UNDERGROUND ECONOMY ANTHONY N. DOOB
CANADIAN CANCER SOCIETY (ONTARIO DIVISION)
CONTENTS
Thursday 4 November 1993
Underground economy
Anthony N. Doob
Addiction Research Foundation
Mark Taylor, president
Dr Roberta Ferrence, director, Ontario Tobacco Research Unit
Canadian Cancer Society (Ontario Division)
John Ronson, past chair, public relations committee
Jack M. Mintz
Retail Council of Canada
Alasdair J. McKichan, president
Peter Woolford, vice-president
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/
Prince Edward-Lennox-Hastings-Sud ND)
Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)
*Caplan, Elinor (Oriole L)
*Carr, Gary (Oakville South/-Sud PC)
*Cousens, W. Donald (Markham PC)
*Haslam, Karen (Perth ND)
Jamison, Norm (Norfolk ND)
*Kwinter, Monte (Wilson Heights L)
Lessard, Wayne (Windsor-Walkerville ND)
Mathyssen, Irene (Middlesex ND)
*Phillips, Gerry (Scarborough-Agincourt L)
*Sutherland, Kimble (Oxford ND)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Dadamo, George (Windsor-Sandwich ND) for Mr Lessard
White, Drummond (Durham Centre ND) for Mr Wiseman
Clerks pro tem / Greffières par intérim:
Bryce, Donna
Manikel, Tannis
Staff / Personnel:
Boucher, Joanne, research officer, Legislative Research Service
Campbell, Elaine, research officer, Legislative Research Service
The committee met at 1011 in committee room 1.
UNDERGROUND ECONOMY ANTHONY N. DOOB
The Chair (Mr Paul Johnson): The standing committee on finance and economic affairs will come to order. We continue our deliberations into an investigation of the underground economy, and today our first presenter is Anthony Doob, professor of criminology, University of Toronto. If you would please come forward, sir, and make yourself comfortable. Whenever you are comfortable, you may begin your presentation.
Mr Anthony N. Doob: Thank you for inviting me. The work that I'm going to be talking about really derives from some research that I've been doing with Neil Brooks at Osgoode Hall law school on income tax and income tax evasion. Obviously that means that it's not focused directly on issues related to the underground economy, but clearly it's quite related to it.
Most of what I will be talking about is contained in the written statement which I believe you have before you and, as that points out, the research is derived from a survey which Neil Brooks and I carried out in 1990. We were focusing, as I mentioned, on income tax and income tax evasion, and previous witnesses before this committee have mentioned the issue of survey methodology.
In general, the comments that others have made before you would be ones that I would agree with, which is that the survey methodology allows one to answer certain kinds of questions, but, for example, one of the key questions which this committee is interested in, namely, the size of the tax gap, I think it's a methodology which is not appropriate for answering that question. One can, I think, get a fairly interesting indication of how people see tax and how people see tax evasion and in that sense it may be useful to the committee.
Obviously, because we were interested in tax and tax evasion, we did ask our respondents whether they cheated on their income tax. It may surprise members of the committee to find out that if you simply ask people whether they've cheated on their income tax, ask them perhaps in a slightly more sophisticated way by asking them whether they've had certain kind of income and whether they declared all that income in the previous three years, people are quite willing to admit that they cheat on income tax.
We found in our survey that about 18% or 19% of our respondents -- these are Ontario taxpayers from randomly chosen households; each person we spoke to was the person who defined themselves as being most knowledgeable about tax in the household -- admitted to cheating on their income tax and, relevant to the interests of this committee, the vast majority of those cheated on their income tax, at least in part, by non-reporting of income.
The overstating of deductions was mentioned by a relatively smaller number of people. The non-reporting of income seems to be, from our survey and from other kinds of estimates, the main way in which people avoid tax, and in that sense obviously is of relevance to this committee.
I'll be very brief in my comments. As I said, they're detailed in the written brief that you have, but I think there are a number of fairly straightforward points which I'd like to make, and then if committee members have questions they might ask me about them.
The first one, and it's something which on the surface seems implausible but I think one has to be respectful of the views expressed by people whom we surveyed, and that is that the relationship between tax fairness and tax evasion is not at all clear. There's an assumption I think that many people make which is that if we had a fair tax system people would be much more likely to be respectful of it and to pay their full tax.
I think that the committee might consider tax evasion and tax fairness to be really two quite separate concepts. One wants to have something approaching complete tax compliance. One also wants to have a fair system. One can easily imagine systems which are completely unfair and quite easy to enforce, which would be where you'd get no tax evasion and complete unfairness, and perhaps the other way around. But the issue, I think, is that one should strive for both of these concepts, for tax compliance and for tax fairness, but one shouldn't assume that simply if we accomplish one, the other will naturally follow.
I point out on page 3 of the brief that in our survey we were again focusing on income tax. About 58% of our respondents thought the income tax system was unfair, but of those 58% who thought the income system was unfair, about 83% of them appeared to be completely complying with the tax laws as best they could. Of those who thought the tax system was fair, about 21% were evading. So one shouldn't think simply that fairness is going to lead to tax compliance. As I mentioned, I'm not putting down the issue of fairness; I'm simply saying that they're both important concepts that we should keep in mind.
Fairness itself is a more complex subject than often is spoken about. You obviously have a Fair Tax Commission which is looking into this issue, but in our work we identified seven quite separate, independent contributors to the concept of fairness. I've listed them, and some of them are the obvious ones, the ones which people point to and that I would imagine the previous witnesses before this committee have mentioned. Those are things like the amount that people pay, the marginal rates and so on.
But there are other parts of fairness, things which really have to do with fairness of the individual components of a tax system, things like systems of deductions. Also, a quite separate component from all of these is issues like the number of people who are seen as avoiding paying their fair share through loopholes in the law, the number of people who are out there cheating, whether Revenue Canada was seen as doing a good job, and then others which you have heard people talk about: whether the government spends its money wisely, whether people feel alienated from the government.
These are really quite independent contributors to overall fairness, and if you consider what that means, it simply means that if you were to accomplish one form of fairness so that people felt they were paying the appropriate amount, it wouldn't necessarily mean they would feel overall that they had a fair tax system. A fair tax system seems to be a multidimensional concept. We identified seven independent ones, as I said. That number, seven, isn't a magic number; it simply probably reflects the limits of the particular method we used.
I give an example of the fact that there is some complexity in even evaluating things like deductions. We asked our respondents their views of one particular form of tax deduction for child care, and what you see in the table on page 4 is that people think it's reasonable for the state to subsidize the child care of relatively poor members of the Ontario community through the tax system, but people see it as dramatically unfair to subsidize through the tax system the child care of the rich.
Another point which I think has been suggested often when one talks about the underground economy is really that people justify or explain or cheat simply because of their concerns about various aspects of the tax system.
We asked people whether, for example, they thought a fair number of people were able to cheat because they were hiring experts to find loopholes in the tax laws and we asked people a number of kinds of justifications about tax evasion. Obviously, on something like finding loopholes, people did feel that there were groups of people out there in Ontario who were able to take advantage of the tax laws that they weren't able to take advantage of.
What's important about this is not only this perception of the tax system, but rather that the members of the Ontario community didn't see that this justified tax evasion. Only about 8% of those who thought there was a fair number of people avoiding tax through the tax system thought that this actually justified tax cheating.
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We asked people about whether they thought the overall tax system was unfair. As I've already mentioned, about 58% of people thought that the overall tax system was unfair, but only about 10% of those 58% thought that this actually justified cheating, and there are other examples again which are in the written material that's before you.
Probably the most serious problem that many people are obviously aware of in the issue of taxes is that we don't see it as a crime. It's easy to talk about tax evasion as a crime. I'm a criminologist, obviously, talking about tax evasion, but when we asked our respondents to evaluate tax evasion against other crimes of the same value, usually against the government, where there was a difference seen, tax evasion was seen as much less serious.
As an example, we asked people: "Which is the more serious offence: Evading $1,000 in income tax by not reporting income, or working part-time while collecting unemployment insurance benefits and thereby illegally collecting $1,000?" -- the same $1,000 that the government wouldn't have at the end of the process but presumably should have.
Unemployment insurance fraud is seen as much more serious. Theft of $1,000 from the government is seen as much more serious than income tax evasion. Interestingly enough, even smuggling, another crime which we don't take seriously in our community, is seen as more serious than tax evasion. In terms of concerns about the underground economy, claiming false deductions is seen as more serious than the non-reporting of income. Non-reporting of income basically seems to be almost okay as long as you don't get caught.
Another important point that I would like to make about this is that in our concerns about dealing with problems of the underground economy or tax cheating in general, we tend to focus on deterrence or on direct enforcement attempts. In certain ways, I think the notion that we pay our taxes only because we're afraid of getting caught should be challenged.
Our respondents, again Ontario taxpayers, largely indicated that they wouldn't cheat even if they thought they could get away with it. The tax system, as we have it, in the income tax system and to some extent obviously in other areas as well, can be seen as a voluntary system. What we found is that about 80% of our respondents indicated that they wouldn't cheat even if they thought they could get away with it. We asked people, if they had opportunity where they knew they wouldn't get caught, whether they would pay their tax anyway, and most people indicated they would actually pay their tax.
The other point about deterrence is that most people know that cheating on income tax pays. It is a situation where crime does pay, and it's probably worthwhile to consider that particular problem. Quite frankly, it's probably almost impossible to make income tax or various forms of tax evasion not pay. You can occasionally catch somebody, but if you did an economic analysis of whether it's worthwhile to cheat, you'd find that in fact it is worthwhile to cheat.
The difficulty, from the perspective of simply pushing a deterrence model of tax compliance, is that we're probably in the end not going to be very successful. We're not going to be successful by looking at the problem through the eyes of the criminal justice system or through the eyes of a penalty system more generally. What we have to do is to look for other kinds of solutions. Deterrence models, models based on catching people who are doing wrong are very expensive, particularly in an area like this.
As I said, perhaps a starting point is to remember the positive findings that we found, which is that most people are paying their tax not because they're afraid of being caught, most people are paying their tax because they feel it's the appropriate thing to do.
I point out in the written material that there are some ways where, if you were interested, or if we were interested in general in our society, we probably could do a better job of estimating the size of the tax gap, the gap between what should be paid and what is paid in particular sectors of the economy. One of them obviously is to do what is sometimes referred to in the literature as a prospective audit, where the tax collector warns an individual or a company beforehand that they're going to be audited in the year 1994 and that the audit will continue occasionally throughout 1994. People under that circumstance probably are much less likely to cheat. One could, by comparison with other people who are not having this kind of intensive prospective audit, get a fairly good estimate about how much tax is being evaded. But as I said, that's probably a better way of finding out about the size of the tax gap than doing anything about it in general.
If one is looking for effective ways of dealing with tax compliance, I guess I would like to focus on two. One is that I think we do have to have, as a long-term goal, the changing of the view of tax cheating. It's a remarkable thing that we find that people will talk quite openly, not only on the telephone to survey people but rather at cocktail parties and everywhere else, about tax cheating. The only other crime I can think of that people talk about in this open way is smuggling. As I mentioned before, tax cheating is seen as even less serious than smuggling.
If you're looking for positive examples of change in many parts of society in how we see offences, I would use the example of impaired driving. When I was 20 years old, I remember people used to joke about driving home while drunk. Now if anybody were to talk that way, they would be seen as being completely out of touch with the way in which people think about the crime.
This is a long-term issue, and it's an issue which is itself a very hard one to deal with, but if we're serious about it I think we have to make full payment of tax a serious issue in our society.
The other way this committee might want to think about -- and in the area I'm thinking about this obviously has some relationship to issues with the federal government as the tax collector -- is that we have to think about the ways in which we can reduce opportunities. The obvious way in which we reduce opportunities in many areas of income tax is to have some form of information reporting.
My salary at the University of Toronto is reported to the government through a T4 slip. I presume I could get away for a few weeks without paying my tax at the end of the year if I owe tax, but presumably the tax collector simply matches the computer information the university gives the tax people and I would be caught not having paid my taxes.
That kind of information reporting as a technique can be extended beyond salary incomes. In other jurisdictions, the United States in particular, there's much more information reporting. It's seen as a burden, and it is a burden. I think one has to concern oneself with whether that burden is really too much and really what the benefit is.
If one were to do that, however, my suggestion would be that one should be cautious in targeting lost taxes more generally than we sometimes do. I think we all have our examples, and this committee undoubtedly has heard the examples of various tradesmen, for example, who will do matters for cash at a lower price than if they do it with full invoices.
It may well be, though, that there are other areas of the economy where we should also have information reporting. One I find quite surprising is the sale of capital; that in sale of stock, sale of property, for example, there's no record the tax people have of such sales. When you're talking about large economic transactions involving individuals or small companies, what we have at the moment is in effect no way of tracking that. When one targets smaller individuals or companies, I think one also might want to think about targeting the larger ones.
The final point I'd like to make, and it does again relate to our survey, is that more aggressive tax enforcement seems to be acceptable to Ontario taxpayers. It's easy for people to come before this committee and complain about the burden of tax reporting. On the other hand, the people we asked, 1,900 members of the Ontario community, were quite happy to have more aggressive tax enforcement. They were willing to involve themselves and presumably their neighbours in more aggressive information reporting of financial transactions. In the written material I outline one of them.
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I think it's also interesting to look at one of the questions we asked; we were asking because there are some theories about this. We asked about Revenue Canada, everybody's best friend, no doubt. Revenue Canada, interestingly enough -- and I suppose to the pleasure of Revenue Canada -- came out quite well; People thought Revenue Canada was doing its job. But a sizable number of people thought Revenue Canada was doing a poor or a very poor job, and we did ask people why they thought Revenue Canada was doing a poor job. There were 290 people who gave us an explanation of why they thought the main tax collector they deal with was doing a poor job, and only one of those 290 thought Revenue Canada was too aggressive. The largest number of people thought Revenue Canada was not aggressive enough in collecting taxes.
So out there, if you're looking for concerns about it, what people seem to be concerned about is in a sense the same concern which is presumably driving this committee's interest at the moment, which is that there is a serious problem of tax compliance out there and people seem to be willing to pay some costs in order to deal with this particular problem.
I've spoken longer than I wanted to. I'm happy to answer questions.
The Chair: Thank you, Mr Doob. We have six minutes per caucus. We'll start with the Liberal caucus.
Mr Gerry Phillips (Scarborough-Agincourt): This is very interesting. I assume your full report is available publicly?
Mr Doob: I wish it were. We're in the process of writing it. If the committee had specific questions, I can certainly make available to the committee more information about the survey. It would be very simple for me to do additional analyses if the committee would be interested.
Mr Phillips: For us to absorb it all, I would appreciate it if there's an opportunity for the research staff perhaps to work with you. I think this is as fact-based material as we've seen. Have you any sense of the trend of this?
Mr Doob: Unfortunately not. We did this survey close to three years ago and, as I said, we're in the process of trying to make sense of the data as a whole. To my knowledge, we had done one smaller survey within Metropolitan Toronto a few years before, but it was a different methodology and so on so I don't think the comparisons are there.
We really don't know. The best trend data I've seen on tax evasion are in fact the trend data which I think were referred to by a previous person before this committee, the paper that Peter Spiro at the ministry of treasury has produced. That's on a specific form of tax evasion. I don't know.
Mr Phillips: Just a follow-up, and then maybe Mr Kwinter. We're really wrestling with this thing. Do you have any advice for us in terms of areas where you think the problem may be larger than other areas? The reason I ask is that cigarettes have become kind of a metaphor for the underground economy, but some people, myself included, think the issue may be even more serious in other areas. Have you any sense of --
Mr Doob: I don't. The simple answer is that I really don't know what areas of the economy would be most serious. We were obviously focusing on individuals and were asking about individual tax; small businesses and so on to some extent get melded in with individuals, but I really don't have a clear answer to that. One of the points from our data, though, which I haven't referred to here, is that it's really quite widely, broadly based. People have different levels of opportunity to cheat on their income tax or on taxes generally, but when you look at simple demographic characteristics, things like income and so on, it really is quite different.
One of the things I may have mentioned in this is that second incomes seem to be seen by many people as being quite different. I've had arguments with people who in effect say you don't have to pay tax on a second income, that you pay your fair share on the first one and the second one doesn't count. Our data suggested that as well, which is that people see cheating on second incomes, on extra things, as being much less serious. I think that fits our own intuitions about the way in which people do it: "I pay my taxes through my T4 slip, but other stuff doesn't count. It's none of the government's business." If I were to target things, I would target those kinds of matters. Those would be the obvious ones.
But as I said, it may well be that there's an enormous area we don't even know about, like large financial transactions. My feeling would be that in the long run the best strategy would be to encourage the ministry to do some proactive audits to try to find out where these things are, to do research on where you're losing money on large financial transactions. I may be dead wrong and it may be, now with the stock market very high, that if you really do track back on stock sales, people are paying, but it may be that they're not.
I would think that one of the things would be to do some work on those and then come back and say, "Here's where we think we're doing it and here's how we might deal with it." As I said, other jurisdictions do have much more information reporting about financial transactions. In many instances, in the United States in particular, they are doing this with some knowledge that that's where they're losing money.
Mrs Elinor Caplan (Oriole): I'm going to be speaking in the House in about three minutes, so I'm going to place my question and I would like the answer even though I may not be here to hear it personally, and I apologize in advance. I'm interested in the kinds of research you would recommend, if you can, the design of the kind of studies the ministry can be doing, the kind of information and data it could then use to adjust policies in a way that might raise public consciousness about the importance of participating appropriately.
Mr Doob: I would answer in two ways; that is, that it seems to me there are two issues. One, as I said, is a long-term concerted effort to change the view of tax evasion, and that goes well beyond the role of the ministry. But the second kind of research which I would be interested in would be action enforcement research, saying: What kinds of actions can the ministry take, in terms of information reporting and so on, which seem to increase revenue? The measure which one could easily use is revenue. In a province the size of Ontario, one can obviously try certain kinds of techniques with certain individuals or certain companies and compare that to see whether revenue increases with that as compared to people you really don't have the resources to deal with.
I'd like to give just one example of one of the difficulties and one of the problems. There's an assumption in many ways that auditing people has not only the impact of getting money at that particular audit but a long-term impact, that if you've been audited for 1993 you're not going to cheat in 1994, 1995 and 1996 and so on. The data on that, interestingly enough, are mixed. There are some data which, on the surface, paradoxically suggest that people, after being audited, cheat more.
The simplest explanation that comes to mind is that people are trying to make up for the money they gave to the government in the previous year. It may actually be more complex than that; it may relate to the way in which people cheat. If you think about an audit, what's easy to audit is deductions. If there's something on paper, that's a good thing for the tax collector to start with and to ask questions about and question its legitimacy. On the other hand, what the taxpayer may be finding with audits is that undeclared income simply isn't found. What that suggests is that we have to focus on that.
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If we want to really find out what the impact of an audit is, if we want to find out whether there's an impact on the particular individual or on other people within the community or within the business sector, it's quite possible to do experiments on this. The ministry doesn't have sufficient resources to do complete audits as much as it undoubtedly would want to, so these can be done on some parts of the economy, to look at comparable parts of the economy and see whether there really is a spread of positive impact. There's a lot of enforcement research which could be done with the resources that are there.
I think what has to happen is that the ministry would have to be encouraged to take a more experimenting view of the collection process. Everybody's estimate is that there's a lot of money that is not being collected, and in that sense it's perfectly reasonable for the ministry to try four or five different kinds of approaches to this and be able to compare with other parts of the economy where it doesn't have sufficient resources to do enforcement actions.
Mr Gary Carr (Oakville South): Thank you very much for a very interesting presentation.
As you know, reading the paper from last week, the Treasurer has already said that he's going to increase fines. He said he's going to introduce legislation. A quote from the Toronto Sun: "Legislation will be introduced this session. You're going to see increased fines, jail terms, beefed-up auditing and police." On page 7, you say, "As has been pointed out to you, auditing is expensive and to some extent it is not very effective."
First of all, I would have thought the Treasurer would have waited to hear everybody in the hearings before jumping to conclusions, but you seem to be saying that in spite of the fact that the public would like more auditing, it really isn't going to help that much. Based on what the Treasurer said, is he wrong in his assessment to be already talking about introducing legislation to end this problem?
Mr Doob: I apologize for the answer I'm going to give, but I'm going to answer as a researcher. There are lots of techniques out there to try to deal with the problem. Retrospective audits are one of them. One of the approaches in retrospective audits, one of the issues really, would be to see what the effectiveness is in the long run. So if I were in charge of that, audits might be one of the techniques that I would use.
I would, for example, say, "How many people do I have the funds to audit?" just to use that as an example. Let's say we can audit 500 people with these particular funds. I'd say: "Okay, let's choose 1,000 we would like to audit" -- and that won't be very hard, because I'm sure the tax people would have no difficulty -- "and let's audit 500 of them. Let's watch them for the next couple of years and watch the other 500 we didn't audit and see whether we're really having a long-term impact and whether that impact is positive or negative." So one of them would be to do that.
I'm not terribly enthusiastic about turning to, in a sense, the criminal justice system and fines and so on. I'm not terribly enthusiastic in seeing that as the solution to the problem, but one of the arguments that's used is that some of these are major crimes against the government. We lock up people for unemployment insurance fraud and we have a view in our society that unemployment insurance fraud and welfare fraud are very serious kinds of offences, but we don't see income tax in the same way.
If one of the ways to increase the perceived seriousness of income tax fraud so that you make people feel they've done something wrong if they cheat on their income tax is to treat it seriously within society, you do that in part through the criminal justice system. I don't think locking people up or giving them high fines is necessarily going to solve the problem, because the chances of being caught are just so small. But what it may do in the long run, not immediately, is to help change our view of the offence.
Mr Carr: Are there any data from other jurisdictions that have toughened up? Rather than us spending the money and possibly finding out it doesn't work, what about other jurisdictions, not only in Canada but in the United States, where this has been done? Has it been proven to work in other areas?
Mr Doob: The simple answer to that is that we don't really know what these broadly based techniques do. In part, we don't know about them because what happens is we change our policy, but then a variety of other kinds of things occur.
For example, I'm not sure whether this is true, but you've heard from Peter Spiro, you've certainly heard from people in the ministry, when you look at his data and you say, "What would've happened if in 1990 we would've done something or another," and then the federal government comes in with the GST, and all of a sudden the size of the cash balances increase dramatically. It's very difficult to disentangle these things and it's very difficult for us to know whether something which worked somewhere else or which had an impact somewhere else would do things.
I think what we do know from other jurisdictions is that basically the reporting of financial transactions that occur in society and letting the government know that these transactions took place, that's a very effective way of dealing with it. My guess is that the tax collector could in fact take all this information and store it very carefully and do very little with it.
But if most of us believe that this form is going, if there's a financial transaction, if I am receiving some money and I know that a form is going to Ottawa, even if I think that they might not match it with my tax form, I say: "Well, they have a record of this. I'd better declare that income." We know that when there's information reporting the amount of declared income goes up.
Mr Carr: The bottom line, you seem to be saying about 18% of people admit to cheating. Based on your best knowledge, how much cheating percentagewise do you think there is in the system today? If 18% reported, that would obviously be the low-end number we've heard anywhere. I won't ask you to translate what that means to the economy, because we can do that very quickly looking at the GDP, but what is your best guess percentagewise of the amount of cheating going on in the system right now?
Mr Doob: My guess is that in terms of very small amounts, we're talking at least double that. I think what's happening with even the 18% is that they're probably a relatively small number of people who are what might be called dedicated cheaters who are sort of consciously doing it throughout the year.
What probably is much more common is occasional second income, occasional financial transactions and things of that sort where a person does some work for a neighbour, gets a few hundred dollars and says, "Well, that's it. I'm putting it in my pocket," and that's the end of it. My guess is that it's more that kind of thing, and the number of those would be dramatically higher.
The people, I think when we were asking the questions, may not have even thought about those. They may not have thought about them when we asked about, "Did you have any other self-employment income?" They're not thinking about the fact that they painted a neighbour's house or plowed their driveway or whatever it might be.
Those kinds of transactions, relatively small transactions, just aren't thought of, so my guess is it's much more widespread in minor ways. Obviously from the data from the ministry, we do know that we're losing an enormous amount of money that isn't coming into the treasury, and my guess is that's concentrated in certain areas.
Mr Carr: As we publicize this, as we're doing with hearings like this, do you think that will make it worse?
The Chair: Mr Carr, we're going to have to go on to the government caucus.
Mr Kimble Sutherland (Oxford): Thank you, Professor Doob, for a very good presentation. We haven't had this perspective presented on the issue as of yet, so it certainly adds to our investigation into the issue.
I thought it was interesting, your comments regarding welfare fraud, unemployment insurance fraud, how much emphasis all that gets, but the comment you made that tax evasion is basically in the same category and that all of us as people in our society in this country should view it in the same category as welfare cheating and unemployment insurance fraud. I think those comments are certainly well taken.
You focused primarily on income tax. I'm wondering if you had any comments on sales tax. We certainly heard evidence before this committee that there seems to have been a growth since the implementation of the goods and services tax, it being a very unpopular tax and people wanting to find ways to avoid paying that. Of course, once you find a way to avoid paying GST, it's not hard to avoid paying provincial sales tax, or in that fact avoid paying income tax. I'm wondering if you have any specific thoughts on how any changes to the GST, besides eliminating it, may help deal with the situation.
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Mr Doob: I think what happened in that situation is that all of a sudden the financial advantage obviously changed, and on January 1, 1991, the financial advantage of not reporting sales and services transactions changed dramatically for many people. Again, my guess is it's seen in much the same way, cheating on sales tax and GST is really seen as much the same thing: As long as you're not caught, it's all right. You'll find people talking about it as if really there's no offence taking place.
There's an interesting aspect of that as well and I think it goes back to the problem of how tax evasion is seen, and that is that when you look at these transactions, you go in and purchase the service or purchase some goods and there's a little bit of bargaining going on and you say, "I'll pay cash. How much would it be if I paid cash?" and they give you a lower rate. You know perfectly well that what's happening is that this is a cash transaction where no sales tax is going to be paid. It's not just that the person's going to swallow the tax and pay it themselves the way sometimes the big department stores do, but this is a transaction which no tax man's ever going to hear about.
What you're doing as a customer, obviously, is being party to an offence. There's no other way really to say it. You're benefiting from a crime, you're encouraging a crime, you're doing a variety of things. It happens not to be a crime, because of course no offence has taken place. I pay $1,000 to somebody to do something for me and it's all cash and I can say to myself, "He prefers my cash to my cheques," and I don't know what he's going to do with the tax man; that's his business. I can write that out of my conscience by saying that's between him and his tax man, not me and my tax man. I've gotten an economic benefit; otherwise I wouldn't have done it.
I think we have to start thinking about that issue and part of the way in which we might think about that issue, as I said, would be to make information reporting a responsibility. If I pay somebody a substantial amount of money without a transaction, it's not going to be that hard for me to say, "I paid such-and-such a company this much money," and I send in a little card to the tax person so there is a trace on that. Our respondents said they're perfectly willing to do that, especially for larger transactions. Again, one would want to do this, I think, across the board. So it is broad and I think the issues are quite the same.
The Chair: Ms Haslam, you have about two minutes.
Mrs Karen Haslam (Perth): That's very interesting, because I just came from a meeting that said there's too much government intervention, there's too much paperwork, there's too much recording, there's too much of this. You're saying now we should add another layer of reporting by small business people or by the purchaser. Do you really think that doing it in a large scale across the board would be accepted?
You are a professor of criminology and a lot of my questions are going to go back to that. I have two or three different questions, so could you just comment on how business and people would see that?
Mr Doob: I realize you just got this today, but on the bottom of page 8, top of page 9, we asked people the question: "To collect the right amount of tax from everyone, should everyone who pays $500 to a contractor like a plumber or electrician have to send a simple form to Revenue Canada reporting the payment?"
Half of our respondents said that was okay. Increase the amount to $5,000 and close to two thirds say it's okay. So my starting point would be nobody likes it, I'm not going to like it, but you can imagine a form that would be very simple. But the point of it all is that if this were described to people as an effective way to make the system more fair --
Mrs Haslam: But you're talking taxpayers and I'm going back to my original comment that small business people would look on this as another layer of paperwork. Would we bring it in that as a contractor they now have another form to fill out every time Mr Phillips wants to pay cash?
Mr Doob: No. Let me take the simplest thing, which is that the contractor would be obligated to give a customer this card and the customer would have to send it in.
Mrs Haslam: I don't want to get into a debate, I just question another layer. Wouldn't it be a situation where some contractors would give you a card but some wouldn't, and then you're back to saying, "It's $2,000 cash but it's $1,900 if I don't give you the card"?
Mr Doob: I'm not suggesting that it's going to be simple or that I have the answers as to the mechanism to do it. I guess what I'm suggesting is, though, that the most effective way I know of to track transactions would be to have some record of them. Various attempts have been made in various jurisdictions to increase information reporting. It may well be that what I'm suggesting would turn out to be unacceptable to small businesses and it may well be that it would be ineffective. I think one of the points, though, about it is that it is, in addition, a way of reminding people that were they not to do it, they're really benefiting from a form of illegality.
Mrs Haslam: Have I got a minute? I've got some --
The Chair: I'm sorry, Ms Haslam. We are out of time; in fact, we're a little over time. We do have another group of presenters here who have been waiting because we started a little late.
Thank you very much, Mr Doob, for presenting before the committee today.
ADDICTION RESEARCH FOUNDATION
The Chair: Our next presenters this morning are the Addiction Research Foundation, if Mark Taylor, Dr Roberta Ferrence and Dr Norman Geisbrecht would please come forward. Please make yourselves comfortable. I apologize for any mispronunciation of your names. Would you be so kind as to identify yourselves for the committee members and for the purposes of Hansard.
Mr Mark Taylor: Thank you, Mr Chairman. You pronounced my name perfectly; I'm Mark Taylor. But then, that's the easy one. Sitting on my left is Dr Roberta Ferrence, who is the director of Ontario's newly established tobacco research unit and a senior scientist in the Addiction Research Foundation, and on my right is Dr Norman Geisbrecht, who is an alcohol policy researcher of, if I dare say so, some renown and also a senior scientist at the Addiction Research Foundation.
The Chair: You may proceed whenever you're ready.
Mr Taylor: I'll be talking about our broad community, the province of Ontario, and the impact of the underground drug economy on our individual and collective lives.
It may surprise you to hear that I am as worried by the traffic in smuggled cigarettes and alcohol as I am by the trade in illegal drugs. Cheap alcohol and cigarettes threaten our health and wellbeing, damage our economy and undermine our collective commitment to society; I might have said, "our collective social contract," but that expression has taken on a certain meaning of its own of late.
Setting aside coffee, alcohol is the drug of choice for most Ontarians. After alcohol, tobacco is the next most popular one. While most of us buy our cigarettes and alcohol legally, the underground economy related to these substances is big business. In 1992, according to the Liquor Control Board of Ontario, the value of illegal alcohol sales was about $750 million. The value of smuggled cigarettes, the legal retail value, was $448 million. That's well over $1 billion between them in Ontario in one year. It has surely increased a great deal since then, particularly when we speak about cigarette smuggling.
I can't tell you what the illegal drug trade is worth in Ontario. Attempts to estimate it were abandoned many years ago by sensible folks. But my gut-level belief is that the illegal traffic in cigarettes and alcohol pretty much matches the illegal drug business, and it probably involves a far greater number of people.
Surveys by the Addiction Research Foundation show that in 1991 four out of five Ontario adults and three out of five students consumed alcohol during the previous year. Alcohol use is widespread and widely accepted as a part of our social fabric. None the less, there has been a growing understanding that problems associated with alcohol use are a major public health concern and therefore a major economic concern.
I want to be clear that I'm talking not just about the problems of alcohol dependence, but about other problems associated with alcohol use as a whole. For example, you don't have to be alcohol-dependent to drink to excess and then to drive and then to crash. Alcohol plays a role, in fact, in about 7,000 deaths each year in Ontario. Alcohol is a cause of liver cirrhosis, cancer and deaths and injuries from traffic crashes and other mishaps. It is also a significant contributor to family and workplace problems. In Ontario alone, 640,000 people report some physical, social or health-related harm as a result of their own drinking.
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It is, of course, impossible to put a price tag on the human suffering associated with alcohol abuse, but in economic terms ARF estimates that in 1990 alcohol abuse cost Ontarians roughly $5.8 billion in increased health, welfare, workplace and law enforcement costs. These human and economic costs of alcohol use are the background against which the question of the illegal alcohol market should be considered.
As I indicated earlier, the Liquor Control Board of Ontario estimates that smuggling cuts something like $450 million out of the province's legal alcohol market each year. Illegal production inside Ontario is valued at another $300 million. Taken together, this represents about 14% of Ontario's alcohol market.
The existence of this illegal market undoubtedly represents a substantial loss to the provincial treasury through uncollected taxes, but even legal alcohol is a bad bargain. Every drink consumed in Ontario in 1990 cost society -- you and me and our fellow taxpayers -- roughly $1.30 in health care, law enforcement and lost productivity costs. The same drink generated only 25 cents for the provincial treasury in taxes, licence fees and Liquor Control Board profits.
This stark comparison suggests that the major goal for government alcohol policy should not be generating revenue; rather that we should concentrate on reducing the social burden of alcohol.
Undercutting the illegal market by reducing taxes might shut down the underground economy. It will not, in our view, solve our alcohol problems and may in fact contribute to them. Lower the price of alcohol by reducing taxes and consumption will go up. Those of us who would not smuggle alcohol or run a still in the garage because it's illegal might be willing to take advantage of lower prices to use a little more alcohol.
It's not just a question of the price to the consumer. It cannot be said often enough: The impact of alcohol abuse in any society is closely linked to the way in which alcohol is sold. When alcohol is made more available, consumption rises. When consumption goes up, the number of people who experience alcohol-related problems also increases.
This is why at the Addiction Research Foundation we think the Liquor Control Board should be maintained and strengthened in the interests of the public health. The government must ensure that the Liquor Control Board continues to fulfil its primary mandate: alcohol control in the public interest. Equally important, governments should maintain their resolve to tax alcohol at a level which minimizes its damage to society. I think of this particularly when I read of fatal tragedies involving young people, cars and alcohol. The price of alcohol has a significant impact on consumption by young drinkers and on those who drink heavily. If you're interested in a more detailed discussion of these issues, I've provided you with two of our Best Advice papers which deal with the public health role of taxation policy and retail alcohol monopolies such as the Liquor Control Board.
If alcohol policy decisions involve balancing access to alcohol for consumers against public health concerns, we are less in conflict about marijuana, cocaine, heroin, LSD and other illegal drugs. All illegal drug use is part of the underground economy by definition, and we don't have to look far to see the impact it has on our community.
In recent years, for example, it's been estimated that the social burden of illegal drug use in Ontario is about $1.9 billion per year. This is a terrible cost, although much lower than the $5.8 billion that alcohol use costs us. The reason for the disparity is that far fewer people, approximately 10% of the number, are involved in illegal drug use compared to alcohol use.
But we should point not only to the financial costs but also to the human costs. Toronto newspapers have been filled with stories about people whose lives ended tragically through heroin overdoses. We've also heard recently about drug-related deaths inside our prisons.
Beneath the statistics are many stories of youthful experimentation, of addiction, of degradation and pain. Among the most significant stories are those of the additional health risks associated with injection drug use, a practice which can lead to HIV or AIDS infection. In the United States and Canada, the sharing of HIV-contaminated needles is one of the most common causes of infection. Setting aside the terrible suffering and pain of this killer, you don't have to be an accountant to imagine the financial burden of this and other health-related effects of drug use.
I can tell you that our problem here in Ontario is much less severe than the problems being experienced in other jurisdictions. In New York, for example, more than 60% of injection drug users have HIV. In Toronto, that rate is about 4%. The difference is attributed to needle exchange programs and to a more humanitarian approach to the problem.
There's a lesson here in the harm reduction approach, an approach designed to reduce the real and terrible effects of the underground drug economy in all its aspects. Providing clean needles is harm reduction. It reduces the harm of drug use to the user, the family and the community. It is a crucial first step. Clean needles do not stop someone from using heroin, but they might stop her from getting AIDS. It might bring him into contact with caring professionals who can help stabilize his life and it might eventually lead to treatment and to an end to drug use.
Taking a harm reduction approach might mean investing more money in prevention and education and less in law enforcement. It might mean taking a hard look at the penalties which we put on marijuana possession, a suggestion recently made by the Canadian Police Association, which have high enforcement costs and which may damage the user more than the use.
We are just at the beginning of understanding the significance of taking a harm reduction approach to illegal drug use, but we are already certain that it represents a practical way to reduce the social, and therefore economic, burden.
A related issue is prescription drugs. Although solid numbers are difficult to come by, we estimated several years ago that the overuse and illegal use of prescription drugs generated social costs in the order of $2.8 billion a year. That's about 50% more than illegal drugs.
It is not really possible to separate illegal use from overuse in these kinds of estimates, but it is clear that there is a significant underground component to this problem; think of uppers and downers and, more recently, of steroids.
Having said all that, it will not surprise you to learn that one of our most significant concerns is a legal drug: tobacco. When anyone brings the underground economy to mind these days, I am sure we all immediately think of contraband cigarettes sold under the counter or out of the trunk of somebody's car.
It is an insidious problem, not only because people buying smuggled cigarettes don't care that they are cheating the government of tax revenue, but because the solutions touted by the tobacco manufacturers and by the smokers' rights lobby will do harm to the public health. There is no doubt that the lost revenue and the accompanying criminality cost us, but the health care and human suffering costs of smoking are also high.
Let's look at tobacco in human terms for a moment. About 27% of Ontario adults use tobacco. Nearly 24% of students in grades 7 through 13 also use it. In 1989, more than 13,000 Ontario residents died of causes related to tobacco. We can expect that figure to continue rising for many years to come.
In financial terms, smoking is very costly. The Pan American Health Organization estimates that in 1989 the total cost in Canada for health care, premature mortality and unemployment caused by disability was $9.5 billion. In contrast, tobacco taxes brought in only $5.5 billion.
I must stress, however, that dollars should not be the overriding issue here. We do not tax cigarettes to recoup the cost of the health problems caused by cigarettes. Rather, society recognizes that high prices do reduce consumption. We tax tobacco to prevent health problems.
The cause-and-effect relationship is really quite simple. Every time tobacco prices go up, more people quit smoking and, more important perhaps, young people are discouraged from picking up the habit in the first place. The Addiction Research Foundation believes that any move to reduce tobacco taxes will result in an increase in consumption.
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The crux of the contraband problem is our proximity to the United States. The price differential between the two countries has created a situation that is ripe for smuggling.
Let me make this point very clear: Canadian cigarettes are being smuggled back into this country not because our taxes are too high, but because American taxes are too low and because, in lifting the export tax, our federal government created a loophole through which 50-foot tractor-trailers are continuously driving.
If we lived next door to almost any other industrialized country you'd care to name, this problem simply would not exist because our taxes are in line with what others are doing. The United States, however, is taxing its cigarettes far less than almost everyone else. But that does not make us powerless. The good news is that the problem can be fixed without lowering Canadian taxes.
First of all, Ontario should be lobbying the Clinton administration and US border states to raise taxes on cigarettes. The Clinton administration is already thinking of doing this, but higher taxes at the state level would also have an effect. The price per pack would not have to necessarily equal the price per pack in Canada in order to reduce smuggling. Just raising taxes by, say, about $1 a pack will reduce the price differential enough to make smuggling less attractive.
Secondly, the federal government should reimpose the export tax on cigarettes that it rescinded last year. During its brief life, that tax did significantly reduce cigarette exports. That meant fewer cigarettes were being smuggled back into Canada. The current situation is a direct stimulus to this contraband trade. We all know that the majority of cigarettes exported to the United States are coming right back into Canada, many of them through Ontario.
Finally, we should ensure that all the remaining tax loopholes in Canada have been closed. You may have seen recent reports of a store in Kingston that sells uncut tobacco to consumers, who cut their own tobacco and make their own cigarettes. This procedure avoids, quite legally, the federal excise tax and makes these homemade cigarettes far less expensive than manufactured ones.
I wrote to the former Minister of National Revenue, Garth Turner, to ask him to close this tax loophole before this type of store spreads elsewhere. I'm hopeful that his successor will take appropriate action.
Legal loopholes, whether they are you-brews or cut-your-own-tobacco shops, contribute to the social burden in the same way as smuggled cigarettes or alcohol.
I should stop now and thank you for your attention. I'm happy to answer your questions, as my colleagues will be.
The Chair: Thank you very much. We have almost 15 minutes per caucus, if you'd like to start, Mrs Caplan.
Mrs Caplan: I'm pleased to see you again. It's nice to have you here; excellent brief. I wanted to discuss both some of your options and also share with you in my questioning, as well, some of my own thinking.
As you know, I've been an advocate under the rubric of healthy public policy for the kinds of options that you proposed. I would say on the record that it was always my hope that increased tobacco taxes would result in reduced tax revenue. Be clear on that: Increased tobacco tax should not result in more taxes and revenue dollars for the government to spend, but in fact reduce tax revenues because people would be buying fewer cigarettes because of the tax increase. We know there's a direct relationship between the level of taxation and the purchase of the product, be it cigarettes or alcohol.
I wanted to make that point because I think a lot of people see tax increases in the sin taxes, as we've usually referred to cigarettes and alcohol, only as a tax grab for more money. It was always my hope that it would do exactly the opposite and reduce revenues to the government. That was one thing I'd like you to expand on, as to whether or not that was something you considered in your research.
The other point is sort of where we are today, the reality that our tobacco taxes, while we compare favourably with other provinces, as you've noted, are so out of whack with what's happening in the United States and the fact that smuggled cigarettes are being sold quite openly to exactly the target group: I'm talking now about young teenagers and particularly young women, because it's my understanding that the statistics are showing that more women now smoke than men, and that more young women begin smoking than young men.
My concern has always been that you hit a point at which your tax increases become counterproductive. Perhaps you could expand on that in some of the time we have and give us your advice and any research you've done in that area.
Dr Roberta Ferrence: Yes, I'd like to respond to that. Tax increases at the present level do not lead to reduced revenue. They actually lead to increased revenue. The reason for this is that the demand for tobacco is still, at the present tax level, relatively inelastic, which means that for a given price increase, you have a less than proportionate decrease in consumption.
We don't know the point at which the tax level would actually result in a greater than proportionate decrease in consumption. We know that this does happen for adolescents. They are much more price sensitive than adults. This isn't necessarily a bad thing. It's a good thing in the sense that there certainly is more scope for an increase in taxes without government revenue declining. Of course, we all want to see a decrease in consumption, and we are seeing that, not only in the number of cigarettes smoked but also in the proportion of people who smoke.
Mrs Caplan: If I could just ask a supplementary on the first part of your response, which I found very helpful, I chose my words carefully. What I said was that I had always hoped that an increase in the tobacco tax would result in reduced revenue.
The reason I made that point is that if you look at the concept of taxation on cigarettes and alcohol as healthy public policy, then your goal is not to increase revenue for the government but to reduce usage. I don't know that we could ever determine at what point revenues would drop, but it would be my hope that we could achieve that expeditiously. I think we've raised public consciousness about how horrible smoking is in relation to the health of the individual and the impact on lung cancer and so forth.
I don't know if you've done any research that would suggest, and you've said you haven't, what that level might be, but I was struck by the fact that you said it was adolescents, those who would be beginning smoking, who were price sensitive and that the concept of reduced revenue as a result of increased taxes could well occur, particularly with the group that we would like to see not start in the first place or quit shortly after having started because it couldn't afford the increased price. Could you just expand on that a little bit?
Dr Ferrence: I think in the future we will see more of an effect of tax increases. The main reason would be because smoking is now much more common among low-income people than high-income people. This is a historical sort of process. Low-income people, of course, would be more price sensitive, as long as they don't have access to other ways --
Mrs Caplan: Smuggled.
Dr Ferrence: -- smuggled cigarettes or make-your-own cigarettes. So I think that potential is there.
I don't think we have to worry about the balance. Part of the problem is that tobacco is extremely addictive, as you know, and that people who do want to quit don't necessarily quit. They don't respond as quickly to the market forces as they might with other products because they are so addicted.
Mrs Caplan: Are you concerned, as I am, because I've said this publicly in the House and on the record, that if we continue to raise taxes without seeing corresponding increases in the United States, then the level of smoking could well increase and that tax policy, rather than being a deterrent -- because people would switch to smuggled cigarettes and it will become, as it has become, open and far more acceptable to buy smuggled cigarettes -- we'll see an increase in smoking in the lower-income groups and adolescent youth? That's a concern I have.
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Dr Ferrence: Our surveys indicate that the prevalence of smoking is still declining in Canada, and I should add, in response to your comments about women and young women, that it is declining among women and among young women. There is a very common misperception about this. It's certainly still a major problem, but it isn't as great as the press can lead many people to believe.
I think it's critical, though, that the price difference between Canada and the US be reduced. There's quite a lot of evidence the United States is prepared to raise its taxes at this point, and if we can, as Mr Taylor said, convince the new government to reinstate the federal export tax -- we don't have to have price equity with the United States. We just have to reduce it enough that it no longer becomes worth taking the risks, and there are significant risks attached to smuggling.
A lot of people will never buy smuggled cigarettes, and even those people who do aren't necessarily going to take up smoking or increase their smoking a lot because they're buying smuggled cigarettes. They don't have access all the time to smuggled cigarettes. But we do know that between 30% and 40% now of consumption is from smuggled cigarettes, so it has become a really quite major problem. But the solution is really much simpler than many people would believe, and it's the two measures we've talked about today.
Mrs Caplan: I find the comments interesting. I'm also interested in clarifying, just for my own information: I'm pleased to hear that when you use prevalence rates, that's sort of the numbers of new people who are starting smoking. Is that correct?
Dr Ferrence: No, that would be the number --
Mrs Caplan: Overall, the number who smoke?
Dr Ferrence: Who smoke, right.
Mrs Caplan: So overall the number of people who smoke is declining, and we're also seeing a decline in women and young women, but it's my understanding that more young women and women smoke than young men and men. Is that accurate or inaccurate?
Dr Ferrence: Women over 25 are less likely than men to smoke and they're also less likely to smoke very heavily. For women under 25, it depends on which province and which jurisdiction. They're roughly equal. The big differences now are by social class, not by gender. What's happened is that at one point rates were much lower, say, for adolescent girls than boys and now they're roughly equivalent, depending on the survey you look at.
Mrs Caplan: Would you say that's a result of the public education campaigns as well as taxation policy?
Dr Ferrence: We think taxation has had the greatest effect, because the United States has had just as many public education campaigns. In fact, theirs happened earlier than ours. They've also had bans on public smoking and other important measures. So until 1989, when the advertising was banned, the only difference we had between Canada and the US that's very clear was a tremendous increase in taxes here, and what we have seen, particularly among the price-sensitive adolescents, is a major decline, close to 60%, since about 1980, and the same thing hasn't happened among young people in the US. Their rates are also at similar levels, but ours were higher before, because Canada's always been a bit behind the US in smoking policy.
Mrs Caplan: My last question really follows, because I know a lot of the work that you do is in behaviours as well as in attitudes. I have been an advocate for an increase in tax on alcohol and on cigarettes, but particularly on cigarettes. That's been something I've been an advocate for, particularly from the time I became Minister of Health in 1987, because I've been aware of the arguments you make and seen the results of the studies that show the impact of tax policy.
But I am concerned that if we see an increase in tax on cigarettes before the differential between us and the United States is reduced, and people's behaviour starts to make purchase of smuggled cigarettes acceptable, it's really hard to then change the behaviour back again that says you shouldn't buy smuggled. Once there is a market in place for smuggled products and people are looking for them, unless that differential is reduced, more and more people will turn to the less expensive smuggled product, so it becomes a behavioural thing where increases in our taxes without that reduction could be counterproductive to the goals that we share.
Dr Ferrence: If nothing is done right away and we do raise our taxes, the United States -- just a moment, I've lost it. Why don't you comment.
Mr Taylor: I'd like to pick up one aspect of Mrs Caplan's questions, which come back with some recurring vigour to the question of whether, in effect, the saturation point has been reached in using the taxation lever with regard to tobacco.
I think the evidence probably says that it has not in strict terms of its impact on overall consumption, notwithstanding smuggling. But the issue, I suspect, is a broader social one, and it may show in individual behaviours in the way you're talking about it; that is, there is a level of intolerance on the part of the society for flagrantly illegal behaviour, and instinctively, as a citizen, I would suspect we are about at that point.
The judgement as to whether you should continue to pursue a narrow, health-based policy or whether the broader issue of flagrantly illegal behaviour is one you should take into account is, I guess, what legislators are elected and paid for.
Mrs Caplan: That's much of what the work of this particular committee is about as we look at the impact of the underground economy, because what I'm really concerned about is that as that behaviour becomes acceptable, we start to see an unravelling of the values within our society that could lead to the kind of society that we wouldn't like very much.
Mr Taylor: Right. But even so, we made the point that in our view, even if one put a cap on taxes, so to speak, for the moment, we are not helpless in the face of that because of (a) the possibility of working on the federal government to reimpose the export tax; (b) the general move towards financing health care in the United States is putting upward pressure on taxes; and (c) I suspect that some of the border states might be amenable to being persuaded that it's getting out of hand on their side of the border as well.
There probably is a commonality of interest surrounding this. There are a lot of ways to go. I don't think they have to be a tax-based approach.
Dr Ferrence: On the issue of reversibility of attitudes, I think there are two factors there. One is that when the export tax was imposed, there was an immediate effect on smuggling. It did go down quite substantially. The other point is that when and if these measures are put in place, smuggling will automatically be reduced. People will not have the option of saying, "Will I or won't I buy smuggled cigarettes?" They will become far less available. I think we have that control on behaviour.
Mr Sutherland: I too want to thank you for coming forward. I think everyone here agrees that the Addiction Research Foundation is seen and recognized as the primary source of information on addiction behaviour, particularly when it comes to tobacco, alcohol and illegal drugs, and you certainly know that your reputation goes far beyond this province and that you've done excellent work.
I want to follow up a little more in terms of what Ms Caplan was pursuing. I think most people understand the information; they understand the data that say the harmful effects tobacco will have, alcohol will have. They understand that. They can understand the basis for higher taxes, to a certain degree, on those products to try to reduce use. Yet with all that information, they're still willing to go out and purchase illegal cigarettes at a much cheaper price. I guess there is an individual sense of invincibility out there, despite all the evidence, that somehow they'll beat the odds.
You've put it back in our court, and that's fair enough, in terms of how you find that balance between an appropriate tax policy on these products to discourage that versus what type of other messages are going out there now that we're having a significant effort made by people in this province to avoid paying taxes. Once they start purchasing illegal cigarettes, does that lead them down the whole path to purchasing all kinds of other illegal products, underground products and smuggling products? How do we find that appropriate balance? Or maybe the problem is, how do we remessage that back to individuals and say we still need to maintain this high tax policy and need to understand that because of the other benefits, the health benefits, and the economic costs of addiction to cigarettes and inappropriate use of alcohol etc? How do we send out the right message to the average person who does smoke and wants their cheap cigarettes?
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Mr Taylor: In the economic times such as we live in, obviously that is a hard sell. One of the reasons for my far from subtle approach to this meeting, in trying to position the whole issue in the context of public health, was in effect to provide a model which you might choose to apply to your own approach.
One of the things that needs to happen through the work of my own agency, and government as a whole, for that matter, is to remind people of the health consequences of various forms of substance use or abuse and to remind them that taxes are there in part to protect them, because the laws of economics of supply and demand -- demand depending on how much a thing costs, in major part -- respond just the same way to drugs as they do to any other product. If the price is high, demand is kept low.
In effect, there is a complex sell required to remind people of the health and social problems that are attendant on these behaviours and to remind them that the taxes are in place not simply because we have an economic problem; they are in place because they have been designed to reduce demand and therefore to reduce the toll we all pay for using these substances.
Mr Sutherland: But don't you think most people take a personal economic view of this until it affects them personally, until they see some of the health side-effects or whatever; that the personal straight economics of being able to get cigarettes or alcohol cheaply outweigh those perceived potential health risks or societal risks?
Mr Taylor: Each of us is an individual and has his or her own sticking point. For example, I indicated in an earlier comment to Mrs Caplan that my personal view was that we probably reached that watershed between taxation as a public health means and the attendant illegal activity, such that probably it was a reasonable matter of public policy -- not for me to make, thank heavens; that's the kind of judgement of Solomon that you have to make -- to tilt the balance back a little bit, not by reducing taxes but by at least leaving them be a little bit until the illegality issue has been dealt with, but that there are ways of dealing with that which are not tax-based. Once that's under control, my sense is that the taxes should be ratcheted up again.
Now, that's a personal interpretation. Getting that across to the public is a complex message. We had a lot of trouble with this presentation precisely because it is a very complex area. We've tried to drive in on the essential point, to ask you to bear in mind that what you do does not simply affect revenues; it affects the health, in many senses, of the public.
Dr Ferrence: Can I just add to that? On the issue you raise, I think what we can do in terms of education is very limited. We have to rely on market forces. A very good example is with cross-border shopping: Now that the value of the dollar's changed, it's not hitting the headlines any more; it's becoming much less of a problem. We have to have faith that the same thing will happen if we implement the appropriate measures.
Most smokers want to quit smoking; something like 80% want to quit, so there is that motivation in the other direction, aside from getting them cheap. Also, many European countries have higher taxes than Canada does, so it's keeping the faith that we're in the right position rather than what you read in the press about it.
Mr Drummond White (Durham Centre): I was quite interested in your presentation and I do have a few questions. I'd like to hold to the issue of course of taxation and tobacco use primarily. The incidence of tobacco consumption here is at 27%. In the United States it's at what level?
Dr Ferrence: It's at a similar level in the United States at this point.
Mr White: So it's 27% here and it's at a similar level in the United States even though their taxes and the cost of tobacco is that much lower?
Dr Ferrence: Yes. That may sound surprising. The reason is that, historically, smoking started earlier in the United States than here and people started quitting earlier; the access to public information about smoking and so forth. What we have found is that their rate started to decline before ours. That's just looking at the prevalence of smoking. The actual number of cigarettes smoked per capita is now lower in Canada. When you look at a graph of per capita consumption you see a crossover a few years ago, where Canada went from being higher than the US to being lower, so we can't just look at prevalence figures.
Mr White: How much lower in actual consumption of cigarettes? I imagine that's a more significant factor. If I smoke five cigarettes a day, my risk of lung cancer is much less than that of someone who's smoking 20 cigarettes a day. That's really a more effective measurement, isn't it? How much lower is that?
Dr Ferrence: I don't have the exact data with me. It's certainly a few thousand per capita per year. Also, you have to look at long-term trends. As I said, what you see is an earlier decline in the US among both adults and young people, but these have levelled off now, whereas with the Canadian tax policy they have still continued to decline. You have to look at it relative to our history.
Mr White: You mention a significant relationship or change in terms of the tax policy having perhaps affected it, and Lord knows what the social milieu is and what particular effect it might have. But there's a difference in terms of consumption or proportion of smokers relative to social class and gender. I'm wondering if you could reflect upon the issue of class.
Dr Ferrence: What happened historically is that the first people to take up cigarette smoking were professionals, wealthy people, people living in big cities. This is a process that happens with many products and tobacco's not unique in that way. Because we're getting towards what we hope is the end of tobacco use, certainly the period of decline, what happens is that there's a diffusion process. The first people to quit are the people with the most education, the most contact with public health information and so forth. The people who are left smoking tend to be those with less education, lower income and so forth, but their rates are also declining, so it doesn't mean they're not getting any messages at all.
Mr White: I guess that flies in the face of the argument that those people who have the least income, ie, adolescents and working people whose income is less -- and I imagine your definition of class is probably defined by income level as opposed to workplace; certainly that was my experience of your research in the past. What you're saying is that those people who are least susceptible, who have the largest disposable income, are the ones who are being affected the most by tax increases.
Dr Ferrence: It sounds as if it would be that way. Actually, education level is much more important than income as a measure of this, but as I mentioned, rates of smoking among lower-social-class people are declining as well. It's just that they're declining later in history, so that's why they're higher at this point. It doesn't at all mean they're not susceptible.
Mr White: I'm not saying they're not susceptible; I'm sure they are. But if one looks at it, we have had an increase in taxation and the effect has been not upon those people who are most vulnerable -- ie, the working-class people, people on welfare or lower-income levels -- but, if we were measuring that one variable alone, the effect has been on those people who should be least vulnerable. The argument about taxes causing a barrier to tobacco consumption and therefore reducing consumption isn't borne out by the evidence. I'm wondering about other policies that might have that effect of reducing consumption, rather than regressive taxation.
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Dr Ferrence: The big decreases in consumption among people with higher education occurred in the 1960s and 1970s, before we had the big tax increases. What's happened since the early 1980s when the tax increases became quite sizeable is that we've had a very large decrease among adolescents, who are more price sensitive, so we certainly have that, and we are getting increasing decreases among those who have low incomes. There certainly is an effect. If you look historically over the past 30 years, the earlier effect had more to do with public education, which affected people with more education.
Mr White: So public education more than taxation has had the positive effect.
Dr Ferrence: I think it's a combination of both. The biggest decreases in young people have been since the taxes have been increased. Cigarettes are still relatively inexpensive. If they were $20 a pack, we would see much larger decreases in smoking. Even though the prices are so much higher than the US, because the demand for cigarettes is still relatively inelastic, which means that for a 1% increase in price there's less than a 1% decrease in use, it suggests we certainly are nowhere near the level at which we're going to get really sizeable effects of tax increases, but the tax increases are clearly having an important effect.
Mr White: At the moment with smoking prevalences, what we're talking about is predominantly what's referred to as regressive tax, a tax which affects those people least able to bear the tax.
Dr Ferrence: It is a regressive tax, but poor people can still afford cigarettes. If you compare it with Third World countries, where there are some people who spend half their income on cigarettes, cigarettes are still relatively cheap in Canada.
Mrs Haslam: Two quick questions. You talked about a saturation point. What do you see as the saturation point of taxes on cigarettes versus the equivalent of finally not smoking? Will there ever be a saturation point, and what is that?
Mr Taylor: I'm not sure I've understood the question fully.
Mrs Haslam: You're talking about taxes, that as taxes go up, cigarette smoking comes down. Ms Caplan was talking about the same situation a few minutes ago, and you were saying, "We're not there yet." I'm saying, what do you see is the saturation point? How far can you tax before it no longer has an effect on the amount of smoking or the number of people who choose to smoke?
Mr Taylor: I don't know if that's an answerable question, but it seems to me that as a statement of principle, we're a long way from it. What we have is a particular confusing factor at the moment, and that is an artefact of a market where there's a huge price disparity across a border so there's a lot of smuggling, so it may be time to call a pause to the escalation based on taxes, but note the word "pause."
Once that problem is reasonably resolved, I know of no evidence -- my colleagues may -- that says there is a saturation level at any reasonably foreseeable point. Quite the reverse: I would suggest that eventually, if the price becomes infinity, the demand becomes zero, so to speak, if there's no other way of getting the product. Now, push it up so high that you again induce some illegal means of supply and then again you've got sort of a ratchet to work against.
But if you accept the thesis in the case of tobacco that there is really no redeeming social virtue to it at all, that it's just a bad habit which some of us have or have had, it seems to me that basically you keep pulling the tax lever until such time as the last smoker quits. But I'm not sure there is any particular evidence that there is ever a point of complete diminished returns once smuggling or underground markets are held in check.
Mrs Haslam: One quick clarification and then I'll be done, Mr Chair. I was under the impression, and it was always a concern to me, that the evidence was that among young people smoking, young women were at a higher percentage and were increasing at a rate higher than young men. Am I clear that that is not correct any more? Is that what you said?
Dr Ferrence: There's been so much confusing evidence about what's happening with young women and young men smoking. Some of it, I think, has been fuelled by concern for getting more programs for women and more emphasis on women smoking. There has been a real neglect in the past, so I think that's an important thing that's been happening. In Ontario, there is almost no difference between the rates of current smoking among young males and young females. Young girls are more likely to be occasional smokers than young males, but when you look at daily smoking, it's not higher for young females, and when you look at half-a-pack-a-day smoking, it's higher for young males.
Mrs Haslam: That's fine. That's the clarification I was looking for.
Dr Ferrence: It's not to minimize the problem. It's a serious problem, and it's certainly equal to young males.
Mrs Haslam: No, I'm very concerned about smoking. I'm very concerned about the incidence of smoking by young people, and I'm very concerned about the increase again in smoking by young people. I had always talked about young women and I had seen facts and figures on it. Some of the reasons were asinine for why young women smoked more than young men, in that young men hung around young women because they borrowed cigarettes. Some of the information was just phenomenal, and now I'm hearing from you that it's on a more level basis between the sexes at a young age. I'm very concerned, period, about the young people and the incidence of them starting smoking and the percentage who are continuing to start to smoke; that's all. Thank you.
The Chair: Thank you very much. I'd like to thank the representatives of the Addiction Research Foundation for making the presentation before the committee today. Thank you very much.
Before we recess, I'd like to let the committee members know that apparently we have a vote following routine proceedings today and we do have a full slate this afternoon, so if you would be so kind as to be here as promptly as possible it would be appreciated.
Mrs Caplan: So there's no subcommittee now?
The Chair: No subcommittee now. We will have one this afternoon. This committee stands recessed until 3:30 this afternoon.
The committee recessed from 1147 to 1547.
The Chair: The standing committee on finance and economic affairs will come to order. We will continue our deliberations on the underground economy.
Our first presenter this afternoon is Mr John Ronson, representing the Canadian Cancer Society, Ontario division. Welcome to the committee, Mr Ronson.
Mrs Caplan: Point of order --
The Chair: Please make yourself comfortable, and when you are comfortable, you may proceed, except I'm going to deal with Ms Caplan's point of order.
Mrs Caplan: On a point of order, Mr Chair: I have a question, really, but it is a point of order legitimately. When the committee adjourned just before noon --
The Chair: Recessed.
Mrs Caplan: -- recessed, you said there was going to be a vote at the committee immediately following routine proceedings.
The Chair: No. I said there was going to be a vote in the House immediately following routine proceedings.
Mrs Caplan: Thank you for the clarification. I thought there was another vote here on something. I couldn't figure out on what.
The Chair: I'm sorry I didn't make myself clearer with regard to that.
Mrs Caplan: I'm glad to know that's been cleared up.
Mr W. Donald Cousens (Markham): It's a good way to get the member for Oriole out to a meeting.
Mrs Caplan: I always like to be there for the vote.
The Chair: Anyway, we'll come to order and allow Mr Ronson to immediately proceed with his presentation.
CANADIAN CANCER SOCIETY (ONTARIO DIVISION)
Mr John Ronson: I believe copies of my submission on behalf of the Canadian Cancer Society, Ontario division, and also the Ontario Campaign for Action on Tobacco have been distributed. I'd like to go through this submission and perhaps supplement it in a couple of places. I should say that --
The Chair: Please carry on. The members from time to time will wave their hands at me, indicating they'd like to be on the list of questioners.
Mr Phillips: Mr Chairman, that's not why I'm raising my hand. Sorry, Mr Ronson. We're starting at 10 minutes to 4. Have we a schedule of time, just so our speakers and ourselves know whether we're going to stick to this?
The Chair: Well, if we take 45 minutes for each presentation, we will actually be going a little beyond 6. So I'll shave about a minute, I guess, off each presentation and question period, and we should be able to allow everyone time.
Mr Phillips: So we'll spend 40 minutes with each.
The Chair: Well, 40 to 45, yes.
Sorry about that, Mr Ronson. Please continue.
Mr Ronson: That's okay. Just to introduce myself, I am a volunteer with the Canadian Cancer Society. As a representative of the cancer society, I also chair a coalition which I've introduced, the Ontario Campaign for Action on Tobacco, again in a voluntary capacity. As you may know, it is a group made up of a number of health organizations, including the Ontario Medical Association, the Heart and Stroke Foundation of Canada, the Lung Association, the cancer society and the Non-Smokers' Rights Association.
To move, then, to the presentation: In recent years there's been a dramatic rise in tobacco smuggling, and this tax evasion is harming the objectives, both health and fiscal, of increased tobacco taxation.
As you've probably heard, almost all contraband tobacco is manufactured in Canada, exported to the United States and smuggled back to Canada. That's largely because Canadians don't like American cigarettes. So they smoke Canadian cigarettes. Even if they go to the United States, if they're snowbirds, they tend to buy Canadian cigarettes when they're in the United States.
The large tobacco tax increases by federal and provincial governments during the 1980s and also in 1990-91 made tobacco products less affordable, which dramatically decreased consumption, especially among children and adolescents. I know that you already heard last week from David Sweanor and he handed out some graphs. I'm not sure if he gave you a copy of his article, but I arranged to have your clerk distribute that as well, which has some graphs in it that show the relationship between tobacco taxes and consumption. We're not suggesting that tobacco taxes are the only thing that's affecting consumption, but clearly there is a very dramatic relationship.
Total tobacco tax revenue collected in Canada by federal and provincial governments increased from $2 billion in 1981 to $7.2 billion in 1992. During that period, revenue increases occurred every year. This increase in revenue is all the more impressive, considering the unprecedented decrease in consumption which occurred during the same period. That decrease is estimated at approximately 40% over the last 10 years, which is one of the highest rates in the world.
Despite declines in overall market size, the tobacco industry earned record high profits in 1992 for the sixth straight year. This is attributable to manufacturers' price increases, which have increased by 74% since 1984. Our estimate is that tobacco companies in Canada earned more than $100 million in 1992 in incremental profit from sales which ended up as contraband -- in other words, that were exported from the country and returned as smuggled cigarettes.
While the tobacco industry claims that it is opposed to smuggling, industry activities are very much at the root of the problem. Companies have set up sister companies in the US and have made marketing deals with other American companies. The purpose is for Canadian companies to get a bigger share of the export market which ends up as contraband.
Tobacco smuggling is a serious problem and will require government intervention to end it. However, the industry has publicized the problem as part of its advocacy efforts to pressure governments to roll back tobacco taxes through industry front groups such as the Smokers' Freedom Society. When the federal government implemented an export tax on tobacco in February 1992 to curb smuggling, the industry successfully lobbied the government to repeal the tax only two months later. The tax, during the brief time that it was in place, was extremely effective and that is undoubtedly the reason for the massive lobbying of the federal government that took place and led ultimately to the rollback of that tax. In return for that repeal, the industry promised to cooperate to control smuggling. But instead, smuggling has only increased.
Reducing taxes is the wrong response to the smuggling problem. This would reverse the enormous health benefits achieved through higher taxes and increase the incidence of disease and death caused by tobacco industry products. I'm not sure whether you have this report, but this is the report of our chief medical officer of health for Ontario, which very clearly documents the health effects of tobacco. If we can get consumption down and if we can get people to stop, we know that the health effects over time will be dramatic. Of course, it would also decrease the amount of revenue collected by the federal and provincial governments.
I notice that your clerk also handed out a copy of this clipping from the Globe and Mail this morning on Quebec's position. I just think their guy's right out to lunch. With a cut of that magnitude he may decrease the differential in terms of the difference between the price of smuggled cigarettes and the price at retail, but he's not going to get his revenue back, because the differential will still be significant. The smuggling's going to continue and his revenue's going to drop. This must be new mathematics or something, because I have no idea what the Quebec Revenue minister is doing.
In terms of what needs to be done, first on taxes, in our submission, federal and provincial governments should encourage US federal and state governments to increase their tobacco taxes. This would be the most effective way to curb smuggling. President Clinton has announced that an increase of US$1 per pack -- that is $10 a carton -- is expected to help pay for health care reform, and certainly from a healthy public policy standpoint here in Ontario we can only hope that increase goes through Congress.
Within Canada, governments should focus on the source of the problem, namely, Canadian tobacco companies that supply the products which end up as contraband. The federal government should reimpose the export tax to increase the cost of tobacco from Canadian manufacturers to the smuggler. The government could consider refunding the export tax when there is proof that tobacco went to a legitimate market. Alternatively, exports should be limited or prohibited altogether.
All provincial governments should have agreements with the federal government to ensure that provincial tobacco taxes are collected at the Canada-US border by federal customs officials.
I'd also like to talk to you about the proposed Ontario tobacco act. Despite the fact that the federal government has at its disposal the most effective tools for controlling tobacco smuggling, provincial governments in Canada do have access to measures which could significantly decrease the trade in illegal cigarettes and reduce this threat to law, order and public health. In Ontario, the proposed Ontario tobacco act, which has been much promised but not yet introduced, in conjunction with rigorous enforcement has significant potential to reduce smuggling of tobacco products into the province.
Just to deal with the specific items under that: implement prominent markings on cigarette packages. Clear markings on legal cigarettes indicating that taxes have been paid would make contraband cigarettes less attractive to retailers. These tax-paid markings would also assist enforcement of anti-smuggling laws, discourage consumers from purchasing unmarked contraband cigarettes and provide evidence for law enforcement officers.
Plain packs: The Ontario tobacco act could also influence cigarette packaging by requiring that cigarettes in Ontario be sold in plain packs, which would be most easily distinguished from those sold elsewhere or by requiring prominent health warnings in addition to the proposed federal warnings, which would also distinguish cigarettes manufactured for legal sale in Ontario from those manufactured and smuggled.
License tobacco retailers: Retailers whose licences to sell tobacco products could be revoked would be much more likely to resist the temptation of profiting from illegal traffic in cigarettes. Like the Ontario Liquor Licence Board, the Ontario government could set up a licensing body for retailers of tobacco products. This body could be self-financing by licence fees and be responsible for monitoring and enforcing the terms of licences.
Reduce the number of tobacco retailers: If tobacco products are removed from pharmacies, health care facilities and educational facilities and if remaining vending machines are banned, the number of legitimate sales outlets for tobacco will be reduced. This will enable increased enforcement of existing tobacco control laws on remaining tobacco product retailers, such as grocery and variety stores.
Reduce demand for tobacco: Tobacco smuggling, of course, is only profitable so long as there are smokers who demand the product. The introduction of the Ontario tobacco act as part of a comprehensive tobacco control strategy will reduce the number of smokers in Ontario, particularly children and adolescents who are most attracted by the low price of smuggled cigarettes, and ultimately decrease demand for cigarettes, whether sold legally or illegally, because we know that if people don't start smoking by the time they're about 19, they aren't likely to start at all.
An Ontario tobacco act would also serve as an example to governments elsewhere. In several US border states, for example, New York and Michigan, state governments attempting to raise taxes on tobacco industry products could use moral and technical support in their fight. Ontario can provide the benefit of its experience with higher taxes to support similar taxes in the US. When taxes rise in the United States, of course, smuggling to Canada will decrease because the profit element will be reduced, if not eliminated.
By passing the act, the government of Ontario can be assured that not only is it doing everything in its power to control tobacco consumption and reduce smuggling, but that by example it is encouraging other provincial governments, the Canadian federal government and US federal and state governments to respond responsively to the tobacco epidemic and the threat of cheap and illegal tobacco products in their own jurisdictions.
Finally, or second to last on enforcement, the allocation of resources to enforcement should be increased. The cost of added resources can pay for itself through fines from increased prosecutions, from the sale of seized vehicles and from reduced smuggling. Sales tax inspectors should be trained to be on the lookout for contraband.
Indian reserves across the country are important contraband distribution points, often selling contraband openly, as is indicated by this Globe and Mail article today. Effective enforcement on reserves is required.
Penalties for smugglers should be increased, depending on the jurisdiction. A smuggler can't re-offend if he or she is in jail. Prosecutions against smugglers could also be taken for failing to have the necessary health warnings or labelling or for advertising tobacco. Smugglers should be prosecuted under both federal and provincial legislation when contraband is intercepted.
Finally, we would plead that governments increase their consultation with health and tobacco control organizations when considering anti-smuggling measures. When implementing new provisions, there should be less acquiescence to the tobacco industry and faster action.
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In summary, I would make two points. First, a tax rollback would be a disaster. It would be both a health policy disaster and a fiscal policy disaster. Second, as I've emphasized in my presentation, there are workable alternatives to a tax rollback, as I've outlined.
I'd be pleased to answer questions from members of the committee.
The Chair: Thank you very much, Mr Ronson. We have about 30 minutes, maybe a little less than that. We'll start with Mr Phillips. I'll divide the time evenly, of course, between caucuses.
Mr Phillips: Thank you for the presentation, Mr Ronson. We're trying to do many things with this committee. The first is to try and get some idea of the magnitude of the issue.
I listened to the brief. I'm not sure there's any indication in the brief from your organization of how big you think this issue is. You show revenue going from $2 billion to $7.2 billion, which on the face of it kind of looks like there isn't a lot of smuggling going on if revenue keeps going up. On the other hand, I think the Ontario revenue from tobacco tax peaked in 1991-92 and is heading down.
The purpose of all this is, can you give us any thought on what you would have thought would have been the revenue in Canada or in Ontario without smuggling and the implications for the revenue of smuggling?
Mr Ronson: At best I could give you an educated guess, but the problem is enormous. We're talking hundreds of millions of dollars, we believe, in lost revenue. Frankly, you're probably privy to better statistics, through your Finance people, than we are, but I don't think the problem can be underestimated. It's a very, very large problem and appears to be increasing rather than decreasing. I'm sorry I can't be more specific.
Mr Phillips: That's fine. You've no doubt seen the study funded, I think, by the tobacco industry.
Mr Ronson: The Lindquist study?
Mr Phillips: Yes.
Mr Ronson: Yes, I'm familiar with that study.
Mr Phillips: That I think indicated, in their opinion, that in Canada one out of six packs was here illegally.
Mr Ronson: That's their estimate, although my understanding, if we're talking about the original study, is that after communication between the Non-Smokers' Rights Association and the authors of the study, they reduced their estimate of the impact of smuggling by a considerable degree because they agreed that their methodology was not entirely accurate.
But having said that, there's no question it's a big problem. Our perception, and I must say it's only a perception, is that the problem is largest in the province of Quebec, but it's a very large problem in Ontario as well, less of a problem in western Canada and a significant problem in Atlantic Canada as well, both coming across the border and also because of Saint Pierre and Miquelon and its relationship to Newfoundland.
Mr Phillips: I'm not sure whether the study was amended before they reported the one out of six or after they reported one out of six.
Mr Ronson: I could check on that for you.
Mr Sutherland: I think it was after; I think the one out of six was what they were using publicly.
Mr Phillips: Then they've downgraded that some.
Mr Sutherland: They must have, yes.
Mr Phillips: As I say, we find the range of estimates fairly large. You mentioned just briefly the Quebec experience. There's a report today that you've seen, I know.
Mr Ronson: Yes, I have it in front of me.
Mr Phillips: You mentioned it. What's your feeling on that approach? I know you talked about taxes, but is that something that's likely to happen?
Mr Ronson: I think it's anyone's guess. I don't know what the views of the new Liberal administration in Ottawa will be, whether they'll be supportive. I think the federal Conservatives generally appeared to have bought into the idea of using taxation policy as a healthy public policy mechanism, and I think to their credit. Whether the Liberals will continue that it's too early to tell, but I think it's worrisome, although I would hope that the federal Finance people in the department will say this doesn't make any sense, because as I said in my presentation, you have to eliminate the differential, or effectively eliminate it or come close enough that there's no significant margin for the smuggler, or you haven't solved the problem.
If your smuggling doesn't decrease but you decrease your taxes, you're not only decreasing the taxes on the stuff that's going out and coming back, but you're decreasing the taxes -- there's no tax on that. But on the legitimate portion, which even under the tobacco industry's estimate is still five sixths of the market, you've decreased the taxes as well. When from a fiscal standpoint we're looking at significant deficit situations both at the provincial level and at the federal level, it doesn't make any sense.
Mr Phillips: Have you any advice for us on the impact on smoking, just hypothetically, saying taxes were reduced? Is there any correlation between price and smoking? Believe me, I'm not advocating that; I'm just saying it would be helpful for the committee if there is any evidence of that.
Mr Ronson: There is, actually. The study is a little bit dated now and it's not entirely clear whether the relationship still applies, but there was a study done -- and I'd be happy to provide you with a copy of it -- on the relationship between price and consumption.
You have to be careful to distinguish between what's called consumption and prevalence. In other words, someone may continue to smoke, but they may smoke less or somebody may quit and that means they don't smoke at all. This one measured consumption, which both measures people who quit altogether and also measures people who may just cut down on the amount they're smoking as a result of price increases. The study, which was done out of Michigan, estimated that for every 10% you increase the retail price, your consumption will drop by about 4%. They also estimated that among teenagers, who are particularly price sensitive -- they don't have a lot of disposable income -- for every 10% you increase the price, the consumption will drop by about 14%. At some point, that 14% --
Mr Phillips: A $1-million pack.
Mr Ronson: Yes, that's right. At some point, that 14% is going to plateau or whatever, but there clearly was a relationship, and if you look at the graph in David Sweanor's article I handed out, you can see the relationship. We're not suggesting that's the only factor driving the relationship. Clearly, public education and passage of non-smoking bylaws by the government have an impact as well, but there's no question that tobacco's no different than any other product in that respect: If you raise the price of a product, generally speaking, people will use less of it.
The Chair: Mr Kwinter, we have about two minutes.
Mr Monte Kwinter (Wilson Heights): If I could just get a comment from you, it would seem to me that taxation would have a direct correlation to entry-level smokers, that if the price is too high, there's a disincentive to get involved.
Mr Ronson: Correct.
Mr Kwinter: What do your studies show about committed smokers, addicted smokers? It would seem to me that the government policy has always been that it looks at cigarettes not as a health issue but as a revenue issue. How does the tax impact on those smokers?
Mr Ronson: I think in one of two ways. I think government increasingly does look at it both as a fiscal issue and as a health policy issue. I think the Treasurer certainly characterized it as both a fiscal and a health policy issue in his 1991 budget, as did -- what was his name; how quickly we forget -- Mr Wilson in his federal budget, when he increased prices by $2 a carton.
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But to your question, a really addicted smoker may simply have to absorb the increase because of the addiction, or may cut back. The research suggests that often it's a trigger point that causes people ultimately to quit smoking, or they may try several times and fail and fail and fail, but it will be a trigger point and the trigger point could be a tax increase and they say, "That's it, I'm not prepared to pay $5 a pack for cigarettes," or it could be their workplace goes smoke-free, for example. So a tax increase can serve as one of several types of trigger points that cause people once again to attempt to quit or to finally succeed in quitting. I don't know; does that answer your question?
Mr Kwinter: Yes.
Mr Carr: Thank you very much for your presentation. Let me start with this question: Would you be able to break down what the cost of smoking would be to the health care system in the province of Ontario?
Mr Ronson: I could try and get you a number for that. The number, I can tell you, is enormous. It's in the billions of dollars, and I wouldn't want to be quoted on this, but I think the estimates are somewhere between $3 billion and $4 billion, although it may be more.
A reasonably heavy smoker, the evidence suggests, loses about 15 years of life as a result of the habit. This of course is statistics; you can't apply this to any one individual. But someone who would otherwise live to be 75 might die at 60, for example. If you look at specific diseases, lung cancer, for example, and the cost of treating lung cancer is very significant, but if you get it, 90% of people who get lung cancer are dead within five years after they get it because all the treatment really is doing is keeping you alive a little bit longer. It's very expensive to treat people who have lung cancer.
One of the largest costs which a lot of people, certainly the general public, don't even recognize is in heart disease and stroke. It's the largest preventable cause of heart disease and stroke. Our hospital system spends hundreds of millions of dollars on the treatment of people with heart disease and stroke. Some people say they're going to die anyway. I don't know about you, but I'd rather die at 80 than at 65.
Mr Carr: You should try to avoid it if at all possible.
Mr Ronson: Exactly; I think particularly with young children. Teenagers think they're invincible. My oldest is about to become a teenager; she's close to it. Kids at that age don't think about health risks, and yet the vast majority of people who get addicted to cigarettes get addicted when they're teens.
Mr Carr: Isn't it true, though, on page 3, that some of your recommendations of what you want to do, it would seem to me, are not going to have much of an impact in stopping people anyway?
Mr Ronson: Which ones in particular?
Mr Carr: All three. You know, if you implement the prominent marking, and most people know about that, the plain pack; license tobacco retailers; cut down the number of tobacco retailers.
Mr Ronson: I agree; some of those things won't.
Mr Carr: If all this was brought in, how much do you see it being reduced? Can you give us percentage terms?
Mr Ronson: It's difficult to single out any one item and put a percentage beside it because, as I said in answer to Mr Kwinter's question, you can't isolate any specific factor and say, "That was it." It's like, what's the trigger point to convince someone ultimately to quit smoking? But in terms of plain packs and markings, plain packs and those things are not aimed specifically at getting people to quit. They would be aimed at making it easier for enforcement people to identify that a particular package was in fact smuggled. It would also, at retail, tell a customer exactly that this pack is not a pack that has had tax paid and might discourage at least some people from making the decision to buy a package of smuggled cigarettes.
Mr White: I'm very impressed with your presentation. We did several in regard to the issue of cigarette smuggling and the issue, frankly, of sales of uncut tobacco. The main means by which you suggest that revenues can be secured in regard to the cigarette taxes is through the federal export tax and through the American states which are bordering on us increasing their taxes.
Mr Ronson: That's correct.
Mr White: They aren't of course issues which we have any direct control over.
Frankly, I found it very striking last spring that the federal government so easily succumbed to the influence of the tobacco lobby. It was probably less than coincidental that the president of that lobby happened to be a prominent member of their government party. I hope that federal export tax will come in again and will secure revenues and of course the very issues you're concerned about. Is the Canadian Cancer Society lobbying the new federal government?
Mr Ronson: We absolutely are. It's a bit of a new move for health charities, but I'll share with the committee that both the Heart and Stroke Foundation of Canada and the cancer society nationally each has full-time people in Ottawa working not just on tobacco but on other issues of interest to our organizations.
For both the heart and stroke foundation and the cancer society, tobacco is our number one issue and we are lobbying very hard both to maintain the levels of taxation to fight the kind of thing that Quebec is proposing and to have the export tax put in, because, as you point out, Ontario has no direct ability to influence either of those things, except through interprovincial, I suppose, and international discussions.
It's really protecting your revenue base as well, because one of the reasons you've suffered an erosion here in Ontario is that if that export tax were in place, you would not be suffering the same fiscal erosion of the provincial tax portion of the price of a package of cigarettes.
Mr White: So you are lobbying very strongly --
Mr Ronson: Very strongly.
Mr White: -- to reinstate the export tax, and you're hoping the new federal government will respond positively in the interests of Canadians.
Mr Ronson: Indeed, and indeed in the province of Quebec we are lobbying very strongly at the provincial level to fight against the kind of move that the Revenue minister is reported to have announced in today's Globe and Mail.
Mr White: In today's Globe and Mail, if I can refer you to that again -- I will attempt to be brief, Mr Chair -- obviously here not only is it the Revenue minister, and Quebec I understand has the highest level of tobacco consumption and prevalence of smokers in the country.
Mr Ronson: That's correct.
Mr White: I'm sure it would be very popular for them to do away with cigarette taxes, and they're of course going into a provincial election. They probably want to secure that support. This would be something which would require the agreement of the federal government too, wouldn't it? If they were to cave in here, they would have to cave in across the country.
Mr Ronson: That's correct. Well, let me be clear. The province can control its portion of the tobacco tax. What M. Savoie is saying is that he won't reduce it unless the feds also agree to reduce it by an equivalent amount. But if he wanted to -- you'll see from the little pie chart there -- he has sufficient tax revenue that he could take $1.50 off by himself. I've said that I don't think it's a smart move. I think what he's doing is dumb. It would be really dumb for him to take the $1.50 all himself, because Quebec is in a significant deficit situation as well.
Mr White: Sure. But the thing is, if he were to take 75 cents off the federal tax, that would have to come across the board.
Mr Ronson: Yes, right.
Mr Sutherland: Mr Ronson, I appreciate your presentation. Everyone's well aware of the excellent work the cancer society has done and continues to do. We had the Addiction Research Foundation in this morning. They made a presentation and talked about some of the similar issues you have raised, but I want to ask you the same question I asked them, and that is, I think most people understand the health risks associated with smoking, alcohol etc, that type of thing, and the use, and you mentioned young people feeling that invincibility.
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I get a sense that a lot of people, individually, not only young people but adults, feel that same degree of invincibility. As much as you can say that the health risks are there, they shouldn't be smoking etc, until it actually has a real impact on them as an individual, economic considerations are going to take precedence. If they're smoking or if they're doing other types of activities, they're going to want to get the lowest price, ie, smuggled cigarettes for that.
The reason for having groups like yours here is in that context and how starting those smuggling patterns and those routes may lead to more extensive underground economic activities: If they can get smuggled cigarettes, then they'll want other smuggled goods. "How do you justify the high taxes?" is what many people would ask. Many individuals would say that despite all the health evidence and whatever, if people are getting this much involved in using smuggled cigarettes and other parts of the underground economy, how do you continue to maintain high taxes?
Mr Ronson: It would be more difficult to maintain if there wasn't a way to solve the problem, but I think I've suggested a number of ways in which the problem could be solved without lowering taxes. As I discussed with Mr Carr, the evidence in terms of the health effects is, as you said, pretty well documented. "When we've got something that's working so well, both as a fiscal policy when we've got a big deficit and as good health policy, why wouldn't we try to protect it?" would be my rhetorical response to your question.
Mr George Dadamo (Windsor-Sandwich): Tomorrow will be two years since I gave up smoking, so I feel really good about that.
Mr Ronson: Congratulations.
Mr Dadamo: Thank you very much. I had tried many, many times, like everybody else, to give it up and was not successful, but I guess it took a trip through the Metropolitan General Hospital cancer clinic. John Connors took me through and explained to me that every Monday morning they get, on average, about six new cancer problems, whether they're lung cancer or whatever it happens to be.
My father died of lung cancer in 1979. You'd think I would have been bright enough to give it up then, but I didn't. But now I'm 40 and non-smoking. I feel good about that.
Mr Ronson: Good for you.
Mr Dadamo: It's a good thing we don't have television ads that pollute the airwaves with cigarette commercials. That's a saving grace, I suppose. But I guess we have to spend that time in educating kids that it's not cool to smoke any more at 13 and 14 years old, and I think you're right, that if they reach 19 or 20, they're adult enough to think they're not going to smoke at all. What are the suggestions for educating these kids not to start up and put those cigarettes in their mouths at all?
Mr Ronson: It's difficult. I remember a discussion actually with Mrs Haslam in her office about this very issue and talking about her teenagers and the issue.
One of the things we're looking at right now, in fact we expect to have research released probably before the new year, the cancer society has funded a study on plain packs, the idea of having a package with none of the fancy pastel colours that appeal to teenage girls, for example, or the macho colours that appeal to teenage boys, and whether plain packs are a turn-off for teenagers. Our preliminary indication is that in fact they're a significant turn-off.
You used the word "cool," and I think that's exactly how teenagers view it. The economic stuff like the tobacco tax is important, but it's not the only way. We have to look at ways so that kids don't find it cool any more.
Another thing that seems to be working through some research that the cancer society has done is some of these peer programs -- and they're not just applicable to tobacco, they're applicable to drugs and alcohol and other things -- which teach teenagers how to resist peer pressure and how to deal with it. Everyone is susceptible to peer pressure, but I think we all know that teens in particular are susceptible to peer pressure.
I think, frankly, one of the things we're most discouraged about at the cancer society is the number of young teenage women, girls, who are smoking.
The Chair: Thank you very much for making your presentation before the committee today. You have a question? Mrs Haslam, I think our time has expired.
Mrs Haslam: I'm always late.
The Chair: I understand that you have had the opportunity to speak with Mr Ronson at length in your office, as he indicated. Anyway, thank you very much, Mr Ronson, for making your presentation before the committee today.
Mr Ronson: You're welcome. Thank you.
JACK M. MINTZ
The Chair: Our next presenter before the committee today is Mr Jack Mintz, if you would please come forward, sir. Make yourself comfortable. I understand you're representing the University of Toronto. Is that correct?
Mr Jack M. Mintz: That's correct.
The Chair: Whenever you're comfortable and ready, you may proceed.
Mr Mintz: First of all, I want to thank the committee that invited me to make this presentation. When I was asked if I would talk about the underground economy I wasn't quite sure whether you viewed me as a participant in the underground economy. I can assure you I'm not. Especially when you're salaried at the university, you know you're not part of the underground economy.
My background is that I've been very much involved in tax policy, not only in terms of the theory of tax policy, but in terms of application of policy. I've dealt with and consulted with a number of governments. Actually, this is the first opportunity I've ever had to really think about some issues of the underground economy, so I wrote up a short, seven-page piece for this day. I don't often do that, but I was intrigued by the questions.
I'm not going to read it, but simply I want to raise a few points about tax policy issues that arise with respect to the underground economy. To do that I want to go through a few points which I think might be useful in outlining some of the issues that are involved with the underground economy.
One of the first points I wanted to raise was really what we mean by the underground economy. I think there's been a lot of confusion over the topic. In fact, probably there are several definitions that various people have and, when talking about the underground economy, some of the problem is maybe just trying to understand what people mean, exactly, by the concept of underground economy.
I'm going to use a particular definition which is different than maybe what most people might think of as the underground economy. I think most people think of the underground economy as when people would normally use market transactions that would be recorded with receipts, etc, they sort of try to hide their affairs by using cash or not report income etc, so they're trying to hide something they're doing. That might be a useful definition in terms of thinking about some of the public policy issues, but I don't think it's really comprehensive enough.
My feeling is that the way of thinking about underground economy is really to think of it in terms of what many experts like to deal with, especially when they go to developing countries, that there are formal markets and informal markets. Formal markets would be transactions that are normally recorded. There would be receipts, there would be some way of trying to measure what people actually do. Then you have what one might think of as the informal economy where there may be no recorded transactions, no receipts, and just cash being used for transactions.
Recently I've been working with a number of countries but I've been down in Guyana. In Guyana you have just almost -- a large portion of the retail sector is done on a cash basis. People drive with their trucks up to the market and they sell goods out of them. There are no receipts being issued, so you can imagine trying to have a retail sales tax in Guyana. It's just impossible, because the only firms that would be paying it are a few large retail stores, and if they had to charge retail sales tax on the goods they sell, they would get hammered by the informal market, which is so large.
I'd like to think of the underground economy really more in terms of the informal economy. That raises, actually, a very important point for policy purposes: you will always get in every economy, even in developed economies like ours, some cash transactions being undertaken. As a result, there'll be no receipts, no reporting of income and of course if you try to tax it for income tax purposes or for sales tax purposes, you're going to have trouble doing it.
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I'm sure just about everybody around this table has engaged babysitters, even teenagers, to look after children once in their lives. I did. I'm positive my 14-year-old babysitter who looked after my kids did not claim income for income tax purposes. I'm sure that we would not try to hit them hard for the fact --
Interjection.
Mrs Haslam: Mr Phillips wants the Treasurer to have the auditing service go after the 14-year-old babysitters, so Mr Phillips is requesting all their names and addresses.
Mr Mintz: Let me go on a few more. I'm sure some of us have gardens and I'm sure we don't declare the imputed income that we get from selling carrots and lettuce to ourselves, which is a form of income. We know that for tax policy purposes, we just don't try to tax every source of income like that. In other words, there are always bound to be some things that you can't get at from a tax point of view. One has to understand the underground economy in a sense as being a limitation on taxing powers. That's the way I like looking at the underground economy.
There are a number of factors that lead to why transactions could be cash, and there are economic factors. I wanted to raise a few of those because I think they're important to keep in mind.
First, in terms of developing economies, we get organizations that become big and as a result we have employees who are hired and there are clear transactions that are being done. As a result, these things are measurable, and so what you get in developed economies like Canada is the size of the informal market is very small.
Also, with the advent of computerization, we're starting to get even more recording of information; for example, what banks can supply. We've seen this through the income tax, where social insurance numbers now are required by banks for bank accounts. Of course, if the government wants to check whether people are reporting all their interest, it can simply run through the computer system a check on social insurance numbers and make sure that people are reporting their interest in that way.
This is all possible now with computerization. We wouldn't have been able to do this about 20 years ago. From my understanding of recently in the United States, this is exactly what they're moving to. They're developing a very sophisticated computerized system for the income tax in the United States and they will be able to use a lot of bank records for checking what people are claiming, because of the use of the taxpayer identification number in the United States, which is the same as the social insurance number. We can move and have moved in those directions as well.
There's another side of technology changes that I think is important, and I want to raise this because later on it's important in terms of saying something about policy, and that is that there have been changes in communications and transportation technologies, and these changes have allowed people to actually deal with many governments at one time. In other words, you can travel to another country, establish bank accounts, you can communicate quite easily with people in other countries, and what it means is that it's becoming more and more difficult for governments to administer taxes, because people can try to escape a tax system within a country by going abroad.
It also means that when you're talking about provinces and municipalities, they will feel even more constrained in terms of their tax administration because of the ease with which people can just go to other provinces. If you talk to anyone in the European Community, this is a very serious issue in the EC, where they have to deal with the treatment of capital income and people claiming income that they get from bank accounts. As is well known, Luxembourg doesn't tax these things very much. There are no withholding taxes in the European Community. It's very easy for a German citizen or for a Belgian to have a bank account in Luxembourg, earn interest and never declare it to authorities. Those kinds of problems are becoming increasingly important, which suggests that some types of tax bases are going to be more difficult for governments to handle. I'm going to get back to this issue at a later point.
These are what I call economic factors. There are other things that create the underground economy and these are the things which you're talking about. Clearly, there are things like laws and regulations that will affect the underground economy. If you have exchange controls, as in some countries, then you end up getting black markets in the trading of currencies, and these are ways of trying to avoid some laws and regulations.
The same thing can occur with all sorts of laws and regulations that we have to deal with, and some regulations actually end up discouraging the underground economy. For example, if someone wants to undertake a certain profession he may have to be registered and then there's a certain amount of information that may have to be provided, as we've seen with banking legislation. As a result, the underground economy is actually curbed by the regulatory process.
The same thing on taxes. Taxes can discourage people from reporting income or reporting sales. There are lots of stories to talk about, such as the GST and the income tax. But also sometimes the tax system actually encourages people to become known whom the government wouldn't know about otherwise. For example, in Canada we have the refundable tax credit, which is actually quite a unique system compared to many countries throughout the world, and as a result we get just about the whole Canadian population filing for income tax. If you go to other countries, you'll see that one of the big problems they have is non-filers, people who don't file for income tax, and trying to find people to make sure that they do file for income tax. We have a system that actually encourages people to file, and as a result we have the people.
Let me run through just three quick policy issues.
What does the underground economy imply in terms of tax policy? First of all, high tax rates will create more of an underground economy, but it won't cause it for every kind of tax and every kind of base. You have to think through what kind of tax bases are going to be affected.
The taxes that are affected most by the underground economy are those that have to depend on self-assessment, where individuals assess how much they actually pay, such as under the income tax and the GST and even the retail sales tax to some degree.
It will also occur where it's easy to hide the information. The services sector is often one in which it's very easy to hide information because the goods are sold at the final point of sale, margins are big in terms of labour effort that goes into providing the service and it's easy to have a cash deal and not report the income. It's very difficult for the government to find out whether there has been a transaction made or not.
When you do have some areas of the tax system where there's a large underground economy, it does suggest that you may need to have tax policies where maybe lower taxes will have to be assessed in reaction to it, because otherwise, if the tax rates get too high, you end up getting such a large underground economy that maybe you're raising the revenues but people get discouraged by the size of the underground economy and it encourages other taxpayers not to comply with the system.
Another part of tax policy which is affected by the underground economy is tax administration. I think you've had a lot of discussion in the past -- I saw some of the minutes of past meetings -- but more improvements in tax administration can curb the underground economy. Here actually I'm quite positive about future trends, because I think with computerization and the kind of technologies we're developing, at least in terms of within Canada and Ontario, tax administration can be very successful in curbing the underground economy to some extent.
The third area where I think tax policy is very important in terms of how the underground economy is affected is to think about tax harmonization. It is more difficult for provinces, for example, to run the income tax system and try to administer it compared to the federal government, especially when it comes to capital income, where capital income could be easily hidden in other provinces.
It's also true that in terms of some taxes, such as the goods and services tax, where you have business-to-business transactions etc, some of these things are more difficult to run at lower-level governments than they are at the upper-level government. In fact, corporate income tax is usually one where most tax experts tend to argue it should be basically a federal responsibility, because it's very difficult for individual provinces to levy corporate income tax, given the way corporate income can be moved across jurisdictions very easily.
So when I bring in the tax harmonization argument, what I'm trying to say is that in Canada we've developed a very good system in terms of corporate and personal income tax harmonization where the federal government largely audits the tax on behalf of most provinces, except for Ontario, Quebec and Alberta. The provinces generally follow the federal base although they're allowed, through the agreements, to deviate to some extent. On top of it, we have a system where there's large exchange of information even by those provinces that handle their own corporate income tax. They exchange information with the federal government to try to make sure that the base is properly followed. On the personal income tax side, all provinces except Quebec have harmonized their tax systems.
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On the sales tax, we have less harmonization. That does raise an interesting issue about who should be levying the sales tax. I'm not as much concerned about the provincial sales, when it comes to the sales tax, and possibilities of tax evasion. My major concern is more with cross-border shopping with the United States and now the treatment of international services, which is getting to be more and more of a problem in terms of imposing sales taxes, including the GST as well as the provincial sales tax.
I would say that we could make some improvements in harmonization of sales taxes, and that could improve the administration of taxes. What I think it requires is the flexibility of both federal and provincial governments to try to put their minds together to develop a good sales tax system for Canada, one in which both governments could share the base in a way that allows for provincial autonomy but at the same time better administration of taxes and sharing of information between the governments. That could help curb some of the issues that come with the underground economy.
The Chair: Thank you very much for your presentation. We have about 25 minutes, I guess. Let's just start with Mr Sutherland.
Mr Sutherland: I have two questions. One, on page 6 of the written presentation you sent in, you did say, "When underground activity is significant for a specific tax, the tax rate must be kept low." You heard the end of the previous presentation from the cancer society. I wondered if you had any comments on balancing that.
Also, on your comments about administration, I believe one of the other experts we're to have in is Satya Poddar. I believe he has suggested that one of the ways we may do that is that one level of government, and I believe he's proposed the federal government, should set sales tax and the provinces should set income taxes and that some type of arrangement should be made for that to occur. I was wondering if you had any comments on that type of system and whether you think that would have any substantial impact on reducing the amount of the underground economy.
Mr Mintz: Let me comment first on the cigarette issue. Revenues have gone up for the federal government, even with the very significant increase in taxes and the increase in smuggling, of which there's lots of evidence as well. In fact, there's a very good federal study by the Department of Finance which documents quite well the changes. It came out in June 1993 and documents well the impact of the increase in cigarette taxes on smuggling as well as revenues.
Whether the tax rate is too high or too low, those questions are judgements, of course. I would support, personally, higher taxes on cigarettes; I'm not a smoker. But I do agree with the arguments that people have given for cigarettes. What I do think is that we're maybe at the edge in terms of raising cigarette taxes any more, unless we improve tax administration so that even higher tax rates on cigarettes could be possible.
There are potential ways of improving the system and I think the previous speaker gave a few ideas, such as the way you control distribution. If you do it with alcohol, one could consider controls on the distribution of the cigarettes as well. That could always help in curbing tax administration.
Just one point on the export tax, as that came up in earlier discussion: I would suggest that the reason the federal government got away from the export tax was that it felt the export tax would not be successful in the end. The problem is this: One could put an export tax on tobacco sales coming out of Canada, and that would work temporarily, but in the long run, producers can simply, in other countries, particularly the United States, establish firms that would produce Canadian cigarettes for the Canadian market and produce outside the country. That was the fear, as I understand from discussions with officials in the Department of Finance, about the long-run impact.
If you're not worried about tobacco producers in Canada, then one could always do it -- at least it might work to some degree -- but for those people who are worried about the tobacco producers, what the export tax eventually would do is kill the production of tobacco in the country.
With regard to the issue of federal-provincial income and sales taxes, Satya Poddar is not the first person to recommend it. Alberta government officials or some people from Alberta have been arguing this position. This is an interesting argument, and the reason is that some people who love value added taxes know it's really the federal government that's best able to impose a value added tax because of the treatment of exports going from one province to another and the way you handle the input tax credit system. If you like the value added tax, some people say, "We've got to have that at the federal level," and then they argue that provinces can handle the income tax, if they wish.
I'm very much against this point of view, but I would argue that income tax is best left at the federal level or at least that the federal government have a dominant influence in it. First of all, the income tax is an important tax for macroeconomic stabilization, and that is the role of the federal government, not of the provinces. For that reason, the income tax I think is best left with the federal government. Also, it's an important way of redistributing resources across the country, as the progressive nature of income tax allows for citizens in richer provinces to pay more tax compared to citizens in poorer provinces, and therefore there's a way of having interregional transfers done rather than just through the equalization program we currently have at the federal level.
Secondly, I think the income tax, especially the corporate income tax, is very difficult to levy at the provincial level and is best left to the federal government. In fact, even the federal government is now, in a global world, having trouble with the corporate income tax because of the ability of companies to shift income from one jurisdiction to another with differential tax rates.
Once you start looking at all those ingredients, I think the income tax is best left at the central level.
As far as the sales tax is concerned, historically, many economists felt that the sales tax is best left at the provincial level because it's one the provinces can handle. I take the view that that is a better tax, especially excise taxes. I don't see any serious problems with provinces handling them. There are some difficulties that may arise in terms of cross-border shopping, but generally they have been not that serious in a big country like Canada which is geographically dispersed.
As far as the value added tax is concerned, I'm not convinced that Canada has to have a value added tax. I don't think it's necessarily the be-all and end-all and I don't think we should pursue objectives in society simply to have one type of tax. In fact, my colleague Tom Wilson and I have a whole scheme in which the federal government, if it wants to, could keep the value added tax that provinces could piggyback on with a retail sales tax, but one in which one could achieve a lot of harmonization and simplicity and still run a good system.
In Europe, they've found now that value added taxes at state levels have not been a serious problem because they've gotten away from some of the prejudices that tax experts have had in saying how a value added tax has to run. In Europe, they've now been able to develop a new system, where it's still a value added tax but there are methods in handling sales going from one country to another. It's working, and it's working quite well.
Mrs Haslam: I didn't know they had a professor of taxation. I find that very interesting. When you look at taxation, do you look at some of the culture and social aspects of people when you're looking at taxation? Do you study that?
Mr Mintz: When you deal with policy, especially as I work with a lot of different countries, you have to take into account institutional issues, the way people operate, how a country operates, and then condition your recommendations based on how that country actually operates, the social aspects of that country and everything else.
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Mrs Haslam: I noticed you were talking about a Third World country where everything's done in cash. I think when you talk about Third World countries and look at the amount of cash transactions, you also look at the infrastructure they don't have and the services they don't have and the health system they don't have when they're dealing basically in cash.
I'm very interested in the cultural aspects of it, because there's been a concern raised here among the members that once the pattern is established of not paying taxes or trying to get away with paying less taxes or -- what we're here to look at -- getting into the underground economy, when we come out of this recession, those patterns having been set up will be harder to break. I was wondering if you had any comments or any discussion around that, patterns you look at when you look at taxation.
Mr Mintz: People have not really measured very well to see whether there's an asymmetry; that if tax rates go up a lot that all of a sudden creates more smuggling or underground economy, but then if you try to have an equal tax rate reduction the underground economy doesn't get that much smaller.
Part of the problem is that people don't know how to measure the underground economy very well in the first place, so it's hard to really get a clear answer to that question. But in terms of the theory, one would expect some asymmetry for the following reason: There's a cost to learning how to cheat. First of all, it could be a psychic cost -- people may not do it until they start engaging in it -- but also there's a cost of setting these things up. The cigarette smuggling case I think is a very good example.
We raised the taxes significantly in 1990, I believe it was. There has been a very substantial increase in smuggling. If we drop the cigarette taxes to where they were, let's say, in 1989, would the smuggling go down by the same amount? I doubt it, because the system has now been set up. People have gotten used to that system, and they've already borne the cost of getting into that. From what I understand, there's now a lot of illicit trade involved with that criminal activity, so as a result it will be more difficult to reduce the amount of smuggling that's been involved.
Mrs Haslam: That brings me to another question. We're looking at the underground economy right now because it seems to have mushroomed, but we've always had an underground economy. Time after time when we have people come and talk, they seem to equate the underground economy with tobacco. Is that a reality or is the underground economy growing in other areas also, and why is it that we seem to only equate it with tobacco? Is it because of the criminality that the press is making a cause célèbre, rather than looking at other factors in the underground economy?
Mr Mintz: I think this goes back to the issue of how you measure the underground economy. It's so difficult to do it that people have trouble decomposing even what they measure. For example, there's been some very good work by Peter Spiro, of the Ministry of Finance, on the cash balances.
Mrs Haslam: Yes, and we've had him in here.
Mr Mintz: But that doesn't tell you where the cash balances are being held or where the cash transactions are being held. I think what people do is look for illustrations, the obvious ones being things like cigarettes, the other one being cash transactions at the retail for, let's say, house renovation and things like that. There are lots of examples of that. It's all anecdotal and no one has a clear measurement of it, and at this point there are no data, I believe, that would allow you to separate and decompose what the size of the underground economy is.
Mrs Haslam: I have one more question, and it's more of a clarification. Have I got time, Mr Chair?
The Chair: Mr White wanted to ask a question, and there's only about a minute left for the government caucus.
Mrs Haslam: Then I'll ask my clarification. I didn't get to ask the last time because of Mr White's question, and I'm sure he wouldn't mind.
On page 6 it says, "There are mechanisms in the development of tax policy that could help deter tax evasion," and you mention an across-the-board tax, like a poll tax or a capital tax instead of an income tax, reducing the revenue loss. I'm questioning whether that would be seen as fair, because we're discussing the perception of people and fair taxation. Corporations can write off X, Y and Z, and we've had a discussion about the fact that writing off is not the same as tax evasion, but in the perception of the people out there, that is unfair, when corporations can write off all these marvellous things and the ordinary taxpayer can't. But you're suggesting that an across-the-board poll tax or capital tax could be seen to reduce the revenue loss arising from tax evasion, rather than income tax. I'd like to know a bit more about that and why you feel that would be seen as fair.
Mr Mintz: I would not recommend a poll tax. In fact, in Britain they had a lot of problems trying to identify who's a resident and that became a very serious issue. Even recently, despite the poll tax being eliminated in Britain, there is a number of cases of disabled people, mentally handicapped, who are in special hospitals and are still liable to pay this poll tax from many years ago. I certainly wouldn't recommend a poll tax. I think it is very unfair.
As far as the capital tax goes, I think that one on corporations is a little more problematic, because it's less clear what you mean by "fairness" when it comes to corporate income.
Mrs Haslam: I'm talking about the perception of tax evasion versus what a corporation can do, to the average woman who's paying those income taxes.
Mr Mintz: What I'm saying is the following: With respect to capital tax, many countries have resorted to capital taxes as a form of corporate minimum tax because they know it's very easy to create expenses, things like interest expenses, and dump them into a jurisdiction to avoid paying corporate income tax in that jurisdiction. If you go to Mexico, Columbia -- Venezuela recently put one in -- a lot of countries throughout the world now have corporate minimum taxes that are capital taxes. The reason they do that is to make sure that some money is paid by corporations to the jurisdiction to help fund expenditures, infrastructure expenditures, for example, that help the corporations.
In Ontario we have a capital tax on corporations, and one could make an argument that that capital tax is really just a way of trying to make sure the corporation makes some payment towards the provision of infrastructures that help that corporation.
Mr Kwinter: Mr Mintz, thank you very much for your presentation. We've had several presenters talk to us about the difficulty in measuring the underground economy, but one of the benchmarks they're using is the feeling that the holding of cash balances has increased and that must be a direct correlation to the underground economy.
I'd be curious to know whether or not you had looked at the possible other factors for the holding of cash; the idea that we've got historically low interest rates, certainly in modern times, where the incentive to put your money in the bank isn't as great, particularly when banks are charging more for accessing your own money. You write a cheque and you get a fairly significant charge for writing that cheque, so people figure: "There's no real incentive for me to put all my money in the bank. I'm much better off keeping some of it in cash. I avoid that particular cost and the penalty isn't that great because the interest I'm getting isn't that great." Have you done any looking into that particular area?
Mr Mintz: Yes. The work I've seen that has been done on the holding of cash balances explicitly allows for interest rate effects. It's well known that interest rates came down from about the late 1980s to now; as a result, there'd be greater incentive to hold cash balances with the reduction in those interest rates.
What people have found is that there's been a very significant increase in cash balances held after January 1, 1991. My bet is that even if you allow for tax rates -- the GST combined with the provincial sales tax, income taxes, and think of cash transactions going on in the service sector -- it's not just the tax rate increase alone that explains more use of cash balances but perhaps the psychological impact of the GST. It may have had, I believe, the impact of people saying: "I don't like this tax and I don't care any more. I've had enough and I think it's right to cheat." I think there's been a dramatic shift recently in terms of the way people view governments, the level of taxation, the benefits they receive, and as a result they're more willing to cheat than they used to be.
But outside of the interest impacts there's not a lot of other things that affect cash balances, except for the advent of automatic teller machines. I think that's had a big impact in reducing cheques being written and people holding more cash for that reason. But that's something that's been going on for many years now, and the huge increase in 1991 in cash balances held I don't think can be explained by any economic factors, outside of a major shift in taxation in that year.
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Mr Phillips: I really appreciate your thoughtful advice and I think you've also given us perhaps more potential solution directions than most. We focused on the problem. I do want to go back to the problem just a little bit. We're trying to get some feeling of how large it is. You've mentioned the GST and that perhaps this stimulated things. Where would that manifest itself in terms of lost revenue and revenue reductions? The huge decrease in revenue in the province is in personal income tax. It looks like we're $3 billion or $4 billion short of what you would have expected as personal income tax revenue, given increases in rates and normal factors. Would that be where it might have shown up, in personal income tax?
Mr Mintz: I think in personal income tax, because if you're not going to report for GST purposes, you're also not going to report for income tax purposes, because both are levied at the same time. If someone's going to hide revenues on the GST side, they're going to also do it on the income tax side, because they know governments will audit both together.
Where I think a lot of the evasion is occurring -- again, this is all anecdotal -- is in what you would call final sales to consumers. When one business sells to another business, you have less cheating. There are problems that sometimes occur, let's say, under a value added tax system, where the purchasers might overstate input credits and the sellers may understate revenues that they collect. There are taxes they collect on behalf of the government to remit to the government. That sometimes does occur in some countries where there's very poor tax administration.
I was down in Brazil, and in Brazil this is a huge problem, where input credits are overstated under their value added tax and sales are understated for business-to-business transactions. That's because the businesses know that the government never gets around to cross-checking receipts. You've got to do that under a GST or a value added tax system to make the value added tax work. In fact, some people, I've been told, feel there has not been enough auditing under the GST in the first two years to make sure that people understand the tax and how it works and for people to understand that cross-checking of receipts is going on.
Where I think most of the evasion occurs is more at the final point of sale to the consumers, and where the margins are very big, where there are a lot of wage costs involved, things like services, I think it's possible. In fact, I was told of one restaurant where there are two cash registers, one that belongs to the government and one that belongs to the owner. The owner reports the GST and the provincial sales tax for one cash register and for the other one he doesn't. What it also means is collecting GST and provincial sales tax and putting them in his pocket.
Mr Phillips: You mentioned in your presentation that you and one of your fellow professors, I gather, had put forward a proposal on some form of harmonizing GST and PST. That may be useful for the committee to get. Is it easy to summarize it so a layperson might quickly understand it?
Mr Mintz: Yes, basically what we said was that if you wanted to have harmonization that works, that saves the public money and makes the system simpler, there are three or four basic principles you want to follow. First of all, there should be only one government that audits the tax, and that could be the central government. I think it would be easiest thing because you have some firms that operate across the country. You don't want a firm to deal with 10 different provincial auditors, so it's easier to have just one auditor, and that's at the central government level. I think the federal government should, in the harmonization agreement, collect the tax and audit it just like under the income tax.
But at the same time, we believe in the principle that provinces should have some autonomy and that if they want to have some zero rating of goods and services, they can do that. It wouldn't be too hard to do that. The federal government could do it through an agreement, because the basic rule could be to follow the federal base, but then the provinces, if they want to zero-rate books, can do that and the federal government would be willing to go along as long as it's possible to undertake the zero rating.
The third concept we had to simplify the system entirely for the provinces is to basically have the tax at the final sale. The way of doing that is that if a good or a service is sold from one business that's registered under the GST to another business under the GST, the GST might apply on the transaction and one firm claims a refund. The purchaser will claim a refund for the tax paid on the input, but then the provinces would levy no tax. It would be just a zero tax at the provincial level, and then you get rid of all the problems of interjurisdictional trades and having a tax on, let's say, exports out of one province to another. There don't have to be provincial taxes at every intermediate stage of production, let's say, from one business to another. All that could be eliminated.
So the provincial government basically keeps the retail sales tax that's piggybacked on the GST base, with some variation, with the province allowed to choose its own rates. I think it's important for the federal government to be flexible in its negotiations with the provinces and to try to get the provinces on board.
The Chair: Thank you very much, Mr Mintz, for presenting before the committee this afternoon.
RETAIL COUNCIL OF CANADA
The Chair: Our next presenters this afternoon, representing the Retail Council of Canada, are Alasdair McKichan and Peter Woolford. Would you please come forward and make yourselves comfortable. Please identify yourselves for the committee members and the purposes of Hansard.
Mr Alasdair J. McKichan: My name is Alasdair McKichan. I'm president of the Retail Council of Canada. With me is Peter Woolford, who is vice-president of the retail council. We're happy to have the opportunity to appear before you this afternoon on a problem which is indeed a significant one.
I should explain that the retail council's members are representative of virtually every sector of store retailing and that together they account for something around 65% of Canada's total retail store volume. Also affiliated with us are something like 100 either sectoral-specific or regional specialist associations, and their members account for another substantial percentage of business. Our sister association, the Canadian Council of Grocery Distributors, has within its membership all the major wholesale and retail food distributors. CCGD supports the views we express today.
As we noted in our pre-budget submission to the Treasurer this year, we are as an industry -- no surprise to you -- having a tough time. Sales have been growing very marginally. Competitive pressures are very strong and margins have been under pressure, new competitors are emerging with new challenges to existing formats and the prospects for the future are virtually for more of the same.
Retailers have an additional challenge from the existence and, as we see, the growth of this substantial underground economy. Our members are finding that they're competing with suppliers in a number of products, but most particularly in relation to tobacco and alcohol. Some members also indicate that flea markets are outlets for goods, as we say, whose provenance is doubtful -- a euphemism.
Our members believe they see the impact of the underground economy on some of the related service activities they offer, and they also see a pattern of purchases of certain categories of merchandise from their stores which leads them to believe other parties are indeed suffering from the underground economy.
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In our belief, the main reason for the rapid development of the underground market for goods and services is the desire to escape taxation. The most prominent products being sold underground, tobacco and alcohol, are both very heavily taxed, both absolutely and in relative terms. Cash sales and informal transactions offer the opportunity to avoid paying commodity, business and income taxes and, of course, all the employment-related payments.
We really think it's the heavy burden of government taxes that has pushed Canadians into a breaking of the laws. Our view is that the solution lies in the taxation area. We believe, at least in the medium term, some of them in the short term, governments must reduce their take from citizens to the point where the tax level is perceived by the citizens as fair and reasonable.
We know that as a committee you've already had considerable data about the smuggling of tobacco products and alcohol; we don't have any additional data to supply to you. We have seen the Lindquist Avey data. We have no quarrel with it; it seems to us realistic.
We gathered a couple of perspectives. First, it's clear that the sales of these products in the economy are driven for tax reasons related both to the difference in taxation between Ontario and the US and to the absolute level. The enormous discrepancy between Canada and the United States has made it obviously very attractive to smuggle these products and to make them available for sale.
At the same time, it would be a mistake to assume that the proposed changes to tax of these two products in the US are going to solve the problem. We have some indications that tobacco products are now being smuggled into Canada from offshore. There's this indication that the distribution system for legal tobacco has matured to the point where you can virtually shop the world for low-priced merchandise. It can be imported covertly into Canada and sold here.
I think it's important to recognize that this alternative distribution system is profitable because of the absolute level of taxation of tobacco and alcohol. Until this is reduced or eliminated, the benefits to smuggling and other forms of non-compliance will be so high as to encourage people to engage in this kind of activity. The level of profitability is so huge that enforcement is going to be difficult or perhaps impossible in some cases. We say short-sighted taxation policy has created a Prohibition-type situation which cannot be controlled by law enforcement practices. I don't think that's too strong a statement.
The extent of the underground trades has had an impact on other parts of the retail trade. As a product, tobacco does bring customers into the store, and when customers are there they of course often buy other products as a matter of convenience. Not only do merchants lose the sale of tobacco; they also lose the sale of the accompanying products. To the extent that individuals go to the States to purchase tobacco and alcohol and smuggle them back, of course retail merchants in Canada are also apt to lose the additional purchases these travellers make in the US.
There's a criminal element apart from the smuggling. The tax-driven price of tobacco has made these products extremely attractive targets for thieves. We've seen very sharp increases in thefts of tobacco in recent years, sometimes of a store's entire inventory of tobacco. That material finds its way back into the underground trade. Often the criminality is accompanied by violence, with injuries to staff.
Moving on from the tobacco issue, a second competitive concern is that they believe there is some evidence that flea markets, some flea markets at least, are acting as outlets for stolen or smuggled merchandise. Many of the markets in fact run quite strictly and well, but that's not the case universally. We think there's a good case to be made for the quite strict policing of these markets to ensure that they are collecting tax and paying it, and also that they're not engaged in the sale of stolen property.
We asked our members for information that they might have that would give us some lead to the extent of the underground economy. We can't say that we've received any hard data as yet, but they do give us anecdotal evidence that they do see signs of the illegal activity that's going on. For instance, particularly in the home improvement area, merchants report that they are seeing substantially increased numbers of cash sales, and presumably some of these are by individual contractors who are buying by cash and doing work and not recording the transaction.
Some retail firms offer services along with products and they also are finding instances where customers ask them if there's a discount for paying cash. Obviously, the customers are used to that kind of treatment and they assume it's going to be available from others. Of course, again the incentive is for the customers.
We'd be happy to attempt to secure any other information that we can for your members that may be of interest to the committee. I'll just add that, from our perspective, far and away the biggest problem is the tobacco problem. We believe it has to be addressed on a taxation basis. We're encouraged by the action which looks as if it may be taken in Quebec, and we think there's a good case for a similar approach in Ontario. Our problem here is not quite as extreme as it is in Quebec, but it's growing so fast it will not be long before it gets there.
The Chair: Thank you very much for your presentation. We have 30 minutes. We'll divide that half and half, I guess, between caucuses.
Mr Kwinter: Mr McKichan, one of the last things you said really struck a chord with me. In all of the presentations we've had to date, the implication is that if someone wants to pay cash, invariably he's trying to do it because he's trying to evade taxes. As a retailer, I have really a two-part question.
What proportion of your total sales -- when I say "you," I mean the retail industry -- is by credit card and what proportion is by cash, and is there much of a movement of people who are saying, "Is there a discount for cash?" It's not so much that they want to evade taxes, but the feeling that, "If I pay you by credit card, you are paying x% to the credit card company for that service, and if I pay you by cash you're not paying that, and why aren't you passing that along to me?" Is that an issue? Is that something that is out there?
Mr McKichan: Let me, Mr Kwinter, deal with the first part of your question first. The ratio of cash to credit transactions varies enormously by sector. In the case of the food trade, with which you are well familiar, there is virtually no, or very little, credit card use, a fair amount of payment by cheque, but it's the equivalent of cash, so in that industry it's not an issue.
On the other hand, in all the sectors like clothing, furniture, apparel, sporting goods and so on where there are sizeable ticket prices, the ratio of credit card sales is very high. It can be as high as 80%. In most cases it's a convenience factor. It avoids people having to carry around large sums of money. A high proportion of these payments are paid off by the due date, within 30 days or 30 days plus the grace period of the purchase, but 20% or 25% are rolled over for a greater or lesser time. Usually it's for quite a short time. The credit period on a credit card type of payment usually averages something like six or seven months when people use the credit facility on the card.
So far as the second part of the question is concerned, it is a question that I wouldn't say is asked frequently, but it's a noticeable factor. Not many merchants give a positive response to that answer because, first of all, the discount rates available to most merchants -- for instance, by belonging to an organization like ours where we've negotiated a deal for our members with the credit card companies, it means that the discount rate is something around 1.6%, 1.75%. That shouldn't be compared with zero, because when a merchant accepts cash, he's also accepting the liability to handle that cash, pay the bank's handling fees, accept the risk for handling the cash. So the differential so far as the merchant is concerned between cash and the discount is quite slight.
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Mr Phillips: Thank you very much for the brief. I know it was prepared quickly and I appreciate it.
There's no mention in here that I can remember of the GST. In virtually every other discussion we've had with other groups, there's been a feeling by most that the GST may have been the catalyst that unleashed a new wave or a growth in the underground economy. There's been a fair bit of debate here about that and whether there's anything that one can suggest. As I say, there's even been some discussion, including by the previous speaker, about the possibility of harmonization or having the GST added on to the price of the product rather than included in it. From the retail council's view, is that a significant issue for the underground economy and have you any advice for us?
Mr McKichan: We didn't mention it, Mr Phillips, because so far as our sector is concerned, there is a very slight -- I would suggest minimal -- amount of merchandise sales going through the underground economy. The underground economy, apart from tobacco and alcohol, is concerned with services primarily. Retailers are not selling things in the underground economy because it's just too hazardous for them. It's not realistic.
On the other hand, I've no doubt that the GST was a very significant factor in the encouragement of hidden sales of services. I think it was the straw that broke the camel's back in many cases. I would go on to say that the GST was also a significant factor, among others, in the big increase in cross-border shopping of three and four years ago. Obviously, the value of the dollar and other things were involved as well, but it was certainly a factor.
In terms of what we do now, we've always advocated harmonization and we would value it virtually on any reasonable basis. Our highest priority would be to see a complete harmonization, the same base, one collecting agency, one audit procedure and so on, simply for the sake of eliminating cost, ensuring certainty, discouraging people from finding ways around it. As a secondary ambition, we would like to see any other reasonable form of harmonization which particularly would allow the collection at the border. The failure to collect provincial tax at the border is still a substantial inducement for people to go cross-border shopping.
Mr Phillips: I think you've indicated tobacco seems to be the highest-profile issue with your members.
Mr McKichan: Very much so.
Mr Phillips: The studies we've seen on it indicate that maybe 15% of tobacco sales would be illegal.
Mr McKichan: We believe it's much more than that now.
Mr Peter Woolford: Our numbers suggest around 25% and growing quite rapidly. You get to the 15% number by the kinds of calculations that are in the Lindquist Avey study, which looked only at Canadian product being exported to the US and then smuggled back in. That study noted that accounts for about 60% of the underground sales in Canada. The other 40 percentage points are coming from other sources, usually US off-brand manufacturers or now increasingly from other third countries, from the Far East or from southern Europe. When you add those two together, it comes out at around 25% for Ontario. In Quebec it's already 50%. In both cases the growth rates are quite dramatic.
Mr Phillips: That's actually probably the highest number we've heard, I think, 25%.
Mr Woolford: If you look at the Lindquist Avey study, they suggest it's about 15%, based on exports to the US and coming back, and if you take 40% of that, you arrive at a figure of about a quarter. Those are the data for 1992, and the more recent update suggests that it's now somewhat higher than that.
Mr Phillips: Have you done any work with your members in terms of confirming that number? The reason I raise it is that if I look at what appears to be the revenue from tobacco tax, it hasn't dropped that dramatically. You would have expected that there would have been a substantial drop in tobacco tax revenue.
Mr McKichan: We could get some figures of year-over-year experience by some of the major vendors.
Mr Phillips: That would be helpful, if it didn't take a lot of your -- we're having some difficulty getting our hands on the size of this issue and --
Mrs Haslam: Quantitative. Nobody has the data.
Mr McKichan: It would just be a signal. It wouldn't be absolute.
Mr Phillips: I understand that, yes.
I found your comments on the home renovators interesting. I gather what you're saying there is that among some of your lumber members, my recollection is that many of the contractors have an account that they run and they go in there and get all their stuff and then put it on the Acme account. You're suggesting that your retailers have seen those accounts drop more than you would have expected with a weak economy?
Mr McKichan: And proportionately their cash sales increase.
Mr Phillips: Yes. Which you would suspect could be traceable to them.
Mr Woolford: That's hard to judge because we're in the midst of, first of all, a recession in 1991-92 and then a very slow recovery, but our members indicate that they feel their account sales have declined far more than they expected they would in such a recovery and they've seen that marked by relatively stronger cash sales, and I think in some cases they've recognized the face handing the money over.
Mr Phillips: Or the truck in the parking lot.
Mr Woolford: Yes.
Mr Kwinter: Just for the record, I wanted to make clear that your position is that the retailers who are in the lumber and building supply business are not participating in the underground economy.
Mr Woolford: No, no.
Mr Kwinter: All they're doing is observing, because of the change in balance, that their feeling is that there must be increased activity in the underground economy because their proportion of cash sales to charge sales has reversed itself and that's probably the only real reason for it.
Mr Woolford: They're quite properly and correctly collecting GST and PST on those sales, so at least the commodity portion of the taxation is being paid, but they suspect, because of the change in the pattern of those purchases, they're being put in by people who are being paid for the service but not charging tax on it.
Mr Kwinter: Yes, and as Mr McKichan rightly said, the underground economy is basically in the service sector, and these people, other than for the recession, are not being impacted negatively; they're just noticing that this is the change in what's happening.
Mr McKichan: Yes. Absolutely.
Mr Woolford: One area where our members were a little cautious about saying too much because they don't have much hard evidence is where they are in the service business as well: providing home repair services, home installation services, servicing of equipment and products they have sold, major appliances, that sort of thing. They suspect that at least some of their service representatives are going to the house and saying to the client essentially: "You can either pay through the company and pay the full rate or I can come back tonight and do it for you for somewhat less than the rate. There'll be no GST, no PST, except on the parts, and I'll just report nobody was home when I came to do the sale." In that instance, the employee is in fact stealing business from his or her employer and turning it over to his or her own account but also evading the tax at the same time.
They don't have any sense of how big that is. They all hope it's not, but they've seen enough evidence to know that is occurring.
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Mrs Haslam: I have a couple of questions going along that route, and one of the areas I'm looking at in my questioning is the culture of it: Is it setting patterns now, when you talk about the increase of cash sales versus account sales, and customers coming into retail outlets and saying, "Is there a reduction for cash"? I agree with my colleague that sometimes you're just asking whether there's a reduction for cash sales, not expecting that it's a tax issue but that I would get a reduction because I have the cash in my hand.
I'm concerned about the patterns, though, and how set those patterns are becoming. Even in a situation where the economy does come out of the recession, albeit we know it's going to be slow, are those patterns already set so that they will be hard to break? I wondered what your retailers were saying about that. The idea of asking "Is there a discount for cash?" is not new. This has been done previously, but I would imagine there's been an increase in it and that's the change you've noticed?
Mr McKichan: To answer the last part of your question first, the answer is yes. Our members believe they're not being asked that question because the customer thinks there's going to be an substantial saving to the retailer because of the credit. They think it's because they're suggesting there may be a way of avoiding some of the tax.
But to revert to the first part of your question, all I can offer you is a personal opinion. We haven't asked our members this, and I don't know if their opinions would be any better than ours anyway. My personal opinion is that you do very quickly ingrain a habit of this nature, and it's much harder to unravel than it is to establish.
Mr Woolford: May I pursue that for a moment? I think we've seen an analogue to that in the cross-border shopping phenomenon. The dollar has dropped from a high of 89 cents down to 75, 76 cents, a very dramatic decline. Relative prices Canada-US have turned around quite substantially. That plus the improved competitiveness of the Canadian retailer have made our prices pretty attractive compared to the US.
Yes, cross-border shopping and cross-border same-day trips have declined dramatically, but Canadians are still going in numbers at a very high level. We're still seeing monthly numbers, while they've dropped down substantially from 1981-82, at extremely high levels relative to the historic pattern. There is now a pattern whereby Canadians routinely go across the border, shopping the market, and they're looking for those bargains. I think that is a good analogy for what's happening in the underground economy, that even though it's not there sometimes, they're now going to routinely look for it.
Mrs Haslam: That brings me to my next point, which is looking at education. Is that an area we should be looking at when we talk about the underground economy or when we bring forth the report? Should we be looking at educating the public on the fact that when it's tax evasion and when it's an underground economy, the programs aren't in place because government doesn't have your taxes to put your programs in place? Would an education program do anything to counter this underground economy growth?
Mr McKichan: Let me again use a cross-border analogy in relation to that. When cross-border shopping was at its height, we looked quite seriously at embarking on some institutional advertising, explaining to Canadian residents that when they spent money in Canada, it stimulated the economy and might even secure their own job, never mind their neighbour's. We did some consumer research in relation to that, both with focus groups and with polling techniques. We found that customers' rage was so intense that that message would only aggravate them. It wouldn't change their behaviour. It might, if anything, intensify their behaviour, so we had to back away from that approach.
Mrs Haslam: When you talk about rage and about anger, it was the middle of the recession and money was tight, unemployment was rising.
Mr McKichan: Taxes were high.
Mrs Haslam: They were concerned about their tax dollars. That type of rage was there, and they didn't get the message that the dollar spent here went back into programs here.
Mr McKichan: They didn't care about that. The answer we got was, "I owe an obligation to my family to do the best I can, and if it denies the governments revenues, if it denies merchants volume and threatens somebody's job, tough."
Mrs Haslam: I have another question on this presentation. This was a letter to the legislative committee on finance and economic affairs. I don't believe it's what you read; I think it's a little different. You didn't read the letter, did you?
Mr McKichan: No, I paraphrased it.
Mrs Haslam: That's correct; okay. On page 2 you talk about the smuggling that is actually coming in from outside the country now. Do you have any idea to what extent that is? I'm surprised it has reached that magnitude.
Mr Woolford: These are the data I was referring to earlier. It now looks as though about 40% of the tobacco that is coming into Canada is coming from non-Canadian manufacturers. A lot of it is coming from generic-brand manufacturers in the States, but increasingly, apparently, we're seeing some product from the Far East and from Europe. Some of it is no-name brand product, some of it is name-branded product manufactured elsewhere and smuggled into Canada. You might get a package of this name brand but it was made for a foreign market. It's grey-market tobacco, in a sense, but it's brought in illegally.
Mrs Haslam: I didn't realize that was the figure you were looking at. I have two more quick questions.
When you talk on page 3 about, "Some retail firms that offer services along with products...customers or staff are seeking cash deals," are there any comments from the retailers you talk with about health and safety issues, having a man coming into your home and not being covered by health and safety; not having any guarantees on the work he does on a cash deal in terms of consumer protection? Do the retailers try to sell that aspect when they're selling their products?
Mr Woolford: Not that I'm aware of. I think the problem for them is that they're being stolen from by their employees when this goes on. They're assuming they're doing it with a proper, responsible consumer relationship where all the protections are in place, and an employee breaks the trust and does it after hours.
Mrs Haslam: Are you saying there are very few retailing outlets that would do it on their own, that it's basically their employees who are stealing from them?
Mr Woolford: Again, the danger for a retail firm is so large that it's not worth their while. Even a relatively small appliance seller makes so much more money off the sales of appliances that the damage to their reputation and to their relationship with the taxing authority if they were ever caught makes it not worth their while.
Mrs Haslam: It's not exactly the information we've been getting from other small firms, and that's why I was questioning you on it.
Mr Woolford: It's an individual thing with the service person. If it's a service firm, then of course it's very much worth their while.
Mrs Haslam: But you're talking basically appliance stores and retail outlets, that type of service.
I've one more comment rather than question. I was talking about the underground economy to somebody in my riding. We were talking about the fact that they're doing cash sales and they said: "But isn't the money still in the system? Yes, the government is not getting its taxes and its share, but doesn't the money for that cash sale in that person's hands still go back into purchases for groceries, purchases for heat? Isn't that money still in the system?"
For instance, when you look at the welfare system, people think welfare cheques are a problem. I remember the member for Chatham talking about the fact that welfare recipients are the ones who put the money back in the system. They tend not to save the money. Their money is so meagre, they spend it immediately on the necessities. Isn't that the same for cash sales?
Mr McKichan: Yes. It goes right back into the system, but the important exception is that it's not contributing its share to all the programs that citizens indicate they want and need.
Mrs Haslam: I agree. It was an interesting comment I hadn't put a lot of thought into; that yes, the government is losing, but the money, as far as retailers are concerned, is still in the retail business. They're still getting it.
Mr McKichan: When it's carried to the extreme in Italy, where there is a very prosperous economy but an absolutely bankrupt government, that's the logical --
Mrs Haslam: Or Third World countries that have a majority of the business done in cash sales and very little in the way of social programs.
Mr McKichan: And very little ability to raise taxes.
Mrs Haslam: That's correct, yes. Those are just my comments and questions.
Mr Woolford: The other part of course is that Canada still does have a smuggling problem. To the extent that those dollars are spent in the United States or other countries, those are dollars flowing outside of the country.
Mrs Haslam: Every time we talk about the underground economy, as I said, it always seems to come back to tobacco being the catch for all we think of as the underground economy. Is it one of many items, or is it just the biggest item right now?
Mr McKichan: In terms of our industry, it's head and shoulders above everything else. In fact, in our industry it's virtually the only item we're concerned about, apart from a little bit of business done through flea markets.
Mrs Haslam: Could I ask one more question on flea markets? How much time?
The Chair: There's about four minutes left, and it's really up to you to make these arrangements with your caucus members.
Mr Sutherland: That's one of the questions I wanted to ask about, flea markets.
Mrs Haslam: I'll ask mine, you ask yours, and we'll get an answer together. You talked about flea markets and said you wanted to do more policing of flea markets. My question is, aren't there some firms that go to flea markets on a Sunday and operate in a flea market?
Mr McKichan: Oh, yes.
Mrs Haslam: You wanted more policing for stolen property and whether they pay taxes. How would you recommend that be done? Do you feel that the public in general and those attending flea markets would look adversely at an increase in policing, and how would you go about increasing the policing at a flea market?
Mr McKichan: I believe some police forces on their own initiative have in fact checked up on stall holders -- when they see merchandise that looks suspicious, they've attempted to trace it down -- and sales tax inspectors have attempted to ensure that tax is being collected. It has been done in a small way. We're just suggesting that the intensity of the scrutiny probably deserves to be higher.
Mrs Haslam: That was my question on flea markets. Mr Sutherland might have one.
Mr Sutherland: You said it was a small portion. If you have any evidence about what portion you think the flea markets might be, if you could forward that to us, that would be great.
Are we in some ways, with the underground economy and its growth, kind of cross-border shopping too? In effect, since the differential has changed on the prices, people aren't seeing cross-border shopping as the great advantage, so now they're turning to the underground economy as a way of doing that.
Just one other question: We've heard a lot of people say that people perceive this as a victimless crime, that it's only the big, bad, taxing government. But aren't you really telling us that your members are the victims in this?
Mr McKichan: We're all the victims. All of us who are taxpayers are the victims.
To answer your first question, you can't cross-border-shop for services, and a big part of the problem, as we've recognized, is in the service area. But in the case of the cigarette issue, whereas five years ago people would go across to buy cigarettes, they don't have to do that any more; they can buy them as cheaply or more cheaply right here in Ontario. The smuggling issue has displaced some of that traffic.
Mr Woolford: In response to your first question on the proportion of flea markets, no, we don't have any data; we simply don't know. The closest I can come is some information I had from our Quebec affiliate, le Conseil québécois du commerce de détail, which did some work in this area in Quebec about two years ago. They were very concerned about it, because not only were flea markets open on Sunday when the retailers were closed, but the flea markets were also not required to charge PST on their sales.
At that time, I think they thought they were losing around 3% of their sales to flea markets. I'm not fully sure that's the right number; that's what sticks in my mind. I would think it would be less than that here in Ontario at this time, so it's not a major problem for the trade.
Mr McKichan: Especially because of the differential application of tax. I think it would be under 1%.
Mr Sutherland: I just hope too we don't interpret that all cash sales are attempts to avoid. As someone whose only credit card is an Eaton's card and does most by cash, I'm paying my taxes when I do it.
Mr Phillips: We know that.
The Chair: Thank you, Mr McKichan and Mr Woolford. I'd like to thank you very much for making your presentation before the committee today.
To the members of the committee, we have had an agreement from all the members of the subcommittee that we will meet on the afternoon of November 25 to deal with three other groups that would like to make presentations before the committee.
This committee stands adjourned until two weeks from today at 10 am.
The committee adjourned at 1745.