report that Ottawa ignored

Diane Francis May 18 1998

A controversial report that Ottawa ignored

Diane Francis

Canada’s biggest competitive disadvantage is high taxes. And businesses and citizens alike must convince Ottawa that is the case or the country will continue to lose capital and talent to the United States and elsewhere. Clearly, the Liberals are not listening. They have ignored the recommendations of a two-year task force Finance Minister Paul Martin established on corporate taxation. The nine-member independent task force, chaired by University of Toronto economist Jack Mintz, concluded that the combined average corporate income taxes must drop to 33 per cent from 43 per cent if Canada is to become competitive with its trading partners. (The U.S. average is 39 per cent.) “Lowering tax rates towards international norms,” the report said, “would provide a greater incentive for business to invest and create jobs here, while also protecting the revenue base.”

Personal income tax rates are also excessive, and the average family spends more every year on taxes in total than it spends on housing, food and clothing. The exception is Alberta where the highest personal income tax rate, including the federal portion, is 45.6 per cent. This is compared with combined rates as high as 54.17 per cent in British Columbia or 52.61 per cent in Quebec.

But overtaxation is just a symptom of a larger problem: Canada remains one of the most overgoverned jurisdictions in the world, and high taxes are required to pay for burdensome bureaucracies and expensive social programs. We have too many layers of bureaucracy doing too many of the same things. We have too many municipalities and school boards, complicating our lives and adding to costs. We have too many provinces. We have too big a federal government.

Comparisons are telling. For instance, California is slightly bigger than Canada, in terms of population and economic size. Californians send to Washington, their capital, two senators and 52 representatives. Canadians send 399 representatives to Ottawa, or 7.5 times more than Californians send to look after their affairs at the federal level. The total U.S. Congress amounts to 535 representatives and senators. But if the Americans sent the same representation proportionally to their federal government as Canadians do, they would have nearly 4,000 people in Congress.

Canada’s governments used to be leaner. But the federal sector swelled for the Second World War effort and never shrank back to its old, decentralized size. Ever since, we have had to pay taxes to support expanding provincial and federal governments as they compete for power. The result has been that neither side has yielded to the other. Both levels simply encroach on turf that should be the private preserve of one layer of government or the other. The duplication is enormous.

The federal government is in serious need of downsizing. It need not be involved in health, education, welfare, mining, forestry, culture and fisheries. These are adequately handled by the provinces, and the federal role should only be to co-ordinate matters. On the other hand, Ottawa should remain in charge of justice, economic management, international diplomacy, defence, internal security and communications policies.

Such downsizing (read lower taxes) is not in the lexicon of Liberals. But Ottawa is ignoring this need and its task force, officially known as the Technical Committee on Business Taxation. When Martin established it, he asked the group to recommend changes in business taxes that would promote job creation and economic growth; that would simplify the tax system and enhance its fairness. But the minister insisted that any reforms had to be revenue neutral, meaning that the same amount of revenue, $85 billion to all levels of government in 1995, should come out of corporations as now.

Martin all but ignored the report’s findings when they were released last month. There was no media briefing, no news conference, and Parliament was not sitting. It’s little wonder. Besides recommending a drop in corporate taxes, the committee suggested that federal business surtaxes should be eliminated; small business taxes should be reduced; and to make up for that shortfall, Ottawa should disallow the deduction of interest for money borrowed to invest in foreign affiliates. It also suggested that Ottawa reduce tax incentives for resource companies or manufacturers to match U.S. incentives and cut research and development credits.

Canadians want, and deserve, less government and less interference in their personal and professional lives

Unfortunately, the minister’s criteria to the task force was flawed. Tax neutrality—or letting government collect as much from corporations and businesses as it now does—was wrong-headed. Canadians want, and deserve, less government and less interference in their personal and professional lives.

As Reform party Leader Preston Manning says succinctly: ‘Taxes kill jobs.” The link between high taxes and high unemployment, and vice versa, is interesting. The United States had 4.8 per cent unemployment in May, 1997, and all taxes collected represented 26 per cent of its GDP. Britain had 5.8 per cent unemployment and taxes represented 33 per cent of its GDP. By contrast, France has 12.8 per cent unemployment and taxes collected represent 45.6 per cent of GDP. Canada is in the middle with 9.5 per cent unemployment and taxes at 41 per cent of GDP.

The best government is the least government at the lowest possible cost. And Canada’s only hope to eradicate its nagging unemployment problem is to lower taxes dramatically. Anything less means more of the same and all politicians must understand that reality. It’s about taxes, stupid.